Portfolio Management – Page 40

Ten Years of Investment Writing

Posted on 12 November 2013 by David Merkel

I’m late on this.? My first foray into public writing on investing was when I started writing at RealMoney on October 17th, 2003.? But how did I get there?

Sadly, almost all of the works of RealMoney prior to 2008 are not accessible.? My first effort was writing Jim Cramer the day after General American Life Insurance failed on August 10, 1999.? He wrote a short piece asking why no one was paying attention to the failure of a major life insurer.? He wanted to know what happened.? I had heard about the failure, and so I searched for more data on it, and I saw Cramer’s article, only one hour old, so I sent him an e-mail as “your friendly neighborhood investment actuary.”

I explained the situation to him in about three hundred words, and lo and behold, my e-mail was featured in a post by Cramer that very day saying how amazing it was that he could get such a cogent explanation that was not available elsewhere on the web.

Not wanting to wear out my welcome with Cramer, I e-mailed him maybe eighty times over the next four years, with occasional e-mails to Herb Greenberg and Howard Simons.? I e-mailed mostly bond market and insurance information.? But in the period from 2000-2003, information on the bond market from an active institutional participant was interesting.? At least, I thought so, and Cramer usually returned my e-mails, as did Herb Greenberg.

In August 2003, after I had taken a job as an insurance equity analyst at a financial services only hedge fund, Cramer e-mailed me, asking me to write for RealMoney.? I don’t have the actual e-mail, but he said something to the effect of “You write better than most of our contributors.? Please come write for us.”

I went to my boss to ask permission, and he refused.? After some pleading on my part, he eventually relented.? That said, when Cramer wanted me to appear on “Mad Money,” he refused, and did not give in.? He did not want the name of his firm associated with Cramer.? I was disappointed, but I understood.

At RealMoney, I wrote about a wide variety of topics as I do at Aleph Blog.? My editor one day called me and after we chatted for a while she said to me, “Did you know that you are our most profitable columnist after Cramer?”? I expressed surprise, and asked how it could be.? She said that I wrote more comments in the columnist conversation than most, and my comments were substantial.? Also, readers would read and re-read my posts, which was rare at RealMoney.

My objective was to teach investors how to think.? I did not want to get into the “buy this, sell that” game.? My most unpleasant memories revolve around bad calls that I made on a few stocks.? I think it was fewer than five stocks, but when you get it badly wrong, passions are heightened.

Cramer and I often disagreed with each other at RealMoney.? I felt I had friends with Cody Willard and Howard Simons, and a few others like Aaron Task, Roger Nussbaum, Peter Eavis, etc.? If I didn’t mention you, please don’t take that as a slight, I just can’t remember everything now.? I thought highly of most of the cast at RealMoney, including the news staff, who would occasionally call me for advice on bonds, insurance, or investing theory issues.

I resisted the idea of starting a blog.? I said to my editors at RealMoney, “The Columnist Conversation is my blog.”? But in early 2007, while trolling the comment streams on Jim Cramer’s blog, and making comments defending him, a number of readers told me that I was one of the best writers on the site, so why didn’t I emerge from Cramer’s shadow?

I thought about this hard for about a month, and then I did it, after doing my research.? I created Aleph Blog, with the first post coming on 2/17/2007, and the first real post on 2/20/2007.? That first real post was prescient, and laid out a lot of what would happen in the bust.

But as I started, the Shanghai Market crashed, and Seeking Alpha pushed one of my posts to the top of their front page.? Cody Willard pushed another post of mine to his media contacts.

I was off and running without doing that much to advertise my blog.? I appreciated that because I think the best way of advertising my blog is to write good content.? I don’t generally like to quote large amounts of the writing of others, and add a few comments from me.? To me, that seems lazy.? I would far rather spend some time, and give you my thoughts.? I’m not always right, but I am always trying to give you my best.

After ten months of blogging, I stopped contributing to RealMoney because I liked the editorial freedom that bloggng offered.? I was never writing for RealMoney in order to get paid, so not getting paid at Aleph Blog was not a problem.

At Aleph Blog, I write about what resonates within me.? That usually produces the best results, though because I write about a wide variety of topics, some people don’t know what to expect of me, and aren’t interested in what I write.? I understand that, and I am not unhappy with a smaller audience.

What I did not expect when I started blogging was that I would do:

Book Reviews
The Education of a Corporate Bond Manager
The Education of a Mortgage Bond Manager
The Education of an Investment Risk Manager
The Rules

and other series at my blog.? I did not consider that I might be a conference blogger for notable institutions like Bloomberg and the Cato Institute.

I also did not realize that I would take aggressive stances against a wide number of semi-fraudulent financial practices like penny stocks, structured notes, private REITs, and a wide variety of other bad investments.

It’s been a lot of fun, and I did it to give something back.? With great power comes great responsibility, and that is why I blog.? Nothing more, nothing less.

May the Lord Jesus Christ bless you.

Thanks for reading me.

David

What a Tweet Valuation!

Posted on 8 November 20138 November 2013 by David Merkel

I don’t have a strong sense on the valuation of Twitter, but I want to share with you forty companies with valuations similar to that of Twitter as of the close on November 7th.

Twitter’s valuation was around $25.9 Billion at the close of regular trading on 11/7.? The private equity sponsors must be jumping for joy, as they got more than they expected on the IPO, and even more, if the price of Twitter holds up past the time of their lockup, when they can sell their remaining shares.

Twitter has no profits, and trades at 10 times book value, versus 2.3x on their competitors here.? Price-to-Sales is around 50, versus 1.8 for competitors here.

There is one thing certain here, there is a lot of profits growth expected out of Twitter.? It has to go from negative profits to positive, and then soar thereafter.? That would justify the valuation.

But how likely is that?? There are few companies that ever do that.? So be wary and avoid Twitter stock, realizing there is a small chance that it might be worth its present valuation, much less more.

Full disclosure: no positions in any companies mentioned here.

Classic: Talking to Management, Part 1: The Big Questions

Posted on 7 November 2013 by David Merkel

This was originally published on RealMoney on April 16, 2007:

“I am a better investor because I am a businessman, and a better businessman because I am an investor.” — Warren Buffett

One of the things I try to do in my investing is analyze the quality of a management team. Though this is a squishy discipline, if I can be approximately right in this endeavor, I can add a lot of value.

I want to share with you the questions I ask management and the reasons I ask them because I believe they’re useful even if you never come face-to-face with a real live C-suite dweller. They cover six major areas:

general topics
financial
competition
pricing and products
changing environment
mergers and acquisitions

I try to analyze sustainable competitive advantage and the ability of managements to generate and use free cash flow, among other factors. (As an aside, in the insurance industry, I can kind of tell management quality by “feel.” I have worked for good and bad managements, and I know their characteristics intuitively.) I try to see if managements are economically rational, are focused on building long-term profitability and act in the interests of the outside passive minority investors who own their shares.

Personally, I am in favor of small-shareholder capitalism. By this, I mean that small investors should have the same access to management, not least of all through quarterly (and other) conference calls held. This view is partly driven by the inadequate questions asked by sell-side analysts.

Too often, sell-side analysts focus on the short run and qualitative variables in their models. The short term is overanalyzed, so I try to look to the longer term. That means most of my questions are about strategy. I try to figure out if the managements in question are — again — economically rational, focused on building long-term profitability and acting in the interests of the outside passive minority investors who own their shares. Or do they act for reasons other than maximizing value for mom and pop, a.k.a. you and me?

Though most of us are outside passive minority investors, pretend for a moment that you are a private-equity investor. There’s value to be had in understanding how an investor in the business would benefit in the absence of a secondary market for ownership interests. The value derived by a private-equity investor feeds slowly to the public equity investor in the short run but directly in the long run.

Then sit back and read through these questions. Prepare to ask them of the managements of the companies in which you are currently a shareholder. Imagine the answers, or even try to get them.

And adjust your holdings accordingly.

General Questions

What sustainable competitive advantages do you have vs. your competitors?

As with most of my questions, I usually have a reasonable idea of what the answer is likely to be. Part of my question is to test the competence and veracity of management. If it trots out some answer that is nonsense, that is a big red flag to me.

Given that most of the time I invest in mature industries, I want to hear answers that tell me the company has an expense advantage over competitors. That can be easily verified. Other possible answers include exclusive distribution agreements, patents, technological advantages and company culture.

Once I hear the answer, I try to analyze how much it makes sense. Has the company really created a “moat” that protects its profits from competition, or is it trying to fool me? I don’t always get a sharp answer, but the exercise is always valuable. Uncertainty leads to doing nothing or to a smaller position, which is always appropriate when you don’t have a big edge.

For instance, longtime readers know that I am a long-term bull on the diversified insurance company Assurant (AIZ). In most of Assurant’s business lines, it is the No. 1 or No. 2 provider in the businesses in which it chooses to compete. Part of that stems from locking up exclusive distribution arrangements, some from proprietary technology that would be difficult and prohibitively expensive to reverse-engineer.

To give another example, Allstate (ALL) and Progressive (PGR) are leaders in customer segmentation, leading to individualized pricing of personal lines coverage. Other major personal lines companies are playing catch-up, and the smaller mutual companies are losing many of their most profitable customers.

So these companies have a clear advantage, which management should be able to communicate quickly.

What single constraint on the profitable growth of your enterprise would you eliminate if you could?

Companies tend to grow very rapidly until they run into something that constrains their growth. Common constraints are:

insufficient demand at current prices
insufficient talent for some critical labor resource at current prices
insufficient supply from some critical resource supplier at current prices (the “commodity” in question could be iron ore, unionized labor contracts, etc.)
insufficient fixed capital (e.g., “We would refine more oil if we could, but our refineries are already running at 102% of rated capacity. We would build another refinery if we could, but we’re just not sure we could get the permits. Even if we could get the permits, we wonder if long-term pricing would make it profitable.”)
insufficient financial capital (e.g., “We’re opening new stores as fast as we can, but we don’t feel that it is prudent to borrow more at present, and raising equity would dilute current shareholders.”)

There are more, but you get the idea.

Again, the intelligent analyst has a reasonable idea of the answer before he asks the question. Part of the exercise is testing how businesslike management is, with the opportunity to learn something new in terms of the difficulties that a management team faces in raising profits.

How are you planning on growing the top line?

This can be a trick question, particularly for industries in which pricing power is nonexistent. When there is no pricing power, the right answer is to focus on the bottom line and not sell underpriced business. The answer here can reveal whether the executive is a rational competitor and whether he has the courage to be honest with the analyst.

The sell side has a bias toward top-line growth, which is wrong in my opinion. Actions that improve the expense structure are just as important as new sales. Good managements have a consistent focus on the bottom line, whether it grows the top line or not.

Particularly in financial businesses, there is a tradeoff between quality, quantity and price. In good markets, you can get two out of three. In bad markets, you can only get one out of three, and if that one is growth in sales or origination, watch out. That business is a candidate for profit shrinkage, and possibly insolvency.

Good managements know when to step back from their markets when competition is irrational. In the short run, that may hurt the stock price, but in the intermediate term, it will keep them in the game. In the long run, it will help the stock price when the pricing cycle finally turns and a few stupid competitors are weakened or bankrupt from their past mispricing of business.

Full Disclosure: long AIZ

Book Review: The Manual of Ideas

Posted on 2 November 20133 November 2013 by David Merkel

I’m a value investor, and one that is not doctrinaire about a narrow set of principles.? Yes, I like my eight rules, but they are broad principles that admit a lot of flexibility.

The Manual of Ideas introduces readers to a wide number of ways to source investing ideas that may offer value.? There are nine main areas that they highlight:

1) One can invest in a small number of stocks that are worth more dead than alive.? Net-net stocks show places where the downside is minimal, and profits could be made if either the company turns around or liquidates.

2) Sometimes companies obscure their value because they do multiple things.? The company would be more valuable broken into its constituent parts, which would get a higher? valuation in aggregate.

3) You can follow the magic formula, and buy stocks that have high returns on equity and low P/E ratios.

4) You can own stocks managed by talented managers, and I admit that maybe 7 of the 37 stocks I hold fall into that bucket, and I will not readily sell them.? The question is how you find those managers.? That’s not easy, and involves industry knowledge which is not available to all.

5) You can own stocks owned by smart investors, and I admit that I track this every quarter.? I get a lot of good ideas from them, but I like to look at the ideas that are cold, because they offer more potential.

6) Buy teensy stocks that no one follows, that are making money and have legitimate business models.? You can’t put a lot of money to work that way, but if you get it right, it can add value.

7) Buy companies that are undergoing a structural change that adds value.? Example: a petroleum refiner decides to spin off a pipeline Master Limited Partnership.

8 ) Buy highly indebted companies that offer the potential of huge gains if the idea works out.? Screen out companies that are more likely to lose it all.

9) Buy international companies — the scrutiny and competition are less — you may find something genuinely cheap, but make sure they play fair with outside passive minority shareholders.

There are some very good methods here, but what should you decide to pursue?? That is the one weakness of the book.? The book gives you a significant but not exhaustive tour of the ideas behind value investing.? What would have added a lot is an integrated chapter on when it is best to pursue each set of ideas. It is difficult enough for professional investors to know which method is best at a given time, much less amateurs.? The time of investors, both professional and amateur, is limited.? It would be a great aid to figure out how to prioritize the methods or ideas.

Also, more emphasis on margin of safety would have been useful.? We can never get too much of that.

But I would recommend this book strongly to all investors.? It will strengthen your idea generation processes.

Quibbles

Already expressed.

Who would benefit from this book: Most investors would benefit from reading this book.? It will aid them in idea generation.? If you want to, you can buy it here: The Manual of Ideas: The Proven Framework for Finding the Best Value Investments.

Full disclosure: The publisher sent me the book after asking me if I wanted 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.

Book Review: Win by not Losing

Posted on 2 November 2013 by David Merkel

Just follow my methods and you will make money. Yes, it is another one of *those* books.? Most of them are not worth your money.? This one might be worth it, but let me give you my misgivings.

The book warms up slowly, because it spends most of its early time destroying other ideas, without introducing their main ideas.? For example, it spends time destroying:

Gains in the market come slowly and steadily.? Correct, that’s wrong.? As my readers should know, market returns are lumpy. [Note to readers at Amazon, there are links at my blog that explain these concepts in greater detail.]
Modern Portfolio Theory.? Again, no argument here, it is not a good explanation as to how the market works.
Volatility isn’t risk; risk is the potential to lose.? Again right.
Diversification among risky assets does not provide much risk reduction.? Again right.
Most mutual funds miss out on the ability to limit risk, because they forbid market timing.? Here I differ.? Aside from funds that aim to time the markets, the asset allocation decision is not in the hands of the managers, but the shareholders, who must them selves decide how much stocks to hold.

This leads to their main hypothesis, that people have been duped into buy & hold investing, when they could make a lot more money if they only invested when conditions are favorable.

There are two problems with this: 1) how can you tell when times are favorable or not?? I use the credit cycle, and estimates of what various asset classes are likely to return if they were private businesses, but not everyone can follow that.? They give their simplified version, which is a moving average crossover method.? Buy when stocks are above the moving average.? Sell when they are below.? Simple, huh?

Yes, simple, and that brings up problem 2.? If a lot of people began managing money in a way like this, the market would become more volatile.? At moving average crossovers, people would rush to buy and sell as groups.? Some would shorten their moving average formula to get a jump on others.? Any risk control method, if used by many will cease to work well.

Other Difficulties

Though it is not a major aspect of their book, and it comes toward the end, part of the goal of the book is to interest people in purchasing their newsletter and/or money management services.
At times, buy and hold investing is the optimal way to go for an era.? Also, not holding assets for a long time limits the ability to limit taxes, and compound really large gains.? My mother and my father-in-law, amateur investors both, limited their taxes on their investing largely through buying and holding quality stocks over decades.? (The authors do advise that their strategy is best done in a tax-deferred account.)
At one point the book insists that the Capital Asset Pricing Model [CAPM] implies that the equity risk premium is constant.? Sorry, but that’s not true.? Many financial planners act as if it is true.? What is true is that it is challenging to estimate the varying equity risk premium.? Value investors have their own way of doing it, but it boils down to: “I’m not seeing many attractive opportunities to deploy capital.”
On page 116, they make too much out of how households have too much money in cash as a fraction of their assets near market bottoms.? The amount of cash may vary some — in general at market bottoms, institutions hold relatively more stock, but the main reason for the increased percentage invested in cash is simply the fall in prices for risky assets.? Aside from IPOs, mergers for cash, acquisitions for cash, money doesn’t enter & exit the market.? Market prices reflect the willing of marginal buyers and sellers to trade cash for stock, and vice-versa.? In aggregate, nothing changes except the price.
They criticize the Facebook IPO as one where sellers knew things would get worse, and so they sold, delivering losses to buyers.? But Facebook stock is considerably higher now than the IPO price.? Those that took the losses from the IPO didn’t wait long enough.
Page 150 — it took a longer time after 1980 before 401(k)s began replacing Defined Benefit pensions plans in any major way.? Congress passed several pieces of legislation in the late 80s which made sponsoring a DB plan less attractive; that’s when the changes started in earnest.
Page 171 — there were many in the insurance industry that remembered being burned on Collateralized Debt Obligations [CDOs] 1998-2002.? It was a common insight that CDOs were weak assets, and underpriced among insurers.? A new class of buyers got skinned in 2008, particularly banks and hedge funds.
Page 180 — there were many firms that anticipated the fall in subprime lending.? I worked for one of them.? I wrote an article about it for RealMoney.com in late 2006.? It took a lot of courage to take action on the “Big Short,” and not many did.
The book dabbles on many topics, showing a superficial understanding of many ideas/events in order to show they one should not buy & hold.? The book plods for 80%+ of its pages developing what fails, and spends less than 20% of its time giving what one ought to do.? Their strategy takes up ~40 pages of a ~240 page book.

All that said, is the strategy a reasonable one?? Probably yes, but not if a lot of people adopt it.? Advanced amateur investors could implement the ideas of the book easily, those with less experience would need help to do it, and the authors offer that help, much of it free, and more for a fee.

Quibbles

Already expressed.? I’ll stick with value investing; I’d rather have a lumpy 15% than a smooth 12%.? This book could have been better if it focused on its positive strategy, fleshed it out more, so that average amateurs would have had a clearer direction on what to do.

Who would benefit from this book: If you don’t have an investing strategy and you want one, this book may benefit you.? I have read far worse strategies in many books.? If you want to, you can buy it here: Win By Not Losing: A Disciplined Approach to Building and Protecting Your Wealth in the Stock Market by Managing Your Risk.

Full disclosure: The publisher sent me the book after asking me if I wanted it.

Sorted Weekly Tweets

Posted on 1 November 2013 by David Merkel

Market Impact

Keep the Economists off the Trading Desk http://t.co/3E3OoDJLrS As Howard Simons said, “Stocks are not GDP futures.” Ignore the economy $$ Nov 01, 2013
‘Skew’ Measure Points to Excessive Market Optimism http://t.co/sT8aVfJ2MI Calls priced high, puts priced low & we r not so bad u know? $$ Oct 30, 2013
Bear hunting http://t.co/nvnCpNfl1G Bear shortage has a few wondering who is left to buy from existing stockholders $$ Oct 30, 2013
Amazing fact #1: Market has been unexpectedly strong since May 1 | Amazing fact #2: Market?s YTD 2013 returns have never been negative $$ Oct 30, 2013
3 ?amazing? facts about the stock market http://t.co/SKog36iBgE Amazing fact #3: The stock market?s Sept and Oct have both been positive $$ Oct 30, 2013
Wall Street is way too bullish http://t.co/dBNe8oaeho Collapsing time horizons may presage a bearish turn for the risky asset markets $$ Oct 30, 2013
BlackRock?s Fink Says There Are ?Bubble-Like Markets Again? http://t.co/cgj8MI5vls “Fed policy is contributing to ‘bubble-like markets.'” $$ Oct 30, 2013
Five Bad Ways to Pick a Mutual Fund http://t.co/9ZXV7y0lWv Good as far as it goes. Important: don’t chase performance or ratings $$ Oct 30, 2013
How Our Brains Betray Us http://t.co/ZFzTZT4t1t We tend 2b 2 optimistic about the future,& not realistic enough about the present $$ Oct 30, 2013
JP Morgan’s Subprime Troubles Ran Deep http://t.co/df0Ok7fQG4 The originators r all dead, so they go after one of the last standing $JPM $$ Oct 30, 2013
Bond-fund charts of the day, rising-rates edition http://t.co/q7DDAectXI Where @felixsalmon finds the speed of rates rising matters a lot $$ Oct 30, 2013
Six Ways to Ensure Qualified Borrowers Can Get Mortgages http://t.co/S7XBegLn4k Unrealistic article, though the part on servicing is good $$ Oct 30, 2013
Is Your Pension Courting Catastrophe? http://t.co/0kMj4FdCpO Good summary & resources, but few pensions invest 2much in CAT bonds $$ Oct 30, 2013
Are CAT Bonds The Answer to Today?s Retirement Planning Woes? 2 Early 2 Tell?More Transparency Needed! http://t.co/M7taq4X2XE Not4retail $$ Oct 28, 2013

Companies & Industries

Phillips 66 to Build Texas Terminal to Export Propane, Butane Overseas http://t.co/XIUbREChpH Exporting nonstandard fuels from fracking $$ Oct 31, 2013
PwC Agrees to Purchase Booz to Expand Advisory Services http://t.co/TW21OqwH5Q Conflict of interests: auditing firms 4 which they consult $$ Oct 31, 2013
Now Amazon Is Just Giving Money Away http://t.co/mdtioUbM4K $AMZN -> great nonprofit that eats businesses continues like Galactus $$ #nomnom Oct 31, 2013
Stop Subsidizing Colleges? 100-Year Debt Binge http://t.co/76w7ngChue Colleges r more fragile than 2 last 100 years; don’t lend 2 them $$ Oct 31, 2013
Dell?s Mitzvah Rescued Buyout as JPMorgan?s Lee Warned of Perils http://t.co/hKyGu1VCnj Da dirt, da whole dirt & nuttin but da dirt $$ Oct 30, 2013
Who?s Right About Apple?s Cash Pile: Cook or Icahn? http://t.co/ZJNFMpVtXu Simple: Cook. Most of the $$ is overseas & can’t easily return Oct 30, 2013
How Mobile Technology is Changing the Way We Dine Out http://t.co/Su0Po5ezxx Social media affects how people choose restaurants $$ Oct 30, 2013
Why Consol is Diving Into Natural Gas While Others Jump Out http://t.co/m3nIsWFv8a Oil > Natgas > Coal | Simple, huh? $CNX $$ Oct 30, 2013

Insurance News

Harbinger Insurer Switches to Iowa Watchdog From Maryland http://stks.co/hsV7 Decamping 4 a more friendly & sophisticated regulator $$ $HRG Nov 02, 2013
Berkshire Hathaway defends asbestos claim-paying record vs stories by Mark Greenblatt of Scripps News http://t.co/lYcEQH13Ea FD: + $BRK.B $$ Nov 01, 2013
Buffett?s $40B Cash Pile Provides Acquisition Fuel http://t.co/WYZ5AWsBaj Would view largest private companies look4 transitional probs $$ Nov 01, 2013
Lincoln National Wins $4 Billion Annuity Reinsurance Deal http://t.co/E3v9AwvDb4 I find this dubious, but $WFC is the likely loser $$ Oct 31, 2013
Crop Insurance Hazards Shown in Lost Pheasants in Grasslands http://t.co/s96GcQn8jw W/Ag doing so well, we need to end the Ins subsidies $$ Oct 30, 2013

Other

No Bones About It: Day of the Dead Is Finding New Life http://t.co/AGzU8olA1b Life is for the living; let the dead bury their own dead $$ Nov 01, 2013
Little Sign of Housing Bubble in Land Prices http://t.co/P8LyXzvyZu Overinvested for a long time; we shouldn’t subsidize home ownership $$ Oct 31, 2013
The 50 Greatest Breakthroughs Since the Wheel http://t.co/Hy0ePPNa9W Ambitious article that explains why innovation benefits us all $$ Oct 30, 2013
Drones Delivering Pizza? Venture Capitalists Wager on It http://t.co/njvc3uysge Sadly, the pizza was cold when it arrived. $$ Oct 30, 2013
If New York Freezes in January Blame Siberian Snow Now http://t.co/7oMGUa8poK These tendencies r weak, like most things on global warming $$ Oct 30, 2013
Cheaper Laser Sensors for Self-Driving Cars Are on the Way http://t.co/Nx09HA3zEW If sensors r that expensive, driverless cars r far-off $$ Oct 30, 2013

NSA / Privacy

Furious Tech Giants Fight Back Against NSA Surveillance http://t.co/KSNmBfE2v4 Ripple effect from Snowden’s revelations get bigger weekly $$ Nov 01, 2013
Edward Snowden Has Japan Copying China?s Playbook http://t.co/iZ1sKibSSd Excessive secrecy creates environment for government wrongdoing $$ Nov 01, 2013
How anti-NSA backlash could fracture the Internet along national borders http://t.co/gswU55LYiS Democratic nations hate being NSA snooped $$ Nov 01, 2013
NSA infiltrates links to Yahoo, Google data centers worldwide, Snowden documents say http://t.co/Sr5YZD4u74 $$ shot: http://t.co/fTFufojKwz Nov 01, 2013
Tax delinquents by the thousands have security clearances, GAO finds http://t.co/8VnAziQSVN Easier 2 suborn someone who is in debt $$ Nov 01, 2013
Obama Unaware as US Spied on World Leaders: Officials http://t.co/DTz36LPrPE The surveillance state takes on a life of its own $$ Oct 30, 2013
The NSA?s Rent Is Too High http://t.co/xSGkk8GZvy Even if what they do were legitimate, they cost Americans far too much $$ Oct 30, 2013

PPACA / Obamacare

Health Policies Canceled in Latest Hurdle for Obamacare http://t.co/eT3EkcotYp I’m grandfathered for now, but how long will that last? $$ Nov 01, 2013
Obamacare?s Biggest Threat Isn?t the Website http://t.co/az9Imf0qBK burdensome complexity subsidy-based plan; failure universal coverage $$ Oct 31, 2013
You Can Keep Your Health Plan* http://t.co/Wi5xqZvdrB *Except if it not a health plan that the Obama Administration does not like $$ #lies Oct 31, 2013
Obama Tempers Insurance Pledge as Health Fight Rages http://t.co/fpZPH27KML An arrogant man who doesn’t understand economics and lies $$ Oct 31, 2013
Yes, People Are Losing Their Insurance Under Obamacare http://t.co/8aqWoASQfl Affects some people who buy their health plans on their own $$ Oct 31, 2013
The ObamaCare Awakening http://t.co/P01zM98SNZ Americans are losing their coverage by political design. That’s a feature, not a bug $$ #lose Oct 30, 2013
Insurers Oppose Obamacare Extension as Danger to Profits http://t.co/nsIz2wSoyT Clever Obama got the insurance companies2carry water4him $$ Oct 30, 2013
Americans lose coverage, Democrats say Obama too rosy about health care law http://t.co/jGg1lWtJA7 My plan was canceled; i had no choice $$ Oct 30, 2013
How Jon Stewart became President Obama?s biggest problem http://t.co/YAJ8fOnFJZ Lousy efforts from the govt deserve 2b exposed $$ Oct 30, 2013
Desperately Needed: More Geriatricians http://t.co/THkwfgtFqn We cannot create more Geriatricians via fiat in the sort run $$ Oct 30, 2013
The First Cracks http://t.co/UAnrYjlzXQ Some Democrats begin to question PPACA/Obamacare $$ Oct 30, 2013

Rest of the World

Will Toilet Rules Prove EU’s Waterloo? http://t.co/0jLUpeIA1a Standardizing toilet specifications across different cultures is futile $$ Nov 02, 2013
Japan Stocks Sink to Monthly Worst in Developed Markets http://t.co/XHJewfR5NZ Really difficult 2c how Japan normalizes econ policy $$ Nov 01, 2013
Ignore Greek Elections: Stocks Might Be the Best Buy in over 60 Years http://t.co/7tKWQ365RW Good call from @valuewalk timely/contrarian $$ Oct 31, 2013
Greek Recovery Makes Stocks World?s Best as Paulson Buys http://t.co/m25XYjWQsE Buy on the rumor, sell on the news, stick a fork in it $$ Oct 31, 2013
Eike Batista’s Empire Soared, Then Melted Into Bankruptcy http://t.co/3lh9catSFf At best, a huckster. At worst, a robber. A cheater $$ Oct 31, 2013
Japan Salaries Extend Fall as Abe Urges Companies 2 Raise Wages http://t.co/jOprQhpTsk Abe has quite an imagination; markets will dictate $$ Oct 31, 2013
OGX Bankruptcy Filing Caps Batista?s $30 Billion Demise http://t.co/MkIdlrCKNv He seemed incredible to me at first, he is credible now $$ Oct 31, 2013
Political Gridlock, Beijing Style http://t.co/xCrcTd2htZ Entrenched economic interests fight Party leadership seeking economic reform $$ Oct 30, 2013
Rebuilding Reserves Means U-Turn on Treasuries http://t.co/5EH3t378gb The $$ is not the only game in town, better liquidity than others $$ Oct 30, 2013
India Breast Cancer Surge Hinders Private Exams for Women http://t.co/Fumyl2WHTO Big problem, few resources; makes me feel sorry for them $$ Oct 30, 2013
Study Sheds Light on the Dark Side of China’s Urbanization http://t.co/GZFyxNKEHn Communism alienates from the means of production $$ #China Oct 30, 2013
The Lust Beneath Japan’s Sex Drought? http://t.co/APyIFrlth7 Japan’s sex culture is perverse, & their society shrinks as a result $$ Oct 30, 2013
The China Americans Don’t See http://t.co/E8FwXk1H6W China is weaker than it looks b/c it can’t handle dissent against the Party $$ Oct 30, 2013
Greek Government Bonds Pay Off Big for Fund Managers http://t.co/9LiFTr8BED Every dog has its day, & this bond mgr rates a healthy “arf” $$ Oct 30, 2013
Man Making Ireland Tax Avoidance Hub Proves Local Hero http://t.co/Iy2CVenb3f Controversial fellow who is not universally admired $$ Oct 30, 2013

Monetary Policy

Fed?s Bubble Alarm Stuck on Snooze http://t.co/Wwx4fARLH4 Not in Fed’s interest 2 go bubble hunting, do bad enough w/inflation & unempmt $$ Nov 01, 2013
JP Morgan sees ‘most extreme excess’ of global liquidity ever http://t.co/WurN40hJfP Global QE leads to a surfeit of spendable funds $$ Nov 01, 2013
Yalies Yellen, Hamada Put Tobin Twist Theory to Work in QE http://t.co/Okj2CGXZfo Op Twist might work at low debt levels, not at high $$ Oct 31, 2013
Sen. Paul Ties His Fed Bill to Vote on Yellen Nomination http://t.co/5hBSNbsOCg Auditing Fed’s monetary policy decisions is a good idea $$ Oct 30, 2013
http://t.co/SrNx6yfP2T Negative interest rates are a way for the government to steal from those that want to keep their risk profile low $$ Oct 28, 2013

Politics & Policy

Prosecutor Pleasantly Surprised to Find There’s a Law Against Fraud http://t.co/nqneLdc6JP Regulators use FIRREA to prosecute finl fraud $$ Nov 01, 2013
Wife Poisoning Husband?s Lover Tests Weapons Law at High Court http://t.co/0p7Otz5hyD Upheld, would federalize all crimes using chemicals $$ Nov 01, 2013
Speedy Lunches Urged at SEC as Union Decries Time-Clock Watching http://t.co/RpXErNaSct Never knew SEC workers had a union $$ #huh Nov 01, 2013
Policymakers think of investment like magic; just because u invest does not mean everyone will be better off; investment can b a waste $$ Oct 31, 2013
12 Steps toward a Simpler, Pro-Growth Tax Code http://t.co/vQWaVnHUw8 Problem is 2Much deferral of income tax & favoring investment $$ Oct 31, 2013
Gross Says America?s Privileged 1% Should Pay Higher Taxes http://t.co/c9i5W8i9R2 Real problem is definition of income; 2much deferral $$ Oct 31, 2013
Counties Made for Horse and Buggy Reject Savings http://t.co/oZshDLJGA6 Ppl value tangible/local govt & don’t begrudge its costs so much $$ Oct 31, 2013
Budget Deficit in US Narrows to 5-Year Low on Record Revenue http://t.co/9puVuXTbNm But it needs 2 shrink further, it is 2 big $$ Oct 31, 2013
Obama’s Broken Promise of Better Government Through Technology http://t.co/bWn3F3Pphy Bigness of govt tends to sabotage tech development $$ Oct 31, 2013
Christie Confounded as Padded Services Send New Jersey Taxes Soaring http://t.co/HTRKeQwchD NJ & corruption? We r supposed 2b surprised? $$ Oct 31, 2013
The expected future payments from defined benefit plans is the acid test for municipal finances; that includes social security & medicare $$ Oct 30, 2013
Pension Pinch Busts City Budgets http://t.co/dUid8OAyuI W/underfunded plans, watch the cash cost curve: what u expect to pay going fwd $$ Oct 30, 2013
The Great Pension-Bonus Giveaway Fiasco http://t.co/JWiO616X5e One of the stupidest things in pensions, allowing ppl 2spike benefits $$ Oct 30, 2013
Evangelical Pastors, Marriott CEO United on Immigration http://t.co/1AG0STUpK2 So long as we do not give them benefits, immigrants r good $$ Oct 30, 2013
Armed agents seize records of reporter, Washington Times prepares legal action http://t.co/NCJ33BSDjG State & Military abuse reporter $$ Oct 30, 2013
Software Helps GOP House Majority Leader Isolate ?Astroturf? Emails http://t.co/eDPLGwo1a7 Easy 2c lazy ppl who only have time 2 copy $$ Oct 30, 2013
Mystery of the ‘Missing’ Global Warming http://t.co/3xkNAd50JA Argues that rising water temperatures r more indicative of the problems $$ Oct 30, 2013
Colorado Secessionists Struggle as Trend Lifts Democratic Votes http://t.co/BJ9g0CbS6K Secessionists r unrealistic; Congress won’t do it $$ Oct 30, 2013
Reagan Revolution Misses Tax Fiefdoms Flourishing in US http://t.co/feUsHyGL5B Many local municipalities levy taxes; some do little $$ #IL Oct 30, 2013
Obamacare and the Death of Liberalism http://t.co/VLVk1GiJrT Liberalism ends when entitlement promises fail; I say give it 10-15 years $$ Oct 30, 2013

Wrong

Wrong: Germany Hits Back at US Over Economic Criticism http://t.co/hsoeuvvtLd Neomercantistic Germany’s surpluses will not get paid back $$ Oct 31, 2013
Wrong: Startup Defeats the Captcha, Wins One for the Machines http://t.co/vVAMnaBdJG Captchas have evolved beyond what has been cracked $$ Oct 30, 2013
Wrong: The political middle is dying. But it?s not redistricting?s fault. http://t.co/zRplttRK5w We need to force the middle to govern $$ Oct 30, 2013
An interview with Alan Greenspan http://t.co/eLgAExy6bQ One constant w/Greenspan is he will not accept blame for the mistakes he made $$ Oct 30, 2013
Wrong: PPP and Japanese Inflation Expectations (Extremely Wonkish) http://t.co/1G5MpBSnhw As usual, Krugman says inflation won’t hurt $$ Oct 30, 2013

Replies, Retweets, & Comments

$$ @ritholtz It is a plan if you prefund the deductible, which many medical service providers r requiring w/PPACA plans b4 service granted Oct 31, 2013
@viccan1 I don’t believe in conspiracy theories Oct 31, 2013
First, this isn’t new. I had professors talking about this in the early 1980s. Second, what may work when… http://t.co/MDJSt6EHaQ Oct 30, 2013
I do not want to spend my days, writing out the i’s & j’s. But i’s & j’s are an enigma, when squashed between a double sigma $$ #mathpoetry Oct 30, 2013
If you too should choose to skew sir, with the skew-goose, please sir, do sir — w/apologies to Dr. Suess $$ Oct 30, 2013
http://t.co/prav9FGJ2h “Now Fink tells us. He was more of a cheerleader for QE at its start.” ? David_Merkel http://t.co/MNHiiBTfnp $$ Oct 30, 2013
“The difficulty w/prosecution is apportioning blame. Easier to go after the corporation.” ? David_Merkel http://t.co/qOh82vAqvU $$ Oct 30, 2013
RT @RCdeWinter: This seems truer and truer every day. http://t.co/cKGi6IBdJH Oct 30, 2013
RT @TFMkts: Exactly how has QE helped jobs? NFP pattern no looks no different before and after QE http://t.co/Y0IUuDxT3B Oct 30, 2013
RT @mccarthyryanj: Amazing hire of @MattGoldstein26 by @DealBook. A really big loss for Reuters Oct 30, 2013
“Consider Stocktwits. They created cashtags. To refer to Google, you would type $GOOG. Twitter?” ? David_Merkel http://t.co/ZxWfSQjwze $$ Oct 28, 2013

On Fat Tails

Posted on 30 October 2013 by David Merkel

I’m reading an investment book that is arguing for market timing.? I’m not impressed with the line of argumentation so far.? I just finished a chapter where the authors pointed out that security price movements are more volatile that the normal distribution would admit.

This is a well known result, or at least it should be well-known.? What I hope to contribute to the discussion is why the tails are fat, and skewed negatively.? There is a famous saying in investments:

Cut your losses, and let your winners run

I regard this saying as vapid, because I have had so many investments where the price action was bad initially, but ended up being incredible investments.? I have also had companies stumble after prior gains, and persevere for greater gains.? Intelligent asset management does not react to the past, but analyzes future prospects, and looks at current margin of safety.

But imagine a situation where many parties have their plans, and they are all similar.? I’ll give a few examples:

Institutional investors decide in 1986 to follow the momentum, but be ready to sell if the momentum breaks.? They want upside, but want to protect the downside.
Japan was a total momentum market up through 1989, and the reverse thereafter.? Loose monetary policy was an aspect of that, as was a loss of fear, warrant speculation, etc.
Those investing in hot emerging markets in the mid-90s did not recognize valuations getting stretched, and the inability of the countries to maintain stimulative policies amid falling currencies.
The guys at LTCM were geniuses until they weren’t.? They had no idea of the risks they were taking.? They did not have an ecological view of investing.? Essentially, they thought liquidity was free, until the jaws of the trap snapped shut, and they died.? Taking a concentrated position is a risk, because the investing typically pushes up the price.? When you are so big in a position that you are affecting the market price, that is a bad place to be for two reasons: 1) if you sell, you drive down the price for future sales, and 2) you no longer know what the fair price would be if you weren’t there.
Aside from that with LTCM, their brokers mimicked their trades, accentuating the boom-bust, but the brokers had risk control desks that forced them to sell out losing trades, which further hurt LTCM.
Think about residential mortgage bonds in 1994.? So many players thought that they had mastered the modeling of prepayment risk only to find amid a Fed tightening cycle that many wanted to limit their interest rate risk as rates skyrocketed, fueling a self-reinforcing panic.
Consider tech stocks 1998-2000.? Momentum ran until the sheer weight of valuations, together with insolvencies, crushed the market as a whole, and tech stocks more.? Think of European financial institutions getting forced by regulators to kick out US stocks in September 2002, putting in the bottom.? Regulators almost always act too late, and exacerbate crises, but they should do that, because worse things would happen if they didn’t.? (Later = bigger crisis, Earlier = Some Type II errors, regulating where it was not needed).
Finally, consider the housing/banking crisis in the US 2005-2009.? People bought homes with a lot of debt financing, and short-dated debt financing.? Banks levered up to provide the financing.? Shallow credit analysis allowed banks to take on far more risk than they imagined.? It all ended in a trail of tears, with many personal, and not enough corporate bankruptcies, with the taxpayers footing the bill.

In each of these cases, you have correlated human behavior.? The greed of investors gives way to fear.

Now if you are thinking about Modern Portfolio Theory, where market players have perfect knowledge, this doesn’t make sense.? These crises should not happen.? But they happen all too regularly, and I will explain why.

Men are not greedy as much as they are envious.? This leads to mimicking behavior when things are going well.? Those not currently playing want a piece of the action, and so they imitate.

Modern Portfolio Theory implicitly assumes that market players don’t react to the actions of other market players, but that is false.? Most market players don’t think; they mimic.

That is what leads to fat tails, because when people move as a herd, you get dramatic price moves.? Because fear is a greater motivator than envy, that is why the big downward moves are almost always greater than the big upward moves.

Add into that the credit cycle, because gains on credit-sensitive bonds are small, but losses are huge when they occur.? The distribution of outcomes has a long left tail.

The main point here is that price movements are non-normal because market players act as a group.? Their behavior is correlated? on the downside, and to a lesser extent on the upside.

Among other things, this means Modern Portfolio Theory is wrong, and needs to be severely modified, or abandoned.? It also means that we need to watch the credit cycle, and speculative activity to get a sense of how committed the hot money is to risk assets.? Hot money follows trends.? Cold money estimates likely returns over a market cycle, and invests in the best ideas when they are out of favor.

I don’t think timing the market is easy.? I do think that fundamental investors have to look at whether they have a lot of opportunities, or few, and vary their safe assets opposite to opportunities.

So beware the fat tails — we haven’t had a lot of volatility recently.? Maybe we are due.

To Young Analysts

Posted on 26 October 201328 October 2013 by David Merkel

I write this because my friend Tom Brakke is putting together a book.? He wrote a series that started with a letter to a young analyst.

I have sympathy for those that are starting out in finance.? It’s tough.? My own route to where I am today was longer than most. In some ways, I have advantages, because I worked inside regulated financial firms, and I saw the pathologies that exist within them.? But here was my path:

Junior Actuary
Actuary for Annuity Lines
Investment Actuary for tihe Pension Line
Investment Actuary for the Annuity Line
Mortgage Bond Manager, and Risk Manager
Corporate Bond Manager, advising the Chief Investment Officer on insurance issues.
Buy-side Analyst of Insurance Companies for a hedge fund
Chief Research Analyst for a minority broker-dealer
Principal of Aleph Investments, LLC

Look, it’s tough to be inexperienced.? I’ve been there.? I really wish I understood the accounting rules, and laws/regulations regarding insurance better, when I was new to my work.? That said, I wish the older guys would have handled the issues better, and not made a neophyte deal with tough issues without advice.

It’s hard, but to the extent that you can, think about analytical issues at their most broad and qualitative levels.? Anyone can put numbers into a formula, but few can understand what the numbers and formulas mean.? Formulas are abstractions, and like all abstractions, they distort reality.? The analyst that can adjust the model to reflect reality will be far ahead of the one that “plugs and chugs.”

A Picture is Worth 1000 Words

Let me tell you about one of my greatest failures.? My division at AIG had a new CEO, and he was an actuary.? We felt like we had lifted from the basement into the stratosphere.? I went to the new CEO, and showed him my proposal for crediting rates.? Most of the presentation was visual, with many graphs.? It was stunning; I walked out of the meeting knowing that I had deeply convinced the CEO.

He was fired the next week by M. R. Greenberg.? He did not understand the politics of AIG, and questioned one of Greenberg’s deeply held convictions.

And so, young analysts, you may do superior work, and it ends up being nothing for reasons outside your control.? What should you do?? Keep up the good work, because most of the time, good work triumphs.

Study the Greats

For what it is worth, I am a lifelong learner.? Though I try to develop my own methods, I study the methods of others.? There is no “not invented here” attitude at Aleph Investments.? Rather, it is more akin to the mid-90s Microsoft motto: “We embrace and we extend.”

I have studied many different types of investors, and many different types of investments.? The breadth of understanding can allow you to analyze odd situations, where the rule books may not have opined yet.? It is good to be curious, and learn things a jump or two outside your circle of competence.? That is what expands your circle of competence, and deepens your knowledge at the core.

Learn the Tools

Even if it just being an Excel expert, learn your tools well.? If you can, be the “local expert” on how to get the most out of the common bits? of software used for analysis.? I still remember the looks on the faces of guys 20 years younger than me as a I showed them how to create deeply nested string functions that solved critical problems in a small space.\

Get the CFA Charter and More

It’s not that the CFA Charter confers great knowledge — I drifted through it with little difficulty.? Your mileage may vary.? But it does give a reasonably balanced treatment of the settled finance literature, while teaching ethics.? The ethics part is important.

Many of us want to “make good,” while few want to “do good.”? But what if the key to prosperity it putting the client’s interests first?? Even on Wall Street, as a corporate bond manager, I looked out for the interests of my brokers.? By being willing to help when they were in trouble, it brought me more than enough “good deals” because they wanted to help a friend who wasn’t playing for the last nickel on every deal.

Investing is a people business.? Do you make your clients happy?? Do you explain to them what you are doing?? Do you answer their intermittent questions?? Even the dumb ones?? If you aim for the good of others, good things will come back to you.? It may seem less direct than most marketing, but it is far more sticky.

As Jesus said, inverting Hillel, “Do unto others as you would have others to do to you.”? As Buffett said, “Don’t do anything you wouldn’t want to see on the front page of the newspaper.”? Jesus was more complete — do what is in the best interests of your clients, and ethical problems go away.

Conclusion

As an acquaintance of mine once said, “This is the greatest game in the world, and they pay us to play it.”? True enough, though many of us are in the top decile of ability, we compete against those in the top percentile.? It’s a tough world, and the competition means risk-adjusted profits are few.? Maybe we should all be wealth managers, sucking alpha out of the tax code, until the government changes the rules.

Be aware that in mid-life you might wonder what good your life has been.? Aiding the efficiency of capital markets is a good thing, but it may seem thin relative to jobs that obviously help other people.

A defense to that is managing money for the good of others, and not just for yourself.? Modest fees, where you have your own assets invested alongside your clients, is a great thing to do, and assures clients that you care for them.

“Care for them,” those words strike me.? Most amateur investors buy near the top and sell near the bottom.? We can be their shepherds, holding their hands during the bad times, and telling them to calm down during the good times.? We can try to limit their risks so that they do not panic or get greedy.

There is real good to be done people and institutions as an investor, but the first thing to learn is control yourself, and all of your emotions.? Once you do that, you can do good things for your clients.

Bad Theories Lead to Bad Results

Posted on 26 October 201327 October 2013 by David Merkel

From John Mauldin’s latest book, Code Red:

Investors should ask themselves: if central bankers couldn’t manage conventional monetary policy well in the good times, what makes us think that they will be able to manage unconventional monetary policies in the bad times?

I would point my readers to two of my detailed pieces on monetary policy:

What Mauldin says is common sense, and is a summary of my own views.? The Fed missed many opportunities to tighten monetary policy enough during the good times.? They tried to be short-term heroes, not willing to take the heat like Martin and Volcker did.

So why should we entrust these losers with “more powerful” tools (that have never been shown to work), when they can’t use the normal monetary policy tools right?? By over-provisioning liquidity from 1986-2004, the Fed created the trap that we are all in now.

I don’t see a good way out of this, and as for investing, I am mostly holding companies that can pass inflation through, with strong balance sheets, should there be deflation.

Traveling with David

Posted on 25 October 2013 by David Merkel

Sometimes I over-commit my time.? That’s been the last few days.? Recently I went to visit a friend who had lost his job at a large company, to look over his severance papers, and advise him.? He is older, a “minority,” and only been with the firm 5-6 years.

Severance agreements have gotten a lot tighter since the two that I have personally experienced.? Corporations dangle some compensation to eliminate possible future legal costs.? I pointed out to my friend the most likely reasons he might sue, but added two things:

The company has a large number of sharp lawyers, so you had better have an open-and-shut case.
We’re Christians, so we don’t go to court over small matters.

But what impressed me in reading the agreement was how airtight it was — can’t sue over Federal, State, Local, or common law offenses, or anything else.? Which made me think about another thing… the connection between entrance and exit doors.

In investing, people are more wiling to invest if they can have their money back at any time.? With employment, it is the same — employers are more willing to employ if they can fire people for any reason.

Every protection for those employed makes it harder for those without work to be employed.? This also forces jobs to go underground — if advertising them publicly subjects them to regulation, then the good jobs will be filled via “word-of-mouth.”

This takes me back to the early days of the Reagan Administration.? They deregulated a lot of things, and the economy grew far more rapidly.? We could do the same now, starting with labor and healthcare.

My friend may do fine, but the things that “protected” him at his last job now hinder him in seeking another job.? Better to eliminate the protections, and let people compete based on skill and assiduousness.

Part Two

Then I was a judge in a financial analysis competition at a local college.? The analysis involved a stock that faced a large investment decision, larger than the current enterprise value of the junk-rated company.? Should the hedge fund buy, sell short, or do nothing with the stock?? The simple part of the case study was working through the intricacies of the discounted cash flow model, together with changes to the assumptions about cash flows and the weighted average cost of capital.

What I found interesting was the lack of attention to:

Details of the case study — did you even read it?
Common sense — we are sorry, but a stock can’t lose 113%.? Perhaps you would like to tell us to short the bonds?
Limitations of complex techniques in finance.? Yes, there’s many nifty formulas available to you, but do you understand what they really mean, and what limitations they imply?? When are they not valid?
What markets can and can’t do.? No, you can’t do an public issuance of junk debt at the level of current debt.? You can’t do an issuance longer than ten years.? You can’t do one that is really big without changing market pricing (and the answers from the case study had this wrong as well).? Same applies to large secondary IPOs for equity.

Now, I know these are students.? They can’t know what an experienced market professional does.? To their credit, they dug up many bits of useful data that the case study did not contemplate.? But the case study itself should have noted these things, and to that degree I fault Darden for writing up a subpar case study.

The main thing I would say again to the students is to ignore the academic models with their false certainty, and try to understand the qualitative aspects of the business, out of which the quantitative modeling will grow.

When we were done, each of the judges gave comments to the students.? I started off with, “Sorry for being such a hard-nose.”? I got a decent laugh from the students, and then explained to them what I have said to you.

Part Three

That evening I went to a talk by CareFirst on the PPACA/Obamacare.? It was a genuinely useful 20-minute presentation, with one annoying thing: all of the pictures in the slide deck were of healthy smiling people.? If you are healthy, you will pay more, unless you are really poor.? A realistic presentation would have had people that are stoic, sad, or crying, if they are healthy and not poor.

The best part of what CareFirst gave me was premium rates for PPACA.? The lowest level plan would increase my premiums by 50%, and would increase the areas in which I would have to pay.? More expensive in every way.

It is only an affordable care act to those who were previously uninsurable; to those who were insurable it is a tax on your health and income.? In 2016, we will rip it out by its roots, and have people pay for healthcare directly, with no tax deduction for employer-provided healthcare.? That will reduce healthcare spending, and shrink healthcare to a more reasonable part of the economy.

If you want healthcare to be affordable, get the government out of it in entire.

Part Four

Dr. Kathryn Crecelius spoke to the Baltimore CFA Society on Thursday.? She is the Chief Investment Officer of my alma mater, The Johns Hopkins University.? She talked to us about endowment investing.? Very common sense stuff, very well said, and much like you would hear from me.? I found myself nodding through the whole talk.? It was all very much like my last piece on endowment investing.? I learned a lot, which makes me happy, because I always like to learn.

My travels are done for a while.? I like that too, because being home is a happy place.