"Recruiting celebrity directors can bring benefits, such as helping a company burnish its image or pursue new business opportunities, said David Becher, an associate finance professor at Drexel University in Philadelphia."
"The absence of arbitrage possibilities does not imply that market prices always and everywhere reflect some sort of fundamental values. Plenty of housing price changes are predictable, and Las Vegas looked pretty overpriced 30 months ago. But how could I have profited from this knowledge, other than avoiding the folly of buying at the peak? There was no easy way to short Las Vegas real estate."
The article concludes:
"...the existence of bubbles and market irrationality doesn’t mean that markets are inefficient, in the sense that they allow easy arbitrage. A classic paper written more than two decades ago by Brad DeLong, Andrei Shleifer, Larry Summers and Robert Waldmann showed that less-than-rational “ noise traders” (a term coined by Fischer Black) could move markets even when rational traders have arbitraged away all the free lunches. The vicious swings of our asset markets suggest that these markets may often be moved by strange, probably irrational forces, but that doesn’t imply that the Efficient Markets Hypothesis is dead."
"...recognizing the occasional madness of markets can provide a bit of investment guidance. The difficulty inherent in finding free lunches doesn’t mean that buyers should just buy a house, or a mortgage-backed security or a stock, trusting that the market has priced things correctly. A house doesn’t become a good buy just because some other idiot paid a fortune for a similar home down the street. A similar fool may not be around when you are looking to sell."
"...it generally is good advice to buy asset exposures cheaply (as to fees), but only if you can really buy them cheaply (as to valuation)."
"...devotees of behavioral economics — a school of economic thought greatly influenced by psychological research — which argues that the human animal is hard-wired to make errors when it comes to decision-making, and therefore people need a little "nudge" to make decisions that are in their own best interests......This is the story of how obscure psychological research into human decision-making first revolutionized economics and now appears poised to remake the relationship between the government and its citizens
"It's a problem that afflicts us all, says Kahneman, who won the 2002 Nobel Prize in economics for his work on this subject. From stockbrokers to baseball scouts, people have a huge amount of confidence in their own judgment, even in the face of evidence that their judgment is wrong.
But that mistake is just one of many cognitive errors identified by Kahneman and his frequent collaborator, psychologist Amos Tversky. For more than a decade, the two worked together cataloging the ways the human mind systematically misjudges the world around it."
"Let's begin:
The CRA was not a static piece of legislation. It evolved over the years from a relatively hands-off law focused on process into one that focused on outcomes ...Regulators, beginning in the mid-nineties, began to hold banks accountable in serious ways. Banks responded to this new accountability by increasing the CRA loans they made, a move that entailed relaxing their lending standards"
- How could a piece of 1977 legislation be significant to the deterioration of mortgage standards 25 years later?
"Regulators instructed banks to consider alternatives to traditional credit histories because CRA targeted borrowers often lacked traditional credit histories. The banks were expected to become creative, to consider other indicators of reliability.
Similarly, banks were expected by regulators to relax income requirements. Day labors and others often lack reportable income. Stated-income was a way of resolving the gap between actual income of borrowers and reported income. The problem, of course, comes when the con-artists and liars come into the game."
"George W. Bush was a major proponent of the kind of mortgages that banks had started making under the CRA. He urged low-to-no doc mortgages and the elimination of downpayments, just like the CRA regulators had long done. “We certainly don't want there to be a fine print preventing people from owning their home,” the President said in a 2002 speech. “We can change the print, and we've got to.”"
"Of course it wasn’t the CRA that caused everything. The CRA was a factor in lowering lending standards. This was a necessary, although not sufficient, cause for the mortgage mess"
"The weak resale market has Goldman and a growing number of Mets and Yankees season-ticket holders considering whether to drop their seats next year, or to switch to a plan with fewer games or cheaper seats. The risk of getting stuck with expensive tickets that are hard to resell, they said, is just too high in a weak economy."
"If I can’t move these tickets, I can’t afford to be stuck with them or take a loss,” said Mr. Coleman, who said he was getting 40 percent less this year for tickets to weekday games that he resold. “The proof is the secondary market. If you don’t have people willing to buy tickets at these prices, I hope the message gets across to the Yankees and Mets.”"
"In hindsight it's easy to see the optimism then was mistaken and the downturn was worse than expected, but this was impossible to predict at the time. Also, the conferences did some good - they reduced the panic and pessimism of the time, and helped keep employment and wages from plunging as they otherwise would have. Some now say we should have “plunged headlong into general liquidation,” but would we have been better off with two or three times as many unemployed over the winter? We shouldn't allow frustration with the delayed recovery to upset our nerve."
"Dr. Richard Thaler, Professor of Economics and Behavioural Science at the Booth School of Business in Chicago is one of the leading researchers in the relatively new field of behavioural economics. This is the field that's exploring some of the ways in which humans reliably and systematically make decisions that most economists would consider irrational. He's also written a best-selling book, called Nudge, Improving Decisions about Health, Wealth and Happiness that explores ways to work around our irrational tendencies. Other behavioural economists, like Dr. Colin Camerer, the Robert Kirby Professor of Behavioural Economics at the California Institute of Technology, are using advanced technologies, like MRI, to study just what's going on deep in the human brain when we make all sorts of decisions"
"Last August, Edward J. Kane, a finance professor at Boston College, wrote about just this likelihood in a paper titled “Ethical Failures in Regulating and Supervising the Pursuit of Safety-Net Subsidies.”....
“When a substantial portion of the financial sector appears to be at risk, it is far easier to patch up the weaknesses in the system with ad hoc loans and guarantees than to negotiate genuine reform,” he wrote."....
For top regulators to be able to push through larger bailouts, he argued, two conditions must hold. “First they must be able to control the flow of information,” ...“so as to keep taxpayers and the press from convincingly assessing either the magnitude of the implicit capital transfer or the anti-egalitarian character of the subsidization scheme.”(FP's emphasis)
"Regulators’ commitment to these bailout policies “must be continually nourished by praise and other forms of tribute from the bankers, borrowers and investors whose losses are being shifted to less-influential parties.”"
"Here's how a typical butterfly or fly trade works.
Palsson told clients to consider buying an August 90 put and an August 70 put on the Standard & Poor's Depositary Receipts (SPY), an exchange-traded fund that tracks the S&P 500 index. At the same time, Palsson advised clients to sell two August 80 puts. SPY was at about $89 when he recommended the trade, and was recently at about the same price. The trade costs $1.85, representing the limit of the loss if the strategy fails.
The strategy is called a butterfly because when it is executed it looks like the often colorful insect. Effectively, traders are long the wings -- the August 70 and 90 puts, and short the body -- the two August 80 puts. (Read that sentence again because this can be confusing and complicated material.)"
"Imagine that the Fed were to announce that, a year from today, it would pick a digit from zero to 9 out of a hat. All currency with a serial number ending in that digit would no longer be legal tender. Suddenly, the expected return to holding currency would become negative 10 percent.
That move would free the Fed to cut interest rates below zero. People would be delighted to lend money at negative 3 percent, since losing 3 percent is better than losing 10.
Of course, some people might decide that at those rates, they would rather spend the money — for example, by buying a new car. But because expanding aggregate demand is precisely the goal of the interest rate cut, such an incentive isn’t a flaw — it’s a benefit.
The idea of making money earn a negative return is not entirely new. In the late 19th century, the German economist Silvio Gesell argued for a tax on holding money. He was concerned that during times of financial stress, people hoard money rather than lend it."
"Below is a list of all the US banks that have closed this year, with the most recent ones first.
A total of 40 banks have failed so far in 2009, versus 25 for all of 2008. For more on failed banks, check out our slideshows of the ten largest bank failures this year and the two dozen of 2008."
"Ortenzio Matteucci points to towns down the wooded Nerina valley in Italy’s Umbria region and blames peer pressure for his decision to let Polino, population 290, buy a U.S.-inspired financial swap he didn’t understand.
A retired steelworker with wavy gray hair, Polino’s Mayor Matteucci says he agreed to the interest-rate swap because Milan...and local towns Arrone and Stroncone all bought derivatives to try to save money....Derivatives have burned towns from Polino to Milan to Erie, Pennsylvania. Jefferson County, Alabama, said it might need to declare bankruptcy because of costs associated with the contracts. Responsibility for the expenses in Italy’s second- biggest city and in Umbria’s smallest village sits with elected officials who agreed to financial instruments they didn’t fully grasp"
"Social enterprises...often don't fit neatly into existing ownership structures. Those that register as nonprofits have trouble tapping private capital to expand, while for-profit companies risk compromising their missions because they must put shareholders' returns first. But growing interest in hybrid business models has spurred recent efforts at the state level to create new corporate structures that allow entrepreneurs to integrate nonfinancial goals into for-profit businesses..
...known as the Low-profit Limited Liability Company (or L3C), is intended for companies that put their missions before profits. The structure lets them qualify for "program-related investments" from foundations—loans or investments that further a foundation's goals and also may yield financial returns. "
"The low-profit, limited liability company, or L3C, is a hybrid of a nonprofit and for-profit organization. More specifically, it is a new type of limited liability company (LLC) designed to attract private investments and philanthropic capital in ventures designed to provide a social benefit. Unlike a standard LLC, the L3C has an explicit primary charitable mission and only a secondary profit concern. But unlike a charity, the L3C is free to distribute the profits, after taxes, to owners or investors.
A principal advantage of the L3C is its qualification as a program related investment (PRI), an investment with a socially beneficial purpose that is consistent with and furthers a foundation’s mission. Because foundations can only directly invest in for-profit ventures qualified as PRIs, many foundations refrain from investing in for-profit ventures due to the uncertainty of whether they would qualify as PRIs or use costly time and resources to acquire a Private Letter Ruling from the IRS to verify that the venture is a valid PRI."
"At Dickinson College in Carlisle, Pa., the women’s swim team held a “virtual swim meet” with Bryn Mawr College, in Pennsylvania, about 112 miles away. Each team swam in its home pool, then compared times to determine the winners. (“We probably saved $900 on bus travel,” said William G. Durden, Dickinson’s president.)"
"The paper presents evidence that the adoption by Japanese firms of a shareholder-centric, more transparent, system of corporate governance creates greater corporate value in comparison to the traditional system.... The effect is not only significant, it is important in magnitude. This paper takes advantage of the unique opportunity afforded by Japan’s introduction of a dual system of corporate governance in 2003, when companies were offered a choice to adopt a new system incorporating outside directors on governing committees. Data analysis shows a significant increase in firm valuation as measured by Tobin’s q, for companies that adopted the committee system, even though comparative financial data show little difference. This finding is attributed to signal sending, as companies who adopted this system signal a choice toward transparency and openness."
MORAN: Why? What in this package today would have prevented what happened last fall?
GEITHNER: ... maybe three key things. The first is we need to give consumers better protections against the risk they get taken advantage of....
The second is to make sure that banks can't take on this much risk and other institutions can't take on risk that threatens the basic fabric of the economy. And so we've put in place much stronger protections, safeguards, stronger constraints on leverage, capital requirements.... again"
And the third because we're not going to be able to prevent....all crises in the future, we need to have better capacity to manage...potential failure of large institutionsMORAN: Now one of the things you're already hearing is that in the effort to protect the system you're stifling it. Too much new regulation and you'll crush the life out of the financial system.
GEITHNER: We've got to get the balance right. I don't think we had it right.
"MORAN: One of the things in this proposal is more power for the Federal Reserve Board and that is very controversial. There are a lot of people saying that's a dangerous thing to do. The Fed should just be about the money policy and not get involved in regulation. What do you say to that?
GEITHNER: All central banks, including ours, our Federal Reserve, are given responsibility for monetary policy, to keep growth stable over time, inflation low and stable. But alongside that responsibility, in the United States, almost 100 years ago, an in countries round the world, central banks also have this critical responsibility for financial stability.
The question is, and the challenge is to make sure they have the authority to discharge that responsibility well."
"The British CFA recently asked its members for the first time if they trusted in “market efficiency” – and discovered that more than two-thirds of respondents no longer believed that market prices reflected all available information.
...77 per cent of the CFA group also “strongly” or “very strongly” disagreed that investors in aggregate behaved “rationally” – in apparent defiance of the “wisdom of crowds” idea that has driven much investment theory.
The shift is significant as the assumption of efficient markets is a cornerstone of the financial calculations of valuing everything from stocks to pension fund liabilities to executive compensation.
William Goodhart, chief executive of the CFA Society of the UK, on Monday admitted that the results showed a new mood of “questioning” following the financial crisis."
"Exxon Mobil is not alone in giving the appearance of regarding the annual meeting as a pointless legal obligation, a sort of tax on the time of the executives and board which must be endured with the least possible effort. Indeed, there is no reason to think that Exxon Mobil is a particularly serious offender: at least it provides decent pastries, and the entire board attends.
Contrast that with an infamous annual meeting of Home Depot shareholders in 2006. Bob Nardelli, the retailer’s then boss, was the only director to show up. Large clocks were used to keep the utterances of talkative shareholders to a minimum. Mr Nardelli, whose combative style earned the firm the nickname “Home Despot”, did not take questions. The whole event was over in less than 40 minutes. Mr Nardelli was fired soon after, in part because of shareholders’ fury at his annual-meeting arrogance—though more because he had failed, despite a huge pay package, to move the firm’s share price in the right direction."
"Jeff Matthews...wants you...to remember this: 'The epicenter of the financial crisis that almost brought the world to its knees was the regulated portion of the U.S. financial system -- in particular Fannie Mae and Freddie Mac, two of the most regulated entities ever created.'"Thanks to MT for the link!
"Real-estate assets represent more than one-third of the value of all the underlying physical capital in the United States and the world. The relationship between the level of interest rates and housing prices does not always follow one direction and a shock event in one market may trigger deep repercussions in the other. With the spread of the securitization process, the risks rooted in these two fundamental markets can have far reaching outcomes."
"The introduction of derivatives in the real-estate market is not easy because liquidity is difficult to establish when returns are predictable. An extensive discussion highlighting the important psychological barriers that need to be passed for the establishment of real-estate derivatives is provided in Shiller [2008]. ...The major obstacle for the introduction of real-estate derivatives was that when returns follow trends at certain points in time, then market sentiment is in only one direction and it is difficult to find counterparties trading against the trend. Nevertheless, if a futures contract is already trading for a series of future maturities, then the shape of the forward curve on real-estate index becomes important. Trades may be executed on the curve, say short a futures with a long maturity and long a futures with shorter maturity, which would be impossible to execute otherwise. With futures and options on futures, an entire spectrum of trading strategies becomes available and market participants such as hedge funds, investment houses, and private equity funds may provide much needed liquidity.2"
Some of my favorite tweets from the past week in no particular order:
KevinLacroix--New German exec comp law requires execs to pay 1.5% of annual pay toward D&O insurance http://bit.ly/10KkJL (HT @kranenburgesq)
"....from Rick Hanley's chart here -- the price of a trade has dropped continuously. Trading volume and investment banking were the two sources of funding for sell-side research -- for the first the price per trade has plummeted, for the second Elliot Spitzer put up a wall between IB and research -- and so the business model of traditional sell-side research within the big broker dealers is broken."
"'The real problem is that long-term unemployment is going up dramatically,' said Franklin Allen, finance professor at the Wharton School. 'Unfortunately, many people ...may never get jobs again,' he wrote in a paper published this week.
Allen, alluding to federal statistics that show 27 percent of the 12.5 million unemployed workers in the country have been without a job for more than six months, said the Great Recession will serve as a 'watershed event' for the country."
| Team | payroll | Injuries | wins | expected wins based off of payroll | Wins - expected wins |
| Yankees | 201449189 | 5 | 36 | 36.414706 | -0.41471 |
| Mets | 148373987 | 8 | 32 | 33.896147 | -1.89615 |
| cubs | 134809000 | 3 | 30 | 33.252453 | -3.25245 |
| red sox | 121745999 | 3 | 38 | 32.632579 | 5.367421 |
| tigers | 115085145 | 3 | 34 | 32.316504 | 1.683496 |
| angels | 113709000 | 3 | 32 | 32.251202 | -0.2512 |
| phillies | 113004046 | 3 | 36 | 32.21775 | 3.78225 |
| astros | 102996414 | 4 | 29 | 31.742861 | -2.74286 |
| mariers | 98904166 | 6 | 30 | 31.548673 | -1.54867 |
| braves | 96726166 | 7 | 30 | 31.445322 | -1.44532 |
| white sox | 96068500 | 2 | 30 | 31.414114 | -1.41411 |
| Giants | 82616450 | 2 | 34 | 30.775778 | 3.224222 |
| indians | 81579166 | 7 | 29 | 30.726556 | -1.72656 |
| blue jays | 80538300 | 5 | 34 | 30.677165 | 3.322835 |
| brewers | 80182502 | 2 | 34 | 30.660281 | 3.339719 |
| cardianals | 77605109 | 4 | 34 | 30.537977 | 3.462023 |
| rockies | 75201000 | 4 | 31 | 30.423895 | 0.576105 |
| reds | 73558500 | 3 | 31 | 30.345955 | 0.654045 |
| diamondbacks | 73516666 | 6 | 27 | 30.343969 | -3.34397 |
| royals | 70519333 | 7 | 28 | 30.201738 | -2.20174 |
| rangers | 68178798 | 8 | 35 | 30.090673 | 4.909327 |
| orioles | 67101666 | 4 | 27 | 30.039561 | -3.03956 |
| twins | 65299266 | 3 | 32 | 29.954032 | 2.045968 |
| rays | 63313034 | 9 | 34 | 29.85978 | 4.14022 |
| As | 62310000 | 7 | 27 | 29.812183 | -2.81218 |
| nationals | 60328000 | 7 | 16 | 29.718132 | -13.7181 |
| pirates | 48693000 | 5 | 30 | 29.166021 | 0.833979 |
| padres | 43734200 | 7 | 28 | 28.930713 | -0.93071 |
| marlins | 36834000 | 5 | 32 | 28.60328 | 3.39672 |
"In a commentary published in Monday's Washington Post, Treasury Secretary Timothy Geithner and the Director of the National Economic Council, Lawrence Summers, defended the need for an tighter regulatory control.
'The financial system failed to perform its function as a reducer and distributor of risk,' Geithner and Summers wrote. 'The economic pain felt by ordinary Americans is a daily reminder that, even as we labor toward recovery, we must begin today to build the foundation for a stronger and safer system.'
Developments in the financial markets have outstripped developments in the regulatory system, Geithner and Summers said, leaving markets virtually unregulated. 'The goal is to create a more stable regulatory regime that is flexible and effective; that is able to secure the benefits of financial innovation while guarding the system against its own excess.'
The two officials said the proposal will focus on five points, including the need for deeper cash reserves at major financial institutions. Those firms with a web of impact on other firms,'interconnected firms,' will be moderated by a consortium of Federal Reserve leaders.
In addition, the proposal intends to impose stricter reporting standards for asset-backed securities"
"As the hedge fund industry smashed through the one trillion dollar level a few years ago, it became vogue to ponder whether the new assets would dilute existing alpha opportunities. Was alpha a finite resource that needed to be shared among an ever growing number of industry players? And if so, was the hedge fund industry destined to become a victim of its own success...?The finding? Sure enough the collective alpha of the industry fell thus supporting the long held view that competition will drive down abnormal returns.
Research seemed to indicate that average alpha was indeed on the decline as the industry grew. But many also argued that the industry was being diluted by “unskilled” new entrants.
But if the new entrants were really “unskilled”, their effect on the returns of the incumbents should be minimal. If a group of 200 “skilled” managers were joined by 5,000 dart-throwing monkeys, then the original 200 should arguably be able to maintain their aggregate alpha. The simian stock-picking efforts of the monkeys should cancel themselves out...."
".... The key to achieving these savings is health-care plans that reward healthy behavior. As a self-insured employer, Safeway designed just such a plan in 2005....The results have been remarkable. During this four-year period, we have kept our per capita health-care costs flat (that includes both the employee and the employer portion), while most American companies' costs have increased 38% over the same four years.
... 70% of all health-care costs are the direct result of behavior....74% of all costs are confined to four chronic conditions (cardiovascular disease, cancer, diabetes and obesity). Furthermore, 80% of cardiovascular disease and diabetes is preventable, 60% of cancers are preventable, and more than 90% of obesity is preventable.
...Safeway has done nothing more than borrow from the well-tested automobile insurance model. For decades, driving behavior has been correlated with accident risk and has therefore translated into premium differences among drivers...have pronounced differences in premiums that reflect each covered member's behaviors....focused on tobacco usage, healthy weight, blood pressure and cholesterol levels."
"In the 1970s, the war between random walkers—theorists who believed that stock prices ultimately fit into the predictable pattern of a bell curve distribution—and professional investors began to settle into an uneasy but profitable truce. Hostilities still flared up from time to time, as on a mid-decade summer morning at Stanford Business School. On the first day of a weeklong seminar for money managers, a young accounting professor just arrived from Chicago kicked things off with a ferocious attack on the idea that anybody could beat the market."
"Stock holdings had begun to migrate in the 1950s from individual portfolios to institutionally managed ones....in the 1970s...another group of institutions came to the fore. These were pension funds, first used as a way to circumvent postwar wage and price controls by giving workers benefits that weren't counted as wages, and soon to become part of the social contract between large corporations and their workers. With General Motors leading the way, America's big companies began setting aside money and investing it to pay for future pension benefits. Together with foundations and university endowments, the pension funds had come to constitute a huge new pool of institutional money by the late 1960s."
Interesting stuff. Both from a history perspective as well as a market efficiency point of view.
"Because of his bond job, Ibbotson was interested in possessing the sort of historical data on bond returns that his Chicago professors James Lorie and Lawrence Fisher had compiled for stocks. Sinquefield was in the midst of starting a stock index fund ... wanted updated stock market data....so Ibbotson and Sinquefield took on the job themselves. Then Fischer Black, who had recently joined the Chicago faculty as a finance professor...After getting a Ph.D. in applied mathematics (a.k.a. computer science) from Harvard in 1965, Black had gone to work at the Cambridge-based consulting firm Arthur D. Little. There Jack Treynor introduced him to the capital asset pricing model and its simple linkage of market risk and reward. Black soon sought out the other two creators of the theory, paying regular visits to John Lintner at Harvard and getting his employer to fly Bill Sharpe to Chicago for a meeting in a hotel near O'Hare Airport (Michael Jensen was there as well) to discuss CAPM's implications for performance measurement."
"Six Flags Inc., the owner of 20 theme parks, sought bankruptcy protection 3 1/2 years after Washington Redskins owner Daniel Snyder become chairman and hired new managers in an attempt to return it to profitability.
The Chapter 11 petition filed in U.S. Bankruptcy Court in Wilmington, Delaware, listed assets of $3 billion and debt of $2.4 billion as of Dec. 31. Thirty-six affiliates also sought protection.
Snyder began a shakeup of Six Flags in late 2005 after winning three seats on the board. The 48-year-old company hasn’t posted an annual profit since 1998 and had losses of $558.8 million in the two years after Snyder became chairman."
"It was inevitable that the increasing role of the Fed in our economy would draw it deeper into the morass of politics.
Now the New York Times describes the efforts of various companies--from rental car giants like Hertz to manufacturers of speedboats, snowmobiles and R.V.s--to get financial assistance from Fed lending programs. The Fed is increasingly having to make politically sensitive choices.
Highly illustrative is the R.V. case. The R.V. industry has been heavily battered by the recession.....But the R.V. people fired up their lobbysts, the president made a trip to Elkhart, Ind--...and by March the Fed said it would finance equipment leasing deals, rental car fleets and “floor plan” loans, which car and R.V. dealers use to finance showroom vehicles."
"Research - by professors Benner from Wharton and Tushman from the Harvard Business School - has shown that ISO 9000, in the long run, can have a severe negative impact on a firm because it hampers innovation. Yet, the short-term benefits are clear; adopting ISO 9000 often comes with some good reputational effects, an immediate increase in customers, and satisfied stakeholders. However, the negative effect on innovation, in the long run, may outweigh all of this.
Nevertheless, firms adopt the practice because they do see the short-term benefits, but are quite unaware of the long run detrimental stuff.....
The same may very well be true for quite a few of our popular governance mechanisms, the practice of excessive risk taking as we saw it in investment banking, many forms of performance management systems, and certainly for corporate sexisms, and pin-striped suits with purple ties on hot summer afternoon. It is not that Darwin is wrong - and the mechanisms he discovered do not rule our markets - it is just that they're just as difficult to shake off as a common cold. And that they are just as annoying."
This page contains information we have gathered from coleagues, friends, and microfinance organizations we respect to help answer some of your questions....."Microfinance is the supply of loans, savings, and other basic financial services to the poor." (CGAP)
As the financial services of microfinance usually involve small amounts of money – small loans, small savings etc. – the term "microfinance" helps to differentiate these services from those which formal banks provide.
Why are they small? Someone who doesn't have a lot of money isn't likely to want to take out a $5,000 loan, or be able to open a savings account with an opening balance of $1,000. Hence – "micro".
"Hedgefunds, unlike mutual funds, employ a wider array of ivesting techniques, which are considered more aggressive. For example, hedge funds often use leverage to amplify their returns (or losses if things go wrong).
The other key difference between hedge funds and mutual funds is the amount of regulation involved. Hedge funds are relatively unregulated because investors in hedge funds are assumed to be more sophisticated investors, who can both afford and understand the potential losses. In fact, U.S. laws require that the majority of investors in the fund are accredited."
"...[after the 1929 crash the] idea that stocks could be good investments became a joke and remained that--in the popular view, at least--for decades. Yet whenever anyone in later years re-examined the data on stocks' long-run performance--major scholarly studies on the topic were published in 1938, '53, '64 and '76--they reached the same conclusion Smith did. Even with the dire experience of the early 1930s factored in, stocks had proved an excellent long-run investment, with returns that far outpaced those of bonds."
"He [Siegel] says the one significant change in his advice over the past decade has been an increased emphasis on "value" stocks with prices that are low relative to earnings, book value and other fundamental measures. Both Arnott and Siegel are boosters of a new investment approach called fundamental indexing, in which one assembles a portfolio weighted by earnings, dividends or the like in order to avoid the tendency inherent in conventional capitalization-weighted index funds to load up on the most expensive stocks.An alternative solution, which Bodie has proposed many many times but has not yet caught on to a great degree, is to use TIPs and long term options. The logic behind this is that stocks are volatile (indeed more volatile in the long term than the short term) and largely because stocks do tend to be so risky, you can never be assured how they will perform over your investment horizon. Therefore, you should invest in TIPs to get the what you NEED for future and if you want to invest the rest in riskier scurities (long term options is Bodie's well reasoned choice) the extra for things you may WANT.
"To Boston University finance professor Zvi Bodie, another frequent debating partner of Siegel's, this entire discussion is beside the point for most Americans. "He could be right," he says of Siegel's argument that stocks are a good deal right now. "I'm just more risk-averse than he is." Bodie, co-author of the perennially best-selling business-school textbook Investments, wrote a 2003 book titled Worry-Free Investing and has been trying ever since to steer personal-finance advice in a radically new direction. For most Americans, Bodie says, stocks are entirely inappropriate vehicles for saving for retirement. The reason they outperform bonds over time is the very reason they should be avoided: they're riskier. And if you're putting away money that you're going to need to live off in retirement, you shouldn't be taking any risk at all...."If your goal is to maintain your standard of living, then here's how much you should be saving and putting into TIPS," he says. "If you want to save more than that and speculate in the stock market, by all means, do it. But you need to recognize that you can't count on it when you do that."
"If you doubt the rationality of the stock market, then isn't investing in stocks a crap shoot? How can you be sure that there is a positive risk premium? The historical evidence is far from conclusive. It depends on what time periods and what countries you look at. Even the experts disagree."The problem is, as Fox points out, that this will likely (albeit not necessarily) yield a lower return so
Bodie concludes:Under such circumstances, shouldn't a rational investor follow the TIPS + calls approach that I advocate?"
"To follow Bodie's advice, then, you're probably going to need to save a lot more money for retirement than you've been doing"So what is the takeaway? With high long term volatility and the academic evidence pointing more and more to markets being less than perfectly efficient, it seems that Fox nails it when he end with
"Stocks are still the best investment for the long run. But maybe not for your long run."
"So what is one to do? My favorite idea comes from Zvi Bodie who applies modern hedging theories to retirement planning. As he wrote in in 2001 Retirement Planning: a New Approach paper the first part of the plan is to assure some minimum standard of living (this is the minimum amount that you will need) by investing in "inflation-protected bonds and annuities as the way to guarantee a minimum standard of living in retirement.""FTR His Worry-Free Retirement book is available here.
