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Article Archive: 2010

The Truth Wears Off
12/29/10   Academia
"Although many scientific ideas generate conflicting results and suffer from falling effect sizes, they continue to get cited in the textbooks and drive standard medical practice. Why? Because these ideas seem true. Because they make sense. Because we can't bear to let them go. And this is why the decline effect is so troubling. Not because it reveals the human fallibility of science, in which data are tweaked and beliefs shape perceptions. (Such shortcomings aren't surprising, at least for scientists.) And not because it reveals that many of our most exciting theories are fleeting fads and will soon be rejected. (That idea has been around since Thomas Kuhn.) The decline effect is troubling because it reminds us how difficult it is to prove anything. We like to pretend that our experiments define the truth for us. But that's often not the case. Just because an idea is true doesn't mean it can be proved. And just because an idea can be proved doesn't mean it's true."

Dogs could have their day in 2011
12/29/10   Dividends
"Michael O'Higgins is the first to admit that the Dogs of the Dow strategy has fallen on hard times as a stock-picking technique. "I'd say it's very unpopular right now," he said. "In the investment world, if something hasn't worked for a year or two, they damn it.""

The power of vulnerability
12/26/10   Behaviour
"Brene Brown studies human connection -- our ability to empathize, belong, love. In a poignant, funny talk at TEDxHouston, she shares a deep insight from her research, one that sent her on a personal quest to know herself as well as to understand humanity"

The disposable academic
12/26/10   Academia
"There is an oversupply of PhDs. Although a doctorate is designed as training for a job in academia, the number of PhD positions is unrelated to the number of job openings. Meanwhile, business leaders complain about shortages of high-level skills, suggesting PhDs are not teaching the right things. The fiercest critics compare research doctorates to Ponzi or pyramid schemes."

Merry Christmas!
12/24/10   Christmas
"Wishing you, your family, and friends the best of the season."

Bargain Junkies Beating Retailers
12/22/10   Thrift
"'I wonder why they waste money on advertising,' she muses. 'We'll buy whatever they want us to buy - as long as they pay us to buy it.'"

Bank Leverage Limits
12/22/10   Behaviour
"Crises are often compared to drinking binges, where excessive exuberance is followed by hangovers. Following that analogy, if you try to say, 'we don't want people drinking to excess, so we will stop everyone at 6 drinks', well then, they will switch from beer to wine, whiskey, or grain alcohol. But the drinking problem is potentially soluble because you can measure alcohol, and say allow people one 12 ounce beer, one 5 ounce glass of wine, etc. Basically, the key unit is 'ethanol, which has measurable properties. In contrast, we don't know what 'risk' is. Beta? Volatility? Skew? Get back to me on that. You can't regulate what you can't define."

Day of Reckoning
12/22/10   Government
"60 Minutes recently did a short program on the looming municipal bond problems, with a focus on Illinois and New Jersey, plus an interview with Meredith Whitney..."

Coming in from the cold
12/19/10   World
"The consoling thought for Ireland's put-upon taxpayers has been "at least we're not Iceland", whose outsize banks failed spectacularly in 2008. But that comfort is fading. Evidence of economic recovery in Iceland means the Irish can no longer persuade themselves that things are worse elsewhere."

Active Share
12/19/10   Funds
"Active share can have a direct influence on returns. Looking at U.S. stock fund performance in the 20 years ending 2009, Prof. Petajisto found that the most active stock pickers beat their benchmarks by 1.26 percentage points annually after fees. On average, funds with lower active share didn't beat their benchmarks."

Toronto a city of socioeconomic extremes
12/19/10   World
"Toronto is becoming a city of stark economic extremes as its middle class is hollowed out and replaced by a bipolar city of the rich and poor - one whose lines are drawn neighbourhood by neighbourhood."

Accounting for Leverage
12/16/10   Academia
"This paper lays out a decomposition of book-to-price (B/P) that articulates precisely how B/P 'absorbs' leverage. The B/P ratio can be decomposed into an enterprise book-to-price (that pertains to operations and potentially reflects operating risk) and a leverage component (that reflects financing risk). The empirical analysis shows that the enterprise book-to-price ratio is positively related to subsequent stock returns but, conditional upon the enterprise book-to-price, the leverage component of B/P is negatively associated with future stock returns. Further, both enterprise book-to-price and leverage explain returns over those associated with Fama and French nominated factors - including the book-to-price factor - albeit negatively so for leverage. The seemingly perverse finding with respect to the leverage component of B/P survives under controls for size, estimated beta, return volatility, momentum, and default risk."

Jim Otar's Christmas freebie
12/16/10   Books
"I'd be happy to make the green edition of my book 'Unveiling the Retirement Myth - Advanced Retirement Planning based on Market History', a textbook on non-Gaussian approach to retirement planning, to your readers for a limited time, from now until January 2nd."

BoC December 2010
12/16/10   Markets
"The Bank of Canada has released the December 2010 Financial System Review which includes reports on: The Countercyclical Bank Capital Buffer: Insights for Canada, Strengthening the Infrastructure of Over-the-Counter Derivatives Markets, Central Counterparties and Systemic Risk, Contingent Capital and Bail-In Debt: Tools for Bank Resolution"

The 10 Mistakes Investors Most Commonly Make
12/12/10   Behaviour
"In an interview with DailyFinance, Statman, a professor of finance at Santa Clara University in California, shared his top 10 errors that trip up average investors"

Accounting for Public Pensions
12/12/10   Government
"A generation ago, when Ronald Reagan was president, the accounting rule makers forced American companies to come clean on the cost of the pension plans they were promising to employees. That decision, perhaps more than any other, heralded the eventual demise of defined-benefit pensions for employees of American companies. Now something very similar may be in store for public sector employees..."

U.S. Arrests Online Seller Who Scared Customers
12/12/10   Crime
"Federal law enforcement agents on Monday arrested a Brooklyn Internet merchant who mistreated customers because he thought their online complaints raised the profile of his business in Google searches."

The megamind of Miami
12/12/10   Funds
"As he nears the end of his morning walk, Berkowitz begins musing on his aversion to losing money. He is not, he insists, interested in taking risks. His contrarian investments may look perilous to outsiders, but to him they are the safest opportunities he can find. He stops and shuffles to the dotted yellow line in the center of the street and points down: 'This is where we can make our shareholders plenty of money.' For Berkowitz, out of the ordinary is middle-of-the-road."

Google Map Foreclosure Tricks
12/09/10   Real Estate
"I wanted to demonstrate the full extent of Foreclosures in the US, so after setting GMaps on foreclosure listings, I slowly zoomed out of the map. Voila! Most foreclosures that are for sale in the USA are now showing on your screen."

Public Pension Parody
12/07/10   Fun
"Thousands of retired government employees are getting pensions of over $100,00 per year, and taxpayers have to pay for them. See how it happened..."

China's credit bubble
12/07/10   World
"Experts argue heatedly over whether or not China has managed to outdo America's subprime bubble, or even match the Tokyo frenzy of late 1980s. The IMF straddles the two. It concluded in a report last week that there was no nationwide bubble but that home prices in Shenzen, Shanghai, Beijing, and Nanjing seem 'increasingly disconnected from fundamentals'. Prices are 22 times disposable income in Beijing, and 18 times in Shenzen, compared to eight in Tokyo. The US bubble peaked at 6.4 and has since dropped 4.7. The price-to-rent ratio in China's eastern cities has risen by over 200pc since 2004 The IMF said land sales make up 30pc of local government revenue in Beijing. This has echoes of Ireland where 'fair weather' property taxes disguised the erosion of state finances."

Roads to Investment Success
12/05/10   Stingy Investing
"I was pleased to talk to the University of Toronto Faculty Association where I made the case that novice investors should opt for low-fee balanced funds. I then discussed more advanced topics in dividends and value investing. Although the session was not recorded, here are the slides that were used..."

The 25-Year Foreclosure
12/05/10   Real Estate
"Patsy Campbell could tell you a thing or two about fighting foreclosure. She's been fighting hers for 25 years. The 71-year-old retired insurance saleswoman has been living in her house, a two-story on a half acre in a tidy middle-class neighborhood here in central Florida, since 1978. The last time she made a mortgage payment was October 1985."

200 Countries, 200 Years, 4 Minutes
12/05/10   World
"Hans Rosling's famous lectures combine enormous quantities of public data with a sport's commentator's style to reveal the story of the world's past, present and future development. Now he explores stats in a way he has never done before - using augmented reality animation. In this spectacular section of 'The Joy of Stats' he tells the story of the world in 200 countries over 200 years using 120,000 numbers - in just four minutes. Plotting life expectancy against income for every country since 1810, Hans shows how the world we live in is radically different from the world most of us imagine."

Prem Watsa sees commodity bubble
12/02/10   Value Investing
"Never mind the current hype over commodities: Prem Watsa and his team at Fairfax aren't convinced that resources and agricultural goods will continue to skyrocket. "Anything that everybody thinks is going to happen worries us," Mr. Watsa said in an interview. "The excesses get built up. Recessions take them out.""

It's Not Rocket Science
12/02/10   Books
"We've compiled four years of Tom's articles and blogs into a new book titled It's Not Rocket Science: Plain-English Advice for Managing Your Investments. The pieces are short narratives that reinforce some of the basic, yet most important, principles of investing."

Securities Class Actions Punish Shareholders
12/02/10   Law
"It's a belief many law-school graduates cling to fiercely, in the face of all contrary evidence: That the tort system is a mechanism for discovering the truth, disciplining wrongdoers, and compensating victims for their losses. A new study in the Financial Analysts Journal casts serious doubt on the premise, at least when it comes to shareholder class actions. In most cases, the authors found, the litigation mainly serves to punish shareholders who have already suffered from a downturn in their stock. Only suits targeting illegal insider trading, and to a lesser extent, accounting fraud were associated with subsequent higher long-term returns."

The Rational Optimist
11/29/10   Books
"Today's Outside the Box is two essays, by Matt Ridley and Bill Gates, from the Review section of the WSJ. Ridley has written a book called The Rational Optimist... Bill Gates writes a longer essay to say why he thinks Ridley has some things wrong, while overall giving the book high marks. This is one of the more thought-provoking exchanges I have read in a while."

A Bully Finds a Pulpit on the Web
11/28/10   Behaviour
"Which means the owner of ... might be more than just a combustible bully with a mean streak and a potty mouth. He might also be a pioneer of a new brand of anti-salesmanship - utterly noxious retail - that is facilitated by the quirks and shortcomings of Internet commerce and that tramples long-cherished traditions of customer service, like deference and charm."

Evan Davis meets Warren Buffett
11/27/10   Buffett
"Warren Buffett is the greatest investor of all time. His decisions about buying shares and companies have beaten the stock market year after year and made him the richest person in the world - thought to be worth 37 billion dollars. Yet Buffett lives modestly in his native Omaha, in America's mid-West, and runs his 150 billion dollar business with a staff of just twenty. Evan Davis meets him to find out about his unique investment strategy and his eccentric lifestyle. He talks to Buffett's family, friends and colleagues about the man they call the Sage of Omaha, and Buffett's friend Bill Gates praises his philosophy of life. As the greed of the super-wealthy is widely criticised in the current financial crisis, Davis asks whether Warren Buffett is the acceptable face of the filthy rich"

Programming our lives away
11/27/10   Behaviour
"Increasingly, algorithms are used to determine whether we can get access to credit, insurance and government services. They are posing a challenge to human decision-making in the arts. They are being used by prospective employers to decide if we should be hired. They can determine whether your online business will succeed or fail, and they have revolutionized the world of high finance."

Neosho Capital Q3-10 commentary
11/27/10   Value Investing
"When asked how he had weathered the 2008/9 financial meltdown, Markowitz said he had been moderately liquid going into those years, thanks to having sold off some of his 20-odd ETFs and some of his Kraft holdings. Thinking that his own use of MPT, CAPM, Monte Carlo simulations, etc. formulas, had contributed to his decision to reduce his allocation to securities in the run-up to the '08/'09 meltdown, we were surprised when Markowitz confessed, somewhat sheepishly, that it was a phone call with his friend, "Steve", a hedge fund manager, who advised him to sell off a significant enough portion of his holdings prior to the panic that started in September of 2008. Given this admission, we wonder if a further updating of the MPT models is needed to reflect this invaluable step: Call Steve. The trick will be finding a way to put this extra step into algorithmic form."

Why the housing bulls are wrong
11/22/10   Real Estate
"Hedge fund manager Bill Ackman is the latest prominent investor to jump on the housing bandwagon. But here are four reasons by housing is still not a good investment."

Life and investing after Buffett
11/21/10   Value Investing
"So it may be time to start taking a look at Berkshire substitutes. While no company is a Berkshire clone, a couple of U.S.-based holding companies offer a similar mix of experienced management, financial heft and the assurance that your money is being overseen by value-oriented investors who have much of their money riding along with yours."

Stocks Acting Like Commodities
11/21/10   Markets
"In the past few years, many investors have concluded that commodities like oil, corn and gold offer independent returns that can diversify away the risks of stocks. But the correlations between stocks and commodities - the extent to which their prices move together - are in many cases the highest they have been in nearly 30 years."

Speak softly and carry a big chainsaw
11/21/10   Government
"Mr Obama badly needs to show that he can still lead on domestic policy. He should start by cajoling Congress into an agreement to tackle America's ominous fiscal arithmetic. Conventional wisdom says such an agreement is impossible: the problem is too big, the politics too difficult. But it is wrong to suppose that the deficit is unfixable, as two proposals for fixing it have shown this month. And even the politics may not be totally intractable."

Wedbush's roof leaks, but his wallet doesn't
11/21/10   Thrift
"His investment firm, Wedbush Inc., manages more than $15 billion in assets, employs 1,000 people and is valued at $300 million. His personal stake is worth more than $150 million. Yet Wedbush has never let go of a compulsive frugality with roots in a Great Depression boyhood and his early days as an entrepreneur, when pinching pennies was the difference between survival and oblivion. For Wedbush, cost control is much more than a slogan. It's a guiding principle, maybe even a way of life."

Data birth
11/21/10   Markets
"After that there was no stopping the love affair between financial economists and number-crunching. Myron Scholes, now a Nobel laureate, became director of CRSP in 1974 and ensured the database was both kept up-to-date and made readily available to academic economists everywhere. In turn, this resource became ever more useful as computing power became more pervasive and affordable. The CRSP database has since been expanded to include bonds, property, some commodities, mutual funds and exchange-traded funds. It has been replicated across the world."

A Tax Cut To Save
11/19/10   Whitman
"Ambac Financial declared bankruptcy, needlessly. Had Congress acted to change the tax code to give troubled corporations a much needed break, Ambac probably could have raised enough equity to rebuild its core business. Unfortunately the U.S. tax code left Ambac with no way of raising equity without destroying one of its most valuable assets, $7 billion worth of net operating losses that could have been used to offset future tax burdens after the company returns to profitability."

Bill Miller's Nov 2010 Commentary
11/17/10   Growth Investing
"It is useful to remember that the great bond bull market that began nearly 30 years ago was preceded by a 30 plus year bond bear market that took long term treasury yields from 3% to nearly 15%. The devastating losses people suffered were such that my friend Lee Cooperman dubbed bonds, "certificates of guaranteed confiscation," when he was overseeing the Goldman Sachs research and strategy effort. A common feature of that 30 year bond bear market was the bond swap. Almost every year, investors who owned bonds lost principal value as yields rose, so they sold their bonds in December and took a tax loss, replacing the bonds with others of similar maturity and quality. This continued year after year, inexorably. Finally, in 1982, yields started to fall. One elderly relative of mine had been taking her tax losses year after year, for over 30 years. When she asked me to look at her portfolio in late 1982, I told her there were some things I thought she needed to do. She said, "Oh yes, it's time for my bond swap." I told her that was not necessary as she now had gains in her bonds. She looked startled, and asked, "Is it legal to have gains in bonds?" I suspect that question may again be asked in the next 30 years."

Dear Uncle Sucker
11/17/10   Buffett
"Well, Uncle Sam, you delivered a motherload of cash. Considering the dollar sums involved, your actions were remarkably ineffective. What was left over afterwards was a wildly over-leveraged consumer whose credit limits had been reached State and municipal budgets were heavily dependent upon that excess consumer spending, creating huge budget holes because of it. Net net: The resultant economy was in the worst recession since the Great Depression."

Pretty Good for Government Work
11/17/10   Buffett
"You have been criticized, Uncle Sam, for some of the earlier decisions that got us in this mess - most prominently, for not battling the rot building up in the housing market. But then few of your critics saw matters clearly either. In truth, almost all of the country became possessed by the idea that home prices could never fall significantly. That was a mass delusion, reinforced by rapidly rising prices that discredited the few skeptics who warned of trouble. Delusions, whether about tulips or Internet stocks, produce bubbles. And when bubbles pop, they can generate waves of trouble that hit shores far from their origin. This bubble was a doozy and its pop was felt around the world. So, again, Uncle Sam, thanks to you and your aides. Often you are wasteful, and sometimes you are bullying. On occasion, you are downright maddening. But in this extraordinary emergency, you came through - and the world would look far different now if you had not."

Four Stocks Ben Graham Might Pick
11/15/10   Graham
"My Graham-inspired picks sell for less than book value (corporate net worth per share) and less than 12 times earnings. They also have debt less than 50 percent of stockholders' equity."

The slaying of the Celtic Tiger
11/14/10   World
"Ireland itself is a fiscal mess, thanks to a budget deficit that makes Greece's look like spare change. The real estate market is a disaster, and interest rates demanded by bond investors are so high that the exchequer effectively can't afford to finance the country. The Irish government has some breathing room - it doesn't have to return to the capital markets until next July. But if that bond auction fails, the country will almost certainly be broke and require a bailout from the European Union."

Are ETFs a Menace?
11/12/10   Indexing
"The proliferation of ETFs, the report contends, raises at least three worries. First, these funds have overconcentrated the ownership of thinly traded stocks. Second, they have led to an escalating number of trading failures. Third, ETFs could trigger another massive market swing like the May 6 'flash crash.'"

Cultures of Impunity
11/10/10   World
"The Irish government now has to deal with the effective evaporation of a major source of revenue at the worst possible time - raising taxes on either individual taxpayers or businesses will further deepen the economic hole that the country is in. But even with drastic cutbacks in government spending, it's unavoidable. This particular bit of the Irish crisis is a direct result of the country's grossly skewed taxation model. And it's left the country in a pretty horrible bind."

The High Cost of Free Parking
11/10/10   Economics
"Professor Shoup is the author of The High Cost of Free Parking, and points out that, 'just because the driver doesn't pay for parking doesn't mean the cost goes away.' In addition to making it harder to find a spot when you need one, 'free' parking exacerbates other problems, from pollution to traffic congestion. Using the power of market pricing, Shoup explains how to fix the parking mess in three steps."

Losing the Lender of Last Resort
11/09/10   Markets
"Now, of course, the default risk free asset is the government bond. Ultimately, the reasoning goes, a government can just print money if it needs to, so an investor can guarantee getting paid even if the value of that money is devalued. The problem is, that as Reinhart and Rogoff have shown, this ain't necessarily true."

Ireland is effectively insolvent
11/09/10   World
"Ireland faced a painful choice between imposing a resolution on banks that were too big to save or becoming insolvent, and, for whatever reason, chose the latter. Sovereign nations get to make policy choices, and we are no longer a sovereign nation in any meaningful sense of that term. From here on, for better or worse, we can only rely on the kindness of strangers."

70 Years Early
11/07/10   Government
"Looking back into the 1920s, he found that investment-grade bonds went bust with alarming frequency, often in the same year they were rated. On average, he showed, a bank that followed the new rules would end up with a third of its bond portfolio going into default. The record was so unreliable that it would be 'still more responsible,' Mr. Palyi growled, to 'stop the publication of ratings altogether.'"

The Perfect Stimulus: Bad Management
11/06/10   Management
"One day, a position opened above me, and I was the most obvious candidate to fill it. My boss called me into her office and said she had some bad news. She explained that the media was giving our company a lot of heat because almost all of our managers and executives were white males. Promoting me, she explained, would only make things worse. I asked how long I might need to wait for all of this to blow over. My boss was vague, but she said the timeline involved smoothing out the effects of two centuries of corporate discrimination."

You Can't Be Too Thin
11/06/10   Value Investing
"Roger Ibbotson has devoted a career to answering a question that has defied the greatest minds of finance. Namely, why some securities offer better returns than others, even when they have a close resemblance. Now a 67-year-old finance professor at Yale University, Ibbotson thinks he's discovered the answer. It's liquidity. Or the lack of it."

The Man Who Saved the Whales
11/06/10   World
"In the last half of the 19th century, whales were facing extinction. They were hunted in large part because their oil was the best, most affordable illuminant available to growing western nations. One man more than any other headed off their extinction, a man whose picture should be in on the wall of every Greenpeace office: John D. Rockefeller, founder of the Standard Oil Company."

Pensions: Angry populists' next target
11/03/10   Government
"This is déjà vu: Generous retirement packages, enabling middle-age workers to retire early, helped sink Detroit -- eventually landing GM and Chrysler at Treasury's door. The United Auto Workers, of course, negotiated those packages -- and management signed off on them. Now a majority of union members work for the government, and labor is determined to protect its pensions. Unlike those in the private sector, government retirement packages are often embedded in law. Wait until politicians tell that to the taxpayers stuck footing the bill."

The Fed Loses Twice
11/03/10   Government
"Bad timing for the Fed. They are powerless, or even negatively powerful (They will achieve the opposite of what they are intending), because they don't understand how monetary policy really works, particularly during times of crisis. The Fed is imitating Japan, which has done horribly over the last 20 years. Can't they learn from recent data? Interest rates that are too low cause businessmen to make bad decisions."

Why are High Risk Stocks so Crappy?
11/02/10   Markets
"The key to the dominance of low volatility equities is that high volatility stocks are bad investments on the two main dimensions of stockworthiness: volatility and return. Volatile stocks by definition have high volatility, and also high correlation with the overall market (CAPM beta) and the business cycle. They all have below average returns. So why do so many people like them?"

Are Monthly Seasonals Real?
11/02/10   Markets
"Over 300 years of UK stock returns reveal that well-known monthly seasonals are sample specific. For instance, the January effect only emerges around 1830, which coincides with Christmas becoming a public holiday. Most months have had their 50 years of fame, showing the importance of long time series to safeguard against sample selection bias, noise, and data snooping. Only - yet undocumented - monthly July and October effects do persist over three centuries, as does the half yearly Halloween, or Sell-in-May effect. Winter returns - November through April - are consistently higher than (negative) summer returns, indicating predictably negative risk premia. A Sell-in-May trading strategy beats the market more than 80% of the time over 5 year horizons."

Patient Capital 2010 Q3
11/01/10   Value Investing
"At current bond prices we strongly believe prospective returns are very low while the potential for loss is extremely high. If interest rates were to rise to only one half of their historical average fixed income securities would suffer substantial losses! We would recommend only very short term fixed income securities at this time. For those looking for income, high quality dividend paying equities are safer and will likely provide returns that are superior to fixed income alternatives over the next several years."

The Papers of Benjamin Graham
11/01/10   Graham
"These papers are not part of either Intelligent Investor nor Security Analysis. The papers range from 1930 to 1974, basically Ben Graham's entire professional life."

Your Adviser Is Scared to Set You Straight
10/31/10   Brokers
"One danger is that if you voice a strong opinion, your adviser might not give you a second opinion. He might merely echo your own, making you think he is smart because he agrees with you - and clearing the path of least resistance to his next commission. Sometimes, acting like a sheep just pays better."

Enduring Values, Enduring Value
10/31/10   Value Investing
"There are four ways to create wealth it is not just cash flow. They are, one, having cash flow from operations available to security holders. A company can use that cash to expand its asset base, reduce liabilities or distribute the money to shareholders, either by paying dividends or buying back stock. Two, and probably much more important, is having earnings, which we define as creating wealth while consuming cash. Remember, though, that earnings for most companies do not have a long-term value unless the company also has access to capital markets because if it doesn't, sooner or later, it will to run out of cash. The third - and very, very important - value-creation method is resource conversion. Such as? Mergers and acquisitions, changes in control, massive recapitalizations, spinoffs, etc. The fourth wealth-creation method, which I touched on previously, is having extremely attractive access to capital markets."

More from less for more
10/28/10   World
"Engineer RA Mashelkar shares three stories of ultra-low-cost design from India that use bottom-up rethinking, and some clever engineering, to bring expensive products (cars, prosthetics) into the realm of the possible for everyone."

Labour and the left
10/28/10   Government
"Last year there were more public-sector employees (7.9m) than private-sector workers (7.4m) in unions - the first time this has happened. And public-sector unions have a distinct advantage over private ones. 'Through their extensive political activity,' says Mr DiSalvo, 'these government-workers' unions help elect the very politicians who will act as 'management' in their contract negotiations - in effect handpicking those who will sit across the bargaining table from them, in a way that workers in a private corporation (like, say, American Airlines or the Washington Post Company) cannot.' And the public-sector managers sitting across the table don't have the same worries as private-sector bosses, who must answer to profit-driven overlords. The lack of competition in government services produces little pressure on management or unions to come up with the most efficient work agreement. As a result, public-sector unions have become accustomed to getting what they want."

Night of the Living Fed
10/27/10   Government
"Since it is customary in polite society to apologize for causing distress, on behalf of the Fed, let me apologize for the extraordinary destructiveness of its policies for the last 15 years. Bernanke's version of an apology, delivered in January this year to the American Economic Association, was to claim that the Fed's monetary policy during the 2000-08 period was appropriate, and that there were no major failings, such as missing the housing bubble completely, that were worth mentioning. This stubbornness in the face of clear data is right up there with efficient market believers. And very impolite indeed."

The Hidden Costs of Indexing
10/27/10   Indexing
"Petajisto estimated that from 1990 to 2005 the annual turnover drag for the small-cap Russell 2000 was at least 0.38%-0.77% and for the S&P 500 at least 0.21%-0.28%. Researchers Honghui Chen, Gregory Noronha, and Vijay Singal in a 2005 paper estimated the cost of index turnover drag at 1.30%-1.84% for the Russell 2000 and at around 0.03%-0.12% for the S&P 500. These figures imply that index funds that don't slavishly follow the index can beat their benchmarks by avoiding the price pressure surrounding index additions and deletions. It's one of those rare free lunches in investing."

Hidden Cost for Index Funds
10/27/10   Indexing
"This paper empirically investigates the index premium and its implications from 1990 to 2005. First, we find that the price impact has averaged 8.8% and 4.7% for additions to the S&P 500 and Russell 2000, respectively, and -15.1% and -4.6% for deletions. The premia have been growing over time, peaking in 2000, and declining since then. Second, the implied price elasticity of demand increases with firm size and decreases with idiosyncratic risk, supporting theoretical predictions. Third, we introduce a new concept that we label the index turnover cost, which represents a hidden cost borne by index funds (and the indexes themselves) due to the index premium. We illustrate this cost and estimate its lower bound as 21-28bp annually for the S&P 500 and 38-77bp annually for the Russell 2000."

Buffett: Combs is 'a 100% Fit'
10/26/10   Buffett
"Mr. Combs was one of hundreds of people who responded to an unconventional 'help wanted' request Mr. Buffett made in early 2007. But his initial inquiry didn't distinguish itself. Undaunted, the low-key father of three, who lives in Darien, Conn., recently sent another letter to Berkshire Vice Chairman Charles Munger asking for a meeting. Mr. Munger said in an interview that he gets 'hundreds' of such requests each year, but 'something in his request piqued my interest.' The two soon met for a lunch that extended well into the afternoon at the California Club in downtown Los Angeles. Mr. Munger later phoned Mr. Buffett and told him, 'this is a guy I am sure you are going to like,' Mr. Munger recalls."

Secret Past of Chinese Stocks
10/23/10   World
"This week, the People's Bank of China jolted stock markets around the world with a surprise interest-rate rise, and the leaders of China's Communist Party called for 'accelerating the transformation of the nation's economic-development pattern.' This drive to manage growth harks back to a declaration on April 22 that 'of the many government functions, the most important is to facilitate commerce and help industries.' The odd thing is, the Chinese government made that statement on April 22, 1903. Amid the almost irresistible excitement over China's explosive growth, it is important to understand that the Asian giant has run this exact race before - several times - and the results weren't pretty."

The Future of Fish
10/23/10   World
"As overfishing threatens the world's wild fisheries, aquaculture advocates say fish farms will play a far greater role in feeding people around the world. 'We are no more going to get our seafood from the wild than we get our beef, nuts, fruit from the wild,' predicts Kevin Fitzsimmons, a professor at the University of Arizona and former president of the World Aquaculture Society. He is also on the board of HQ Sustainable Maritime Industries (HQS), an NYSE Amex-listed company that sells Chinese-raised tilapia. 'It's all going to be farm-raised,' he says. And there's no fish better suited to this new world than tilapia, says Fitzsimmons. It's a fast-growing species with mild-tasting flesh that producers can easily adapt to all kinds of uses. 'Tilapia,' says Fitzsimmons, 'is going to be basically where chicken is with poultry.'That means that the creatures thrashing in Chen's ponds are the future of fish. The growing American appetite has led to a boom in Chinese aquaculture: With hundreds of breeding centers, fish farms, feed mills, and processing plants, China is the world's tilapia superpower."

Ridley and the rational optimist
10/21/10   World
"Matt Ridley, author of The Rational Optimist, talks with EconTalk host Russ Roberts about why he is optimistic about the future and how trade and specialization explain the evolution of human development over the millennia. Ridley argues that life is getting better for most of the people on earth and that the underlying cause is trade and specialization. He discusses the differences between Smith's and Ricardo's insights into trade and growth and why despite what seems to be strong evidence, people are frequently pessimistic about the future."

The Tax Haven
10/21/10   Taxes
"Google uses a complicated structure to send most of its overseas profits to tax havens, keeping its corporate rate at a super-low 2.4 percent "

O Canada!
10/19/10   Government
"By the 1990s, Canada had also become one of the developed world's most socialized economies, with the government accounting for 53% of the country's GDP. Economic growth was stagnating, while debt levels were inexorably and dangerously mounting. At its scariest zenith, Canadian federal and provincial government debt amounted to 120% of GDP, with roughly 70% at the national level and an outrageously bloated 50% owed by the provinces. Again, to put that in perspective, despite our debt binge over the last decade, US government debt is around 60% of GDP, while state debt is nearly 17% of GDP, or 77% overall (this is based on net, not gross, debt and excludes the Social Security trust fund holdings as well as intergovernmental liabilities.)Moreover, unlike in our present situation, Canada's interest rates were rising due to worries about the nation's solvency. Its coveted AAA credit rating was yanked, and the market was treating it as an increasingly unreliable borrower. In other words, it was much like the situation a number of European countries find themselves in today - except that Canada didn't have Germany to bail it out. As you can readily see, there's simply no question that Canada was in some very deep doo-doo. Which begs the multitrillion-dollar question: How the heck did it get out of that jam? "

Spain's Solar on Edge of Bankruptcy
10/19/10   World
"Spain stands as a lesson to other aspiring green-energy nations, including China and the U.S., by showing how difficult it is to build an alternative energy industry even with billions of euros in subsidies, says Ramon de la Sota, a private investor in Spanish photovoltaic panels and a former General Electric Co. executive. "

Forget gold, buy stocks
10/19/10   Buffett
"You could take all the gold that's ever been mined, and it would fill a cube 67 feet in each direction. For what that's worth at current gold prices, you could buy all -- not some -- all of the farmland in the United States. Plus, you could buy 10 Exxon Mobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?"

$200 Billion Blunder
10/19/10   Buffett
"Warren Buffett says Berkshire Hathaway is the 'dumbest' stock he ever bought. He calls his 1964 decision to buy the textile company a $200 billion dollar blunder, sparked by a spiteful urge to retaliate against the CEO who tried to 'chisel' Buffett out of an eighth of a point on a tender deal."

Volatility mesures behavioural risk
10/18/10   Behaviour
"I was wrong to dismiss standard deviation as a risk measure for all of those years. It's not a measure of investment risk but a measure of behavioural risk. Still, standard deviation measures a type of risk that has potentially damaging consequences."

Lies, Damned Lies, and Medical Science
10/18/10   Health
"He zoomed in on 49 of the most highly regarded research findings in medicine over the previous 13 years, as judged by the science community's two standard measures: the papers had appeared in the journals most widely cited in research articles, and the 49 articles themselves were the most widely cited articles in these journals. These were articles that helped lead to the widespread popularity of treatments such as the use of hormone-replacement therapy for menopausal women, vitamin E to reduce the risk of heart disease, coronary stents to ward off heart attacks, and daily low-dose aspirin to control blood pressure and prevent heart attacks and strokes. Ioannidis was putting his contentions to the test not against run-of-the-mill research, or even merely well-accepted research, but against the absolute tip of the research pyramid. Of the 49 articles, 45 claimed to have uncovered effective interventions. Thirty-four of these claims had been retested, and 14 of these, or 41 percent, had been convincingly shown to be wrong or significantly exaggerated. If between a third and a half of the most acclaimed research in medicine was proving untrustworthy, the scope and impact of the problem were undeniable."

The Financial Time Bomb of Longer Lives
10/17/10   Government
"First the good news: We're living longer, healthier lives than ever before.We're already so used to the idea of greater longevity, in fact, that it may seem ho-hum to learn that boys and girls born in 2008 in the United States have life expectancies of 75 and 81, respectively.Those life spans, however, represent a bonus of about three decades, compared with Americans born in 1900, according to a report last year from the Census Bureau. And, by the way, Spain, Greece and Austria fared even better, proportionally: Life expectancies in those countries doubled over the course of the 20th century.Now for the bad news: At this rate, we can't afford to live so long."

How to Erase the Lost Decade?
10/17/10   Stocks
"Whatever figure turns out to be right, the bottom line is that "people should ratchet down their expectations for stocks," he said."There's no harm in hoping that things turn out better," Mr. Arnott added. "But the danger is assuming and planning for the best while saving as if the market can do your work for you.""

No Margin of Safety
10/17/10   Markets
"This creates a terrible problem for investors here. Given that the yield on the SandP 500 is now below 2%, it is essential for investors to recognize that they now rely on the achievement and maintenance of sustained bubble valuations in the years ahead. Unless investors believe that bubble valuations can be maintained indefinitely, they can expect little but abysmal returns over the coming 5- 7 year period."

Bad Mathematics
10/17/10   Academia
"It is likely that someone who engaged in large amounts of deliberate practice in mathematics could perform extremely well on mathematical tests, exams, and other competitive measures so long as these tests involved calculations or derivations that had been practiced. The problem is that by their nature inventions and discoveries involve problems that have never been solved by anyone. There is no way to practice in this way."

The Crisis in Local Government Pensions
10/13/10   Government
"We calculate the present value of local government employee pension liabilities as of June 2009 for approximately 2/3rds of the universe of local government employees. Using local government accounting methods, the total unfunded liability in these areas is 190 billion or over 7,000 per municipal household. When government accounting is corrected by discounting already-promised benefits at zero-coupon Treasury yields, the total unfunded obligation is 383 billion or over 14,000 per local household."

N.Y. Faces 200 Billion in Retiree Health Costs
10/13/10   Government
"The health benefits are entirely separate from the pensions that New York's public workers have earned. Governments have reported their pension obligations for years, but their retiree medical obligations have been building up unseen, because governments were not required to account for them. The information is starting to come to light because of a new accounting requirement."

Congressional Staffers Gain From Trading in Stocks
10/11/10   Government
"The aides identified by the Journal say they didn't profit by making trades based on any information gathered in the halls of Congress. Even if they had done so, it would be legal, because insider-trading laws don't apply to Congress."

A closer look at BetaPro's HXT
10/09/10   Indexing
"In a recent blog post, I provided an overview of the new Horizons BetaPro SP/TSX 60 Index ETF (HXT/TSX). HXT's synthetic exposure left us with two questions, both of which are addressed below."

Share buybacks put a shine on Danier
10/09/10   Stocks
"The market, in other words, appears to be assigning scant value to Danier's ongoing business - and that's hard to understand. In the year to June - certainly no boom time for the Canadian economy - it produced 7.2-million in earnings, or about 1.58 for each of the shares remaining at the end of the most recent quarter. If the market were willing to pay even 12 times those earnings, Danier would be a 19 stock."

How Fake Money Saved Brazil
10/05/10   World
"This is a story about how an economist and his buddies tricked the people of Brazil into saving the country from rampant inflation. They had a crazy, unlikely plan, and it worked."

The Non-Economist's Economist
10/05/10   Books
"Now comes the test of whether his popular writings will endure longer than the memory of his celebrity and the pleasure of his prose. 'The Great Crash' has a fighting chance, because of its very lack of analytical pretense. 'History that reads like a poem,' raved Mark Van Doren in his review of the 1929 book. Or, he might have judged, that eats like whipped cream.But the other books in this volume seem destined for only that kind of immortality conferred on amusing period pieces. When, for example, Galbraith complains in 'The Affluent Society' that governments can't borrow enough, or that the Federal Reserve is powerless to resist inflation, you wonder what country he was writing about, or even what planet he was living on."

Individual Investors Duped by Derivatives
10/05/10   Derivatives
"Leona Miller, an 84-year-old retired beautician, says she was seeking safe and steady income from bonds two years ago when she bought securities recommended by her Wachovia (WFC) broker, Robert Baldacci, paying 9 percent interest. Within six months, Miller lost about 30 percent of her 20,000 investment, and the bonds were converted into shares of Merck (MRK) in a falling stock market."

A Greek Bankruptcy Is Unavoidable
10/05/10   World
"Sitting in his bare office at Harvard University with the shades drawn, Rogoff says, coolly and soberly: 'A Greek bankruptcy is unavoidable. There is a 95 percent chance that Spain will go bankrupt. Hungary is on the brink. Things will get much worse in Eastern Europe. We will have a certain number of countries that will go bankrupt. We will have a number of euro zone countries that would be well advised to take a sabbatical from the euro for a year. The situation in the United States is very worrisome. The markets will refuse to tolerate this level of debt.' The worst of it is that it sounds as if he were expressing unavoidable facts."

Later
10/04/10   Behaviour
"A few years ago, Dan Ariely, a psychologist at M.I.T., did a fascinating experiment examining one of the most basic external tools for dealing with procrastination: deadlines. Students in a class were assigned three papers for the semester, and they were given a choice: they could set separate deadlines for when they had to hand in each of the papers or they could hand them all in together at the end of the semester. There was no benefit to handing the papers in early, since they were all going to be graded at semester's end, and there was a potential cost to setting the deadlines, since if you missed a deadline your grade would be docked. So the rational thing to do was to hand in all the papers at the end of the semester that way you'd be free to write the papers sooner but not at risk of a penalty if you didn't get around to it. Yet most of the students chose to set separate deadlines for each paper, precisely because they knew that they were otherwise unlikely to get around to working on the papers early, which meant they ran the risk of not finishing all three by the end of the semester. This is the essence of the extended will: instead of trusting themselves, the students relied on an outside tool to make themselves do what they actually wanted to do."

In praise of inflation
10/03/10   Government
"In times when people are reluctant to take risks, a little inflation can help grease the skids. In doing this, though, inflation helps debtors and spenders at the expense of creditors and savers. It's easy to see why this makes us uncomfortable. It seems to reward those who have behaved recklessly, and to punish those who played by the rules, saving their money and living frugally. But the economy doesn't exist, in the end, to reward virtue and punish vice. It exists to maximize our well-being, and, currently, doing that may require helping the undeserving and irresponsible, if only because there are so many of them. Boosting inflation isn't the right policy, but it may just be the correct one."

The 10 Biggest Gold Myths
10/03/10   Behaviour
"Gold has been the investment phenomenon of the past decade. It hit a new high of 1,278 an ounce this week. In the past 10 years, investors in gold have made nearly five times their money. Over the same time, Wall Street has gone sideways. But few investments seem to attract more myths and hokum than gold and other precious metals. At the risk of inflaming those on both sides of the issue, here are 10."

The Bond Bubble
10/03/10   Bonds
"If anybody is to blame for a bond bubble, it isn't Joe Schmo it's Uncle Sam, with some help from overseas.'The Fed has effectively been taxing money-market funds by cutting short-term interest rates to recapitalize the financial system and to make things easier on borrowers,' says Dan Dektar, chief investment officer at Smith Breeden Associates."

What is the Carry Trade
09/30/10   Markets
"For the next 20 years, and many hedge funds specialized in the 'carry trade', which was as simple as it was successful: lend capital to high interest rate currencies, enjoy the high riskless rates and currency appreciation on the spot rate borrow capital at the low interest rate currency, and make money on the depreciation of this debt over time. In 2008 these strategies suffered significantly, but the net effect is still there is no clear relation between risk and return in currencies."

China Metal Monopoly
09/30/10   World
"A generation after Chinese leader Deng Xiaoping made mastering neodymium and 16 other elements known as rare earths a priority, China dominates the market, with far-reaching effects ranging from global trade friction to U.S. job losses and threats to national security."

Michael Eisner on Teamwork
09/26/10   Books
"Eisner slips into the realm of the absurd when he proposes that more successful partnerships might be an antidote to the virus of executive greed that led, he boldly asserts, to the recent financial crisis.For anyone who remembers the hundreds of millions in stock options that Eisner garnered during his tenure at Disney, when he was one of the highest-paid executives in the world, this insight is the most hilarious punch line of all. Particularly, it so happens, as Eisner is said to be a candidate to take over the Tribune Co. If Wells were alive, let's hope he'd lean forward and suggest gently to Eisner that he's making a fool of himself. Though all evidence indicates that their beautiful partnership would never have survived if Wells did anything of the kind."

Earnings Assumptions and Century Bonds
09/26/10   Retirement
"So in an environment like this, where interest rates are low, and surpluses could not be built up in the past, pension funds are hurting. The truth is, they are worse off than their stated deficits imply. For economic and political reasons, the likely outcome resembles the riddle of how one eats an elephant: one bite at a time.So we will see investment earnings assumptions and discount rates fall slowly, far too slowly to be the economic truth, but slowly recognizing funding gaps as corporations eat the loss one bite at a time, as they can afford to."

Hiding, Harboring, Hoarding at Harvard
09/26/10   Government
"Until now, the conflicts of interest among academics who moonlight as well-paid corporate advisers haven't been page-one material. But 'Inside Job' breaks new ground by exposing the failure of universities to regulate the integrity of their biggest stars.Mr. Ferguson believes that the honor and independence of the economic discipline in academia has become so sullied that it poses 'systemic risk' by influencing policy."

Economic Consequences of Index Investing
09/22/10   Indexing
"Trillions of dollars are invested through index funds, exchange-traded funds, and other index derivatives. The benefits of index-linked investing are well-known, but the possible broader economic consequences are unstudied. I review research which suggests that index-linked investing is distorting stock prices and risk-return tradeoffs, which in turn may be distorting corporate investment and financing decisions, investor portfolio allocation decisions, fund manager skill assessments, and other choices and measures. These effects may intensify as index-linked investing continues to grow in popularity."

How to tilt the investing odds in your favour
09/22/10   Behaviour
"From late 1993 through mid-2008, I estimate that Canadian mutual fund investors experienced returns of 5.6 per cent annually - about 1 per cent a year more than GICs. Fetching an extra 1 per cent a year is not chump change, but it's not up to scratch. Investing is inherently uncertain. Investing successfully, however, is about tilting the odds in your favour. These tips can help you do just that, regardless of your preferred investment vehicle."

The joy of spending
09/22/10   Thrift
"If you have 2 million and can't force yourself to buy a coffee, there's a problem."

Value and Momentum in Frontier Markets
09/20/10   Academia
"We document the presence of economically and statistically significant value and momentum effects in the new emerging equity markets in the world, the so-called frontier emerging markets. We are the first to investigate the characteristics of individual stocks in these markets. Our unique data set consists of more than 1,400 stocks over the period 1997 to 2008 and covers 24 of the most liquid frontier emerging markets. Our results serve as out-of-sample evidence for the existence of value and momentum effects that have previously been reported for developed and emerging markets. Further, we provide empirical evidence that value and momentum strategies within frontier markets are negatively correlated, and are uncorrelated with the same value and momentum strategies in developed and emerging markets. Our mean-variance spanning tests indicate that investors who expand their investment opportunity set with value and momentum investment strategies based on stocks from frontier markets can significantly improve the efficiency of their investment portfolio."

How GM made $30 Billion
09/20/10   Accounting
"Consider this: How could it be that one of GM's most valuable assets, listed at $30.2 billion, is the intangible asset known as goodwill, when it's been only a little more than a year since the company emerged from Chapter 11 bankruptcy protection?"

The Illusion of Pension Savings
09/19/10   Government
"Earlier this year, Illinois said it had found a way to save billions of dollars. It would slash the pensions of workers it had not yet hired. The real-world savings would not materialize for decades, of course, but thanks to an actuarial trick, the state could start counting the savings this year and use it to help balance its budget."

Land of the free, home of the tightwad
09/19/10   Thrift
"And - this is the probably the most important bit - it allows U.S. families to cut their debt a lot faster than you might believe. One analysis by Deutsche Bank projects that by 2013, American households might be able bring their debt ratios down to where they were about 20 years ago. That's probably too optimistic. But consider the possibility that today's frugality will feed a roaring economic expansion several years from now. In the short term, its economy is still messed up. But longer term? It's never wise to bet against the U.S."

A conversation with Charlie
09/19/10   Munger
Charlie Munger speaks at the Ross School of Business.

The razors-and-blades myth
09/16/10   Pricing
"Gillette hadn't played razors-and-blades when it could have during the life of the 1904 patents and didn't seem well situated to do so after their expiration, but it was exactly at that point that Gillette played something like razors-and-blades and that was when it made the most money. Razors-and-blades seems to have worked at the point where the theory suggests that it shouldn't have. Why is that? Did Gillette succeed because of quality or were their powerful even-if-hard-to-discern-now locks - psychological or otherwise - between the razors and the blades?"

The two key housing problems
09/16/10   Real Estate
"It is important to note that falling house prices helps clear the excess supply, although more jobs and more households is the preferred solution. However falling prices makes the negative equity problem worse."

Classic relative value arbitrage
09/16/10   Markets
"Classic relative value arbitrage - the elegant, sometimes dangerous investment strategy that has proved the making and undoing of more Nobel prize winners than any other - used to be compared to picking up nickels in front of a steamroller."

The NYSE from 1815 to 1925
09/16/10   Markets
"In this paper, we collect individual stock prices for NYSE stocks over the period 1815 to 1925 and individual dividend data over the period 1825 to 1870. We use monthly price and dividend information on more than 600 individual securities over the period to estimate a stock price index and total return series that extends virtually to the beginning of the New York Stock Exchange. We use this data to estimate the power of past returns and dividend yields to forecast future long-horizon returns. We find some evidence of predictabiity in sub-periods but little predictability over the long term. We estimate the time-varying volatility of the U.S. market over the period 1815 to 1925 and find evidence of a leverage effect on risk. This new database will allow future researchers to test a broad range of hypotheses about the U.S. capital markets in a rich, untouched sample."

Travelling through Universal Travel Group
09/16/10   Stocks
"The company claims in its most recent quarterly balance sheet to be carrying 43 million in cash and accounts receivable of almost 20 million. If the airline and hotel business are dubious then the profits generated that cash are dubious. In that case the cash itself is dubious.I know people will buy this as Ben Graham net-net stock if it collapses. Unless this company can get a big four audit firm to sign-off for them I think you can - at least for the moment question the entire balance sheet. "

Risk and return in general
09/12/10   Markets
"Professors have been very successful at presenting the CAPM and its spawn as a triumph of the social sciences, in a way similar to how macroeconomists used to present Keynesian macro models before the Phillips curve started to do multiple backflips. The profs are filled with wishful thinking based on ever more obscure econometric tests that prove their big idea works, a science no less than thermodynamics. It doesn't work, not even as an approximation."

Beware of professors bearing ETFs
09/12/10   Indexing
"But while market research by these scholars has helped shape how firms design hundreds or thousands of portfolios, the particular investments created by the academics themselves haven't always performed well."

Do Investors Benefit from Financial Advice
09/10/10   Academia
"Working with one of the biggest brokerages in Europe, we record what happens when unbiased investment advice is offered for the first time to about a random 8,000 of their several hundred thousand active retail customers. We analyze the data to answer which customers accept the offer and, if they accept the offer, do they improve their investment performance. These are our findings. First, only 5%, (who are likely to be male, older, richer, more financially sophisticated, and have a longer relationship with the brokerage) accept the offer. Second, of those who accept the offer, the advice is hardly followed. Third, though the investment performance does not improve for the average advisee, it does improve for the average advisee who follows the advice. Fourth, it seems that the investors who most need (do not need) the financial advice are the ones who are most likely to not get it (get it). Overall, our results imply that the mere availability of smart and unbiased financial advice is a necessary but not a sufficient condition for benefiting retail customers. "

Debunking Beta
09/08/10   Dreman
"It's time to delete the CAPM from business school textbooks. It's done more harm than good for investors."

Apple's Pricing Decoys
09/08/10   Behaviour
"Next time you're sitting at an airport bar and hear two businesspeople debate whether Apple is a technology or design company, chime in: 'Nope. What Steve Jobs sells is pricing.' Pricing? You bet. Jobs is a master of using pricing decoys, reference prices, bundling, and obscurity to make you think his shiny aluminum toys are a good deal."

The puzzling success of trend-following
09/08/10   Markets
"the part of his speech which I found most fascinating seemed to contradict this conclusion. This is an assessment of investment strategies which are based on momentum in asset prices, rather than long term economic fundamentals. Momentum wins the race hands down."

Patience and Finance
09/08/10   Markets
"Evidence from social and economic systems points to two evolutionary paths. Along one, patience becomes self-reinforcing. For example, financial liberalisation may encourage patience and improve inter-temporal choice, unlocking growth. But there is a second path, along which impatience is self-reinforcing. Financial liberalisation can also unlock impatience, generating over-trading and under-investment."

Beware of Greeks bearing bonds
09/07/10   World
"After systematically looting their own treasury, in a breathtaking binge of tax evasion, bribery, and creative accounting spurred on by Goldman Sachs, Greeks are sure of one thing: they can't trust their fellow Greeks."

Not enough labor day
09/06/10   Government
"Today, many Americans will be enjoying a respite from the incessant demands of their jobs. But many Americans will be wishing desperately they could trade the holiday for the incessant demands of a job. This year, given the state of the economy, Labor Day should be called Not Enough Labor Day."

Do financial statements tell the truth?
09/04/10   Accounting
"Financial statements are like fictional works 'based on a true story'. They bear some relationship to actual events, but they are interpretations with their own biases and agendas."

The apathy trade
09/04/10   Markets
"Week before last, the poll of American Association of Individual Investors members showed the lowest percentage of bullish respondents since March 5, 2009, essentially at the moment of the 2009 low. The bullish percentage rebounded a bit this past week, but still lagged behind the number of bears. Ned Davis Research's "crowd sentiment poll" showed a parallel degree of pessimism, as did the Rydex/SGI Advisor Confidence Index, a measure of investment-advisor psychology that hit a 16-month low in August. Meantime, corporate insiders have all but quit selling shares of their employers."

Epidemic models of bubbles
09/04/10   Markets
"Contagion or epidemic models of financial markets are proposed in which interest in or attention to individual stocks is spread by word of mouth. The models give alternative interpretations of the random walk character of stock prices."

Thinking outside the stocks
09/04/10   Markets
"There is always a bull market somewhere. With the stock market continuing to whipsaw and bonds getting ever-pricier, investors are looking further afield for decent returns - and some are finding them. Self-storage buildings, anyone? How about abandoned railroad beds, cellular towers, student apartments or parking facilities? Such unglamorous niches, once shunned by the investing elite, are performing well in 2010, even as the Dow industrials limp along."

Bond bubble
09/04/10   Montier
"It is possible to build a speculative case for bond investment (i.e. riding the deflationary news flow down), however, as ever this leaves participants with the conundrum of Cinderella's ball as described by Warren Buffett 'The giddy participants all plan to leave just seconds before midnight. There is a problem though: They are dancing in a room in which the clocks have no hands!' Personally I prefer to stick to investment rather than speculation."

Do countries graduate from crises?
09/03/10   Markets
"Are declarations of victory against the global crisis premature? This column argues that 'graduation' - the emergence from recurrent crisis bouts - is a long and painful process which neither developed nor developing countries look close to completing. Two centuries of evidence suggests that most countries need 50 years before the chances of further crises subside."

Graham PE and CPI
08/29/10   Markets
"Saturna Capital has an interesting take on the calculation of the Graham / Shiller PE10, otherwise known as the Cyclically Adjusted Price Earnings ratio (CAPE). Saturna argues that The Market May Be Cheaper Than It Looks because the Consumer Price Index (CPI) provided by the Bureau of Labor Statistics (BLS) understates the true rate of inflation, a key input to the CAPE calculation"

The elements of investing
08/29/10   Books
"The Elements of Investing.written by former Vanguard board members Charles Ellis and Burton G. Malkiel.distills investing into five fundamental principles: save, index, diversify, avoid blunders, and keep it simple. Simply visit the publisher's website and download your copy today."

Lies, damned lies and economists
08/29/10   Economics
"It's established by now that economics didn't help stop some of the more spectacular misadventures of the financial community but it's a bit less obvious that it was directly responsible for many of the mishaps. It's all tied up with the dirty fact that economists are basically a bunch of untrustworthy, deceitful bums who shouldn't be left alone with your child's piggybank, let alone the world's economy. The trouble is that economists have a world-view that sees us all as self-interested moneygrubbers without an ethical thought in our heads. Perhaps that's because that's a pretty good description of economists themselves: they act like their models are true, the dirty rotten scoundrels."

The Fed can create money, not confidence
08/25/10   Government
"The key word here is "uncertainty." The Obama administration and Congress have dumped a huge load of highly dubious new legislation on Americans, much of it unread even by the legislators who voted for it. ObamaCare is an attempted federal takeover of a vast and complex industry. No one really knows how much chaos the financial sector "reform" act will generate. Hyperactive zealots in federal bureaucracies such as the Environmental Protection Agency have been unleashed to do silly things like attempt to reduce the planet's supply of carbon dioxide."

The lost half decade
08/25/10   Real Estate
"While it has been a 'lost decade' for equities, housing isn't too far behind. The sector is now in the midst of a lost half decade and counting. Following up on yesterday's downright awful release of existing home sales, today's new home sales report for July came in at a seasonally adjusted annualized rate of just 276K, which is a record low dating back to 1963. Since peaking in July 2005, new home sales have now declined by more than 80% in five years."

How to tell when a CEO is lying
08/25/10   Behaviour
"Assessing whether reported financial statements are intentionally misstated (or manipulated) is of considerable interest to researchers, creditors, equity investors, and governmental regulators. While there is a lot of information out there on deception detection, there is not a lot of useful information. This recent study, where the authors analyze linguistic features present in answers of CEOs and CFOs during quarterly earnings conference calls, caught my eye. Investors might want to pay attention"

War between the sexes
08/25/10   Government
"On average, 65-year old men today will receive only 43.6% of the net benefits that women receive, and young men today can expect a net tax burden over their lifetimes that will be 3.4 times greater than for women."

A man from a different time
08/25/10   Montier
"Looking at the U.S. market since 1871, on a 1-year time horizon, nearly 80% of the return has been generated by fluctuations in valuation. However, as the time horizon is extended, 'fundamentals' play an increasing role in return generation. For example, at a 5-year time horizon, dividend yield and dividend growth account for almost 80% of the return."

Darwin's darlings
08/25/10   Value Investing
"The premise of the report was that undervalued small capitalization stocks (those with a market capitalization between $50M and $250M) lacked a competitive auction for their shares and required the emergence of a catalyst in the form of a merger or buy-out to close the value gap."

Complex adaptive systems
08/25/10   Government
"As long as the Chinese keep giving us money and inflation remains low, I see nothing forcing US policy to change. This is not sustainable, however, and when the US turns into a Greece-like situation, it will be a very bad decade. When you try to micromanage a complex system, the most important virtue is humility."

Strucs vs. Cycs
08/25/10   Economy
"So in the interest of peace between the camps - and of lowered unemployment - here's a plea to each. Strucs: You've got to be more specific about exactly how much of current unemployment you think is structural, and explain what those structures are, so that those who believe that government might be able to help fix it can at least offer some ideas. And Cycs: You can start by acknowledging what is different about unemployment in this recession and so-called recovery, and give us targeted policy proposals, instead of vague exhortations to pump up demand."

The rise of unemployment
08/23/10   Economy
"This disturbing graphic, by Latoya Eguwuekwe, charts the rise of unemployment across the U.S. from 2007 on."

Battle looms over public pensions
08/23/10   Government
"There's a class war coming to the world of government pensions. The haves are retirees who were once state or municipal workers. Their seemingly guaranteed and ever-escalating monthly pension benefits are breaking budgets nationwide. The have-nots are taxpayers who don't have generous pensions. Their 401(k)s or individual retirement accounts have taken a real beating in recent years and are not guaranteed. And soon, many of those people will be paying higher taxes or getting fewer state services as their states put more money aside to cover those pension checks."

Huge government benefit
08/23/10   Government
"Not participating in Social Security is a huge benefit. The implicit return on 'premiums' paid by you and your employer is typically below zero. In other words, if you took your social security taxes and stuffed them in a mattress, you would get a better return."

Britain reels as austerity begins
08/23/10   World
"Last month, the British government abolished the U.K. Film Council, the Health Protection Agency and dozens of other groups that regulate, advise and distribute money in the arts, health care, industry and other areas. It seemed shockingly abrupt, a mass execution without appeal. But it was just a tiny taste of what was to come."

Lou Simpson retiring from Geico
08/22/10   Buffett
"Lou Simpson, the Chicago-based investor with such a stellar track record he once was considered the successor to Warren Buffett, is retiring at the end of the year after decades managing Geico's investment portfolio."

But still expensive
08/22/10   Funds
"A few years ago, a research paper by three academics claimed that Canadian mutual funds levied higher average fees than funds in seventeen other countries. Since average Canadian fund fees are high, the media jumped all over this research - despite being incomplete. Reading through many versions of the paper, it became clear that the core data and underlying assumptions were questionable."

Mott's strike
08/22/10   Management
"After nearly 90 days of picketing in the broiling sun outside the sprawling Mott's apple juice plant here in upstate New York, Michelle Muoio recognizes that the lengthy strike is about far more than whether the 305 hourly workers at the plant get a fatter or slimmer paycheck."

Beware of 'independent' research
08/20/10   Academia
"It was the medical profession, of course, that sparked the first real public outcry over corporate-funded research. After regulators exposed cases in which researchers doctored data in favor of drug companies, oversight of medical-school faculty tightened. "If people step over the line, it ends up being a big brouhaha," says James O'Toole, professor of business ethics at the University of Denver. But business schools say keeping the corporate world at arm's length would run counter to their core mission."

The free-marketeers strike back
08/16/10   Markets
"'From an historical perspective, the current crisis follows a well-known pattern,' says Princeton University's Jose Scheinkman. 'It is astounding,' agrees Columbia University's Charles Calomiris, to what extent 'the current banking crisis fits into the pattern of all banking crises that we have known about since the fifteenth century': excessive leverage and a strong belief in ever-rising prices, followed by a collapse of trust in, and a run on, the banks. 'The weakness of many contemporary economists is a short memory,' Calomiris adds. It's an amnesia shared by the public, which tends to erase bad memories. After all, banks usually work pretty well, so long periods of time can pass without a crisis breaking out, making it much easier to forget."

Value Workshop: Indigo
08/15/10   Stingy Investing
"We're putting Indigo Books & Music (IDG on the TSX) under the microscope today."

Advertising on the handicap principle
08/15/10   Markets
"Biologists have been long perplexed by the peacock's tail, economists by the use of advertising. In both cases the struggle has been to understand why something so self-evidently pointless and potentially damaging can survive in a vicious world of winner-takes-all, loser-goes-extinct natural selection. Meanwhile researchers from both worlds have been closeting themselves ever deeper in an arcane world of computer modelling, where truth can be validated only by mathematics. Hints of answers to these puzzles have come not from number crunching but from fuzzy human intuitions about the way the world actually works."

Soak the very, very rich
08/12/10   Taxes
"In a society that's becoming more stratified, a sensible tax system should draw more distinctions, not fewer. The U.S. is now a place where the rich and the ultra-rich really inhabit different worlds. (A couple of years ago, Barron's declared, 'Yes, it takes more than $10 million to be seen as rich these days.') They should probably inhabit different tax brackets, too."

U.S. is bankrupt
08/12/10   Government
"Let's get real. The U.S. is bankrupt. Neither spending more nor taxing less will help the country pay its bills. What it can and must do is radically simplify its tax, health-care, retirement and financial systems, each of which is a complete mess. But this is the good news. It means they can each be redesigned to achieve their legitimate purposes at much lower cost and, in the process, revitalize the economy."

Slime mould like humans
08/12/10   Behaviour
"This style of 'comparative valuation' may seem uncannily human, but it's also one that's shared by hummingbirds, starlings, honeybees and many other animals. In fact, Latty and Beekman think that it's a 'common feature of biological decision-making'. Certainly, it's a much easier process - comparing two nearby options is less 'computationally intensive' than making absolute judgments about each of them."

Meet the $69 hot dog
08/12/10   Markets
"Absurdly priced menu items are more than a publicity gimmick. They're an application of "anchoring," a cognitive phenomenon discovered by psychologists Amos Tversky and Daniel Kahneman in the 1970s. Whenever we try to estimate a numerical value, we are unconsciously influenced by related numbers just considered. In this case, the diner in a touristy Manhattan restaurant is trying to decide how much he or she can afford to spend. The familiar prices back home don't apply. That diner isn't going to order a $69 hot dog, but might happily opt for an $17.95 cheeseburger. The hot dog makes the cheeseburger appear reasonable in comparison (even though $17.95 would be a ridiculous price for a cheeseburger almost anywhere else). In scores of careful laboratory studies, price contrasts like that affect decisions. Restaurateurs and consultants believe it works on menus, too."

Why I'm not hiring
08/09/10   Government
"A life in business is filled with uncertainties, but I can be quite sure that every time I hire someone my obligations to the government go up. From where I sit, the government's message is unmistakable: Creating a new job carries a punishing price."

Is giving bad!?
08/08/10   World
"When one of the most popular economic blogs writes a post like this (title: "Should We Be Leery of the Generosity of the Uber Rich?" - no - seriously - that is the title!), and the overwhelming majority of the commenters agree with the author, it makes me weep for the future of America."

Tracing oil reserves
08/04/10   World
"Today, a principal tenet of geology is that a vast majority of the world's oil arose not from lumbering beasts on land but tiny organisms at sea. It holds that blizzards of microscopic life fell into the sunless depths over the ages, producing thick sediments that the planet's inner heat eventually cooked into oil. It is estimated that 95 percent or more of global oil traces its genesis to the sea."

Illiquidity premium
08/04/10   Markets
"The outperformance of value stocks was a little more consistent across the liquidity spectrum as you can see from the chart below. In this case, value stocks outperformed growth stocks by around 10% across the board. However, for high liquidity stocks, this difference represented a 4-fold increase in abnormal returns (from around 3% to around 12%)."

The original captain of industry
08/03/10   Books
"Lipton's story starts out as a period piece but turns out to be completely contemporary. Unfortunately, The Great Lipton lived in an age before The Apprentice, when there were few options for a flamboyant CEO outside the C-suite. Without him, though, there might never have been such a show."

Warren Buffett's Mr. Fix-It
08/02/10   Buffett
"When investors think of Berkshire Hathaway, they of course think of Warren Buffett and his record as a hands-off, if highly attentive, CEO. He gives free rein to the heads of his large collection of companies, ranging from Geico to Dairy Queen to Benjamin Moore to the Buffalo News to NetJets. Yet even in Buffett's empire, sometimes a CEO blows it, and his business needs to be fixed or a deal needs to get done -- fast. When that happens, Buffett's go-to guy is David Sokol."

The meaning of fair
08/02/10   Behaviour
"Chapman University experimental economist Bart Wilson argues that fairness should not be construed as equality of outcome, but as a process in which everyone plays by the rules and honors agreements. When lawmakers obscure the definition of this word, it may result in policy that is ineffective, arbitrary, and fundamentally unfair."

Tim's 2010 Conference
08/02/10   Value Investing
"Glacier, Indigo, EGI Financial, Sun-Rype Products and Arlington, which is a little bit of a special situation. But all of these companies, I think, are really through any restructuring. They're somewhere in various stages of cash generation or discovery, and whether or not we sell them or not, depends an awful lot on the price they're trading at."

Background check
08/01/10   Accounting
"Yet you don't have to be a forensic accountant to spot trouble on a financial statement. Here are several line items on a balance sheet you should focus on to gauge a company's strength, including inventories, free cash flow, and accounts receivable."

Letting go
07/27/10   Health
"The subject seems to reach national awareness mainly as a question of who should 'win' when the expensive decisions are made: the insurers and the taxpayers footing the bill or the patient battling for his or her life. Budget hawks urge us to face the fact that we can't afford everything. Demagogues shout about rationing and death panels. Market purists blame the existence of insurance: if patients and families paid the bills themselves, those expensive therapies would all come down in price. But they're debating the wrong question. The failure of our system of medical care for people facing the end of their life runs much deeper. To see this, you have to get close enough to grapple with the way decisions about care are actually made."

The muni-bond debt bomb
07/26/10   Bonds
"Like homeowners before the housing bubble burst, states and cities have gorged on debt, extended repayment times, and used devious means to avoid limits on borrowing - all in order to finance risky projects and kick fiscal problems down the road. Though the country's economic troubles have helped expose some of these unwise practices, the downturn has brought not reform but yet more abuse. Even as Tea Party protesters and taxpayer groups revolt against excessive government spending and taxes, they are paying too little attention to the gigantic state and local debt bomb. If it can't be defused, we're all at risk."

Trader's cocoa binge
07/26/10   Markets
"To some, he is a real-life Willy Wonka. To others, he is a Bond-style villain bent on taking over the world.s supply of chocolate. In a stroke, a hedge fund manager here named Anthony Ward has all but cornered the market in cocoa. By one estimate, he has bought enough to make more than five billion chocolate bars."

This ain't your granpa's debt
07/26/10   Government
"The deficits of the next few decades are scheduled to balloon because of budget decisions -- Medicare and Social Security and tax levels -- that are decades in the making. The political process created this time bomb and the political process will have to defuse it."

Credit score is the tyrant
07/25/10   Real Estate
"A FICO score, he patiently explained, is merely a tool that lenders use to help manage their risk; criticizing it is akin to criticizing 'a saw because the construction job turned out badly.' With big banks making thousands of credit decisions every day, they couldn't possible do it without some standardized benchmark; a credit score provided that benchmark. Over the years, he added, the algorithm had gotten very good at predicting the odds of a borrower defaulting. In fact, FICO scores are not the best predictor. The amount of equity a person has in his home, his debt-to-income ratio, his job stability and his cash reserves are all better predictors than credit scores, according to Dave Zitting, the chief executive of Primary Residential Mortgage, a leading mortgage lender. And yet, he said, 'The credit score has become the line in the sand for the banks.'"

Mr. Market refuses
07/25/10   Value Investing
"I like sitting on Uncle Warren's knee while he talks about the time he swapped a bag of cocoa beans for a controlling interest in Berkshire Hathaway: 'For several weeks I busily bought shares, sold beans, and made periodic stops at Schroeder Trust to exchange stock certificates for warehouse receipts. The profits were good and my only expense was subway tokens.' Great story, Uncle Warren. I'm right now trying to buy Pfizer with a paper clip and some pocket lint"

The technocracy boom
07/22/10   Government
"When historians look back on the period between 2001 and 2011, they will be amazed that a nation that professed to hate bureaucracy produced so much of it."

Small reactors?
07/22/10   World
"A growing body of plant designers, utility companies, government agencies and financial players are recognizing that smaller plants can take advantage of greater opportunities to apply lessons learned, take advantage of the engineering and tooling savings possible with higher numbers of units and better meet customer needs in terms of capacity additions and financing. The resulting systems are a welcome addition to the nuclear power plant menu, which has previously been limited to one size - extra large. Developing a broader range of system choices using nuclear fission energy could have a measurable impact on segments of the energy market that have been most often served by burning distillate fuel or natural gas. Small modular reactors offer a reason to be optimistic that human society will have access to all of the energy that it needs for increased prosperity for larger portion of the population."

Turning Japanese
07/21/10   Stocks
"I have maintained throughout this blog that I thought that zero interest rates in America would have a different outcome to zero interest rates in Japan because Japanese banks are predominantly deposit franchises and zero interest rates are very bad for them - but that American banks - especially larger American banks - are fundamentally lending franchises and zero interest rates would not impair their ability to make a spread on the loan book."

Krugman versus Ferguson
07/21/10   Markets
"Not since Ken Rogoff's famous attack on Joe Stiglitz has the dismal science of economics provoked such pompous, self-important, personalised squabbling. Professors Paul Krugman and Niall Ferguson, of course, have form; they've been at it on and off for nearly a year now over the efficacy of deficit spending in fighting the downturn, and today they return to the fray. The occassion was another piece that Ferguson, an eminent economic historian, has penned for the Financial Times on the dangers of attempting to spend your way to economic recovery. Foolishly - or perhaps deliberately, for it is sometimes possible to imagine that the two have secretly agreed to slag each other off for the publicity - he mentions Krugman by name. 'Those economists, like New York Times columnist Paul Krugman', he writes, 'who liken confidence to an imaginary 'fairy' have failed to learn from decades of economic research on expectations. They also seem not to have noticed that the big academic winners of this crisis have been the proponents of behavioural finance, in which the ups and downs of human psychology are the key.'"

Bond default
07/21/10   Bonds
"When Arkansas defaulted on its bonds in 1933, the politicians and investors talked about the same things we would talk about today. The state blamed underwriters for allowing it to sell too many bonds. Investors compared the willingness to repay debt with the ability to pay, and weighed the advantages of bonds backed by a pledge of taxing powers to those secured by specific revenue. Unlike today, nobody thought the federal government should come to the rescue."

Don't take the bait
07/21/10   Markets
"More sober and historically reliable measures of market valuation create a much more challenging picture. Apart from our own measures, which indicate continued overvaluation, there are several good indicators of market valuation that are not overly sensitive to year-to-year fluctuations in profit margins. One is based on the 10-year average of actual net (not operating) earnings, which is advocated by economist Robert Shiller, and another is Tobin's "q" ratio which is based on comparing market value to replacement cost, and is advocated by Andrew Smithers. Both of these measures largely agree with our own measures, both presently and on a historical basis. Based on last week's valuations, both suggest that the S&P 500 is substantially overvalued."

A perfect predator
07/21/10   Stocks
"Flatt seems to go out of his way to paint Brookfield as boring. 'We own 129 office buildings. Some are a little taller, some are a bit shorter,' he says laconically. The strategy? 'We're in the business of buying assets of great quality at less than replacement cost.' The company's remarkably consistent objective over the years simply has been to earn a 12% to 15% compound annual return per share. 'We have no goal to be large or significant,' says Flatt. 'If [reaching our objective] meant we should shrink in size, we'd do that.' Even Brookfield's logo is understated, and its 2009 annual report looks like something thrown together at Kinko's. Move along, everyone, nothing to see here. The reality is that this slender 45-year-old executive runs a conglomerate that manages $108-billion worth of real estate, utilities and infrastructure across the planet."

The most underrated part of Warren
07/21/10   Buffett
"What are the most underrated and overrated parts of Berkshire Hathaway CEO Warren Buffett's success?"

Into thin error
07/16/10   Books
"I sought Viesturs out because I was curious about the kind of attitude you develop toward error when a single mistake can easily cost you your life. I also wanted to test a hypothesis that I call "the paradox of error": If your goal is to avoid making mistakes, then you must constantly assume that you are about to make one. That's why fields like aviation and medicine have, at their best, a productive obsession with error. It turns out the same goes for mountaineering - or, at least, mountaineering as practiced by Viesturs. He's totally comfortable with being wrong, he says; the important thing is that, "if you goof up, it's in the right direction.""

Stewardship common sense
07/16/10   Funds
"In the course of our research we've uncovered a fund company - one that received a good culture grade and had no regulatory deductions - that purchased shares in a related company in one of its funds. Since the firm has followed all of the rules, technically, it's not considered a regulatory issue. Accordingly, the trade was not reviewed by the IRC. But when we discovered all of the facts, we have zero doubt that a conflict of interest existed, whether or not the law defines it as such."

The zeroes
07/16/10   Books
"Lane believed he would make his own fortune by giving luxury advertisers a forum to reach this small but growing mob of ultrarich arrivistes. Unfortunately he chose a medium that would prove to be a surefire prophylactic against profits. Despite zealously attempting to sell out, Lane couldn't make a buck. When stock markets collapsed in 2008, so did his publishing empire."

Untangling skill and luck
07/16/10   Markets
"In this report, we will discuss why unraveling skill and luck is so important, provide a framework for thinking about the contribution of skill and luck, offer some methods to help sort skill and luck in various domains, and define the key features of skill in the investment business."

Washington takes aim at Apple
07/15/10   Government
"If you want to produce something in America, you'd better play the game. Contribute to politicians' campaigns, hire their friends, go hat in hand to a congressional hearing, and apologize for your success."

Government for sale
07/14/10   Government
"The article's subhed tells you all you need to know: 'Why Lobbying Is Washington's Best Bargain; Lobbyists say for just a few million, they can make clients billions'"

Relative status in practice
07/14/10   Markets
"In Kenneth Fisher's book The Only Three Questions that Count, in the references under "Risk" he merely has 'see benchmarking'. If everyone benchmarks, risk is deviating from the consensus, and thus taking too little exposure to any popular investment is just as risky as taking on a lot of exposure. Cremers and Petajisto have a paper where the define portfolio manager risk this way. If risk is defined as a deviation from the benchmark, it becomes like idiosyncratic risk, unnecessary, so unpriced. Further, via arbitrage 'benchmark risk' can not be priced, because you can't get a risk premium from both having zero or twice the normal exposure to BP."

Bank of America comes clean
07/14/10   Stocks
"Bank of America has finally admitted that it understated the quarter end assets and liabilities for the years 2007 to 2009. It does not (yet) admit that similar transactions took place in many other years and it does not spell out the effect of these transactions on BofA.s need to carry capital."

Preventing 2006
07/11/10   Markets
"'The true debate in economics is - between economists who care about the productivity of resource allocation and those who only pay lip service.' That is harsh, but not wrong. I'd draw the lines a bit more mildly, and say that the core argument is between people who think we are in a financial crisis that has engendered an economic crisis, and others (like me) who think that the financial crisis is the outgrowth of longstanding and continuing economic mistakes."

On business competition
07/10/10   Management
"'A funny thing happens when you begin to capture competitive differences on paper', says Harvard Professor Youngme Moon in her book Different, 'there is a natural inclination for folks in the competitive set to focus on eliminating differences rather than accentuating them.'"

What fresh hell is this?
07/09/10   Government
"Somewhere along the way an enterprising employee of mine made coffee in our new (not yet legal) office for the early morning fishermen, but we soon found that to continue to provide coffee would require the installation of a triple cleanup sink, which in turn would add marginally to the load on the current septic system, which in turn would trigger a county requirement for us to build a new $2.5 million sewage treatment facility. Uh, never mind on that coffee."

Buffett's best advice
07/08/10   Buffett
"What's the best advice Warren Buffett has ever received? You might be surprised: It has nothing to do with money."

Fractals and the art of roughness
07/08/10   Academia
"At TED2010, mathematics legend Benoit Mandelbrot develops a theme he first discussed at TED in 1984 -- the extreme complexity of roughness, and the way that fractal math can find order within patterns that seem unknowably complicated."

Barbie does economics
07/08/10   Montier
"Economics starts from a far worse place. It isn't a science, and often seems more interested in twisting the facts to fit a theory rather than the other way around. In fact, as Nassim Taleb has pointed out, economics is more akin to medieval medicine than its current practice, 'Medicine used to kill more patients than it saved - just as financial economics endangers the system by creating, not reducing, risk.'"

Montier resource page
07/08/10   Montier
"The essence of investment was to seek out value; to buy what was cheap with a margin of safety. Investors could move up and down the capital structure (from bonds to equities) as they saw fit. If nothing fit the criteria for investing, then cash was the default option. But that changed with the rise of modern portfolio theory and, not coincidentally, the rise of 'professional investment managers' and consultants."

Applying the equity risk premium
07/07/10   Markets
"It's simply not true that growth outperforms value, or certain stock sectors have higher returns, even countries do not have obviously higher returns, or that more volatile stocks have higher returns than low volatility stocks. A beautiful theory killed by data, it happens all the time."

Down with doom
07/07/10   World
"By the time I was 21 years old I realized that nobody had ever said anything optimistic to me - in a lecture, a television program or even a conversation in a bar - about the future of the planet and its people, at least not that I could recall. Doom was certain."

The true cost of pensions
07/07/10   Government
"But the present value of future liabilities is around 1.1 trillion, even after the government slipped in a reduction in index-linking in the recent budget. That is around 80% of GDP, a figure that of course is on top of the national debt numbers normally calculated. if the British government were to pay interest on this liability each year, the bill would be larger than the cost of servicing the official debt."

Sticking to what works
07/06/10   Value Investing
"This month Sequoia Fund marks its 40th anniversary. It's a milestone rarely achieved in an industry where three years is considered long term. Even more remarkable is that Sequoia is being run pretty much the same as it was when Warren Buffett's friend and stockbroker, the late Bill Ruane, launched the fund in 1970. It's still a concentrated portfolio with two or three dozen stocks, all heavily researched and bought with the idea that the market is valuing them at less than their true worth. Co-managing the fund is Robert Goldfarb, whose tenure at the New York firm dates back to 1971."

Times must charge for news
07/05/10   Markets
"Why content creators, in particular newspapers, ever succumbed to the notion that they should forever give away their product online seems one of those odd, lemming-like phenomena akin to the 'irrational exuberance' that preceded the dot-com stock market crash. Lured by the siren song of having an infinite audience via electronic distribution, publishers forgot that it meant infinite ad inventories whose price is rapidly approaching zero."

The confidence game
07/05/10   Books
"There really are loans that so safe that they can be written with a zero-loss standard and levered 150 times - but they are only that safe if you have removed the possibility of fraud - and you can only really do that by getting your fingers dirty. You cannot do that with a mathematical model."

Negative idiosyncratic risk premium
07/04/10   Academia
"The average gross return of an equally weighted portfolio that is long (short) the fifth of stocks with the lowest (highest) idiosyncratic volatilities, reformed monthly, is 0.79% per month or about 9% per year. Results are similar for sorting on total rather than idiosyncratic volatility. In other words, low-volatility stocks tend to outperform high-volatility stocks."

The Andy Grove essay
07/04/10   World
"The former Intel chief says 'job-centric' leadership and incentives are needed to expand U.S. domestic employment again"

Illinois stops paying its bills
07/04/10   Government
"For the last few years, California stood more or less unchallenged as a symbol of the fiscal collapse of states during the recession. Now Illinois has shouldered to the fore, as its dysfunctional political class refuses to pay the state's bills and refuses to take the painful steps - cuts and tax increases - to close a deficit of at least $12 billion, equal to nearly half the state's budget."

Padded pensions
07/04/10   Government
"In Yonkers, more than 100 retired police officers and firefighters are collecting pensions greater than their pay when they were working. One of the youngest, Hugo Tassone, retired at 44 with a base pay of about $74,000 a year. His pension is now $101,333 a year."

Physics envy can kill you
06/30/10   Economics
"Andrew Lo of MIT doing his riff on how physics envy can kill you - especially if you're in finance/economics"

What's on my shoe? EBITDAPO
06/30/10   Accounting
"Instead GM's advisors are plumping for enterprise value as a multiple of something called EBITDAPO. That's the same as regular old earnings before interest, taxes, depreciation and amortization, but with pension costs and other post-retirement employee benefits (OPEB) - healthcare, basically - also stripped out."

College: paltry return
06/28/10   Academia
"Over the past 30 years, the S&P 500 Index averaged about 11 percent a year. Only 88 schools out of the 554 in the study had a better return than the S&P. Everywhere else, students would have been better off - financially, at least - if they invested the money they spent on their college educations and never set foot in a classroom. 'For almost every school on the list,' writes Lee in an e-mail, 'prospective students paying full price would probably have been better off investing in the stock market 30 years ago rather than spending their money on a college education.'"

Vancouver's bubble trouble
06/27/10   Real Estate
"In Vancouver, new developments are pre-sold via "assignment letters," or commitments to buy. Throughout 2009, say Connell and others, assignment letters were being flipped. "The minute I actually heard a taxi driver talking about flipping assignments," says Connell, "I knew something had to give.""

The cost of retiring at 66
06/27/10   Retirement
"The state pension age looks set to rise to 66 in just six years' time, and may be extended far further -possibly to 70. Unions have condemned these "work till you drop" plans - but they shouldn't come as any surprise."

States of crisis
06/26/10   Government
"Even as the U.S. appears to be on the mend -- gross domestic product has climbed three straight quarters -- finances in Arizona, Illinois, New Jersey, New York and other states show few signs of improvement. Forty-six states face budget shortfalls that add up to $112 billion for the fiscal year ending next June, according to the Center on Budget and Policy Priorities, a Washington research institution. State spending is 12 percent of U.S. GDP."

Niederhoffer on being wrong
06/24/10   Behaviour
"I made so many errors there it's pathetic. I made one of my favorite errors: "The mouse with one hole is quickly cornered." That is key. There are certain decisions you make in life that are irreversible, that lead you into a path you can't get out of, and unless you have more than one escape clause, the adversary can gang up on you and destroy you. What else? I didn't have a proper foundation. I was not sufficiently private in my activities. I was playing poker with men named Doc. I must've made a hundred errors on that one, but those are five or six that come to mind."

What we should be afraid of
06/23/10   Fun
Just when I was about to go back into the water again ...

Chinese firms using back door
06/23/10   Accounting
"When I asked Heckmann whether he would be leery of Chinese reverse mergers, he said that he wouldn't avoid just reverse mergers, but all Chinese companies, because it's simply too hard to determine the real numbers. One reason: He says he believes, from his experience, a primary goal of Chinese companies is tax avoidance."

Suing yourself
06/23/10   Law
"Lawsuit arbitrage! Fantastic! So, see, the problem is that the shareholders ALREADY own the company. So when they sue the company, they are suing themselves. And the lawyers get rich in the process. Sweet."

Is Illinois the new California?
06/22/10   Government
"Like California, Illinois hasn't balanced a budget in nearly a decade, and instead uses gimmicks and borrowing to close gaps. Like California, Illinois regularly issues bonds to pay for current government operations. But unlike California, Illinois has some of the country's least-funded public employee pension plans."

Something's wrong but you'll never know
06/22/10   Behaviour
"Knowing what you don't know? Is this supposedly the hallmark of an intelligent person? ... That's absolutely right. It's knowing that there are things you don't know that you don't know. Donald Rumsfeld gave this speech about 'unknown unknowns.' It goes something like this: 'There are things we know we know about terrorism. There are things we know we don't know. And there are things that are unknown unknowns. We don't know that we don't know.' He got a lot of grief for that. And I thought, 'That's the smartest and most modest thing I've heard in a year.'"

The fog of war
06/22/10   World
"Robert S. Mcnamera's own words about everything from world war 2, JFK, Vietnam and the Tonkin bay incident, the cold war and the Cuba crises. A must see."

The velluvial matrix
06/21/10   Health
"The truth is that the volume and complexity of the knowledge that we need to master has grown exponentially beyond our capacity as individuals."

Dividend investing
06/21/10   Stingy Investing
"By sticking to companies that have the means to pay high dividend yields, you not only get the added bonus of a regular paycheque from your portfolio (now electronically deposited in your investing account), but studies show that you'll likely enjoy a higher rate of return over the long run than the market typically provides."

Dividend growers
06/21/10   Stingy Investing
"Only a handful of stocks in the S&P/TSX 60 sport good five-year dividend growth records. Even fewer pay dividends that are well supported by earnings. I'll highlight four that pass both tests, and also happen to trade at modest price-to-earnings ratios."

Why Amish businesses don't fail
06/21/10   Management
"Want to find America's most successful entrepreneurs? Skip Silicon Valley and Manhattan; head to the rural Amish enclaves. Amish businesses have an eye-popping 95% success rate at staying open at least five years, according to author Erik Wesner's new book, Success Made Simple: An Inside Look at Why Amish Businesses Thrive."

Do politicians cause downsizing?
06/21/10   Government
"This paper provides a new empirical approach for identifying the impact of government spending on the private sector. Using changes in congressional committee chairmanship as a source of exogenous variation in state-level federal expenditures, we find that fiscal spending shocks appear to significantly dampen corporate sector investment activity. Specifically, we find statistically and economically significant evidence that firms respond to government spending shocks by: i.) reducing investments in new capital, ii.) reducing investments in R&D, and iii.) paying out more to shareholders in the face of this reduced investment opportunity set. Further, we find that when the spending shocks reverse (through a relinquishing of chairmanship), most all of these behaviors reverse. Finally, we also find some evidence that firms scale back their employment, and experience a decline in sales growth."

Paid not to marry
06/21/10   World
"Sophia Constantinidou works as a teacher in a private school in Athens. She also has a more lucrative job: remaining unmarried. The 52-year-old gets 400 euros ($496) a month from the Greek government, part of her late mother's state pension. Under the current system, Constantinidou qualifies to receive the payment for life as the only surviving child of a deceased civil servant, provided she doesn't tie the knot."

So that's why
06/21/10   Zweig
"In other words, investors often go along with the crowd because - at the most basic biological level - conformity feels good. Moving in herds doesn't just give investors a sense of "safety in numbers." It also gives them pleasure. That may help explain why market sentiment can change so swiftly, why true contrarians are so hard to find and why investors care so much about the "consensus view" on Wall Street."

Payback time
06/21/10   Government
"Many states are acknowledging this year that they have promised pensions they cannot afford and are cutting once-sacrosanct benefits, to appease taxpayers and attack budget deficits."

Canada key to trade
06/18/10   World
"The Obama administration is looking to Canada to help realize its goal of doubling U.S. exports by 2015, but Canadian business leaders say that won't happen unless a number of trade irritants are dealt with first."

The coal age continues
06/18/10   World
"One way to keep perspective amid all the Beltway cogitation over how to keep a climate component in an energy bill is to pay attention to the global coal industry. Coal is the prime factor determining the pace of growth in emissions of heat-trapping carbon dioxide as human populations and appetites crest in the next few decades. And regardless of what happens in the United States, the industry's leaders see nothing but bright prospects ahead. We're still stuck on the coal rung of Loren Eiseley's heat ladder."

Naive Keynesianism
06/16/10   Economics
"One of the most frequently cited statements in economics is John Maynard Keynes' observation that 'Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.' For decades after those words were written, and extending even to the present time, Keynes was that influential defunct economist."

The $600 billion challenge
06/16/10   World
"Bill Gates, Melinda Gates, and Warren Buffett are asking the nation's billionaires to pledge to give at least half their net worth to charity, in their lifetimes or at death. If their campaign succeeds, it could change the face of philanthropy."

How to destroy an industry
06/15/10   World
"Mr Chavez has often threatened Lorenzo Mendoza, Polar's billionaire chairman, with expropriation. But as the rotting food shows, his government is better at destroying the existing order than at creating a viable alternative. Some 70% of Venezuela's food is now imported, which generates ample opportunities for graft. Most of the farms and food companies the president has expropriated suffer from inflated payrolls, declining productivity and rampant inefficiency. His threats against Polar are rejected by a well-paid and loyal workforce. The company is one of the biggest remaining obstacles to the installation of Cuban-style communism in Venezuela. But to seize it now might well lose Mr Chavez the legislative election. As Venezuelans say 'love, with hunger, doesn't last.'"

Don't let your sons grow up to be scientists
06/14/10   Markets
"The Real Science Gap: It's not insufficient schooling or a shortage of scientists. It's a lack of job opportunities. Americans need the reasonable hope that spending their youth preparing to do science will provide a satisfactory career."

Dividends reign as market pours
06/13/10   Dividends
"But layered against the dourness, earnings have been strong, cash positions are growing and interest rates are extremely low, making other investments look relatively more attractive than bonds and cash."

The strange survival of ink
06/13/10   World
"The survival of newspapers is by no means guaranteed. They still face big structural obstacles: it remains unclear, for example, whether the young will pay for news in any form. But the recession brought out an impressive and unexpected ability to adapt. If newspapers can keep that up in better times, they may be able to contemplate more than mere survival."

A gambling man
06/13/10   World
"Is it far-fetched to argue that having cast his main bets Mr Obama can now do nothing except await their result? Of course. He can, for a start, work harder to explain them. The president did not expect health reform to go down like this. Once it was passed, he predicted in the spring, Americans would wise up to the lies of the Republicans and see that 'nobody is pulling the plug on granny'. Now that spring has given way to summer, the White House has embarked on yet another campaign to hasten the voters. understanding. Mr Obama visited an old folks. centre in Maryland to spell out the excellence of the forthcoming changes. But voters, not being stupid, are not so sure. This is complex legislation whose full costs and benefits will take years to be seen. Another thing Mr Obama can do is double down: more stimulus, more troops, more controversial legislation in areas such as energy and immigration. But after the huge decisions he has already taken his stock of money, troops and political capital is severely depleted. For the first term at least, what you see now is probably the bulk of what you are going to get, and success remains uncertain. Much more gripping than an oil spill."

U.S. kickbacks in doctors' conflicts
06/13/10   Health
"In the U.S. in 2010, the average price of a primary artificial hip was $7,200, more than four times the $1,600 in Germany, says Melissa Hussey, a senior analyst on the orthopedic team at Millennium Research Group, based in Toronto. In Germany and other countries, she says, sales representatives have restricted access to surgeons. 'These items are ridiculously expensive, and a lot of the monies in that bucket are to keep the surgeon tied to that product,' Rodine says. He figures about half the price charged for devices can be traced to funds companies pour into persuading doctors to pick their goods."

Poof, there goes the pension
06/13/10   Government
"Gov. David A. Paterson and legislative leaders have tentatively agreed to allow the state and municipalities to borrow nearly $6 billion to help them make their required annual payments to the state pension fund. And, in classic budgetary sleight-of-hand, they will borrow the money to make the payments to the pension fund - from the same pension fund." [Note the 8% return assumption for extra chuckles.]

A breakthrough in China
06/13/10   World
"For China's thousands of stainless steel producers, the combination of nickel and iron is hugely attractive. They pay NPI producers the same price (or slightly less) as they would pay traditional producers to get the nickel content they need to make stainless steel. They get a bonus of iron - another ingredient needed to make steel - for free."

His own worst enemy
06/11/10   Behaviour
"Terrance Odean, a finance professor at the University of California, Berkeley's Haas School of Business, has spent his career studying a very specific type of investor: the one who is overconfident, shortsighted and far more likely to snap up a stock at the worst possible moment than to make the kind of contrarian bet that pays off in the long run. Odean's specialty, in other words, is the average investor."

When markets go wrong
06/11/10   Markets
"The most recent example of markets going wrong was the American housing boom which prompted both ordinary homebuyers and financial institutions to become overexposed to property prices. When the market collapsed attention focused on the shorts - those betting against subprime securities and bank shares' But subprime securities were indeed over-valued and some banks were in effect insolvent. Short-sellers simply accelerated the alignment of prices with reality. It was 'long-buying' in previous years that was the problem. Markets were unfair - unfairly optimistic. Alas, if governments keep punishing short-sellers during busts, as Nicolas Sarkozy of France and Angela Merkel of Germany want to do, there will be fewer shorts around to temper the next boom. You can bet you won't hear leaders complaining about speculators if there is another bubble in equities or property."

The ethanol trap
06/10/10   Government
"The most disgusting aspect of the blowout in the Gulf of Mexico isn't the video images of oil-soaked birds or the incessant blather from pundits about what BP or the Obama administration should be doing to stem the flow of oil. Instead, it's the ugly spectacle of the corn-ethanol scammers doing all they can to capitalize on the disaster so that they can justify an expansion of the longest-running robbery of taxpayers in U.S. history."

Betting on the bad guys
06/06/10   Fun
"When I heard that BP was destroying a big portion of Earth, with no serious discussion of cutting their dividend, I had two thoughts: 1) I hate them, and 2) This would be an excellent time to buy their stock. And so I did. Although I should have waited a week. People ask me how it feels to take the side of moral bankruptcy. Answer: Pretty good! Thanks for asking. How's it feel to be a disgruntled victim?"

The homeownership gap
06/04/10   Real Estate
"Recent years have seen a sharp rise in the number of negative equity homeowners - those who owe more on their mortgages than their houses are worth. These homeowners are included in the offi cial homeownership rate computed by the Census Bureau, but the savings they must amass to retain their home or purchase a new home are daunting. Recognizing that these homeowners are likely to convert to renters over time, the authors of this analysis calculate an 'effective' rate of homeownership that excludes negative equity households. They argue that the effective rate - 5.6 percentage points below the official rate - may be a useful guide to the future path of the official rate."

Go for the jugular
06/04/10   Markets
"The collapse of Greece's economy, and its domino effect on Spain, Portugal, and other countries in the euro currency zone, is in many ways a replay of an earlier financial crisis--the break-up of the continent's Exchange Rate Mechanism in 1992. Then, as now, Europe's policymakers showed little patience with--or understanding of--markets. Then, as now, Germany often seemed contemptuous of the less competitive economies on the periphery of Europe."

Pummeled stocks for contrarian investors
06/02/10   Dorfman
"The rude market of the past month has knocked many stocks down to attractive levels. Investors who are brave -- and have a time horizon of one year or longer -- can find worthwhile bargains among them."

The millionaire cop
06/02/10   Government
"So when you hear that government workers now make, on average, 30% more than private sector workers, you are not getting the full story. Government workers make more than twice as much as private sector workers, on average, when you include the net present value of their pensions."

Benjamin Graham's S.F. speach
06/01/10   Graham
"Here is the original typewritten text of a speech Benjamin Graham gave in San Francisco one week before John F. Kennedy was assassinated. In this brilliant presentation, Graham explores how an investor should go about determining whether the market is overvalued, how to tell what asset allocation is right for you, and how to pick stocks wisely. This speech is a rare opportunity to see the workings of Graham's mind in the raw."

What motivates us
06/01/10   Management
"This lively RSA Animate, adapted from Dan Pink's talk at the RSA, illustrates the hidden truths behind what really motivates us at home and in the workplace."

How much should we pay executives?
06/01/10   Management
"Our results led us to conclude that financial rewards are often a two-edged sword. They motivate people to work well, but when these financial rewards get very large they can be- come counterproductive and actually hurt performance. If our tests mimic the real world, then higher bonuses may not only cost employers more, but also hinder executives in working to the best of their abilities."

Red tape hamstrings Greek growth
05/29/10   World
"Critics say a sprawling civil service has tried to secure its own survival through an opaque patchwork of fees, taxes and red tape. The European Commission estimates the administrative burden of Greece's bureaucracy - the value of work devoted to dealing with government-imposed administration - is equivalent to 7% of gross domestic product, twice the EU average."

Green from envy
05/29/10   Behaviour
"However, if our actions are based not on absolute wealth but relative wealth - an envy-based economy - the market would need no risk premium. Falkenstein developed the empirical case for this in his January, 2010, paper 'Risk and Return in General: Theory and Evidence.' But other researchers have pointed to similar envy-indicating results, including Cornell economist Robert Frank, whose research showed that most people would choose to live in a world where they made $100K and their peers made $85K, over a one in which they made $110K and their peers made $200K."

Easy money, hard truths
05/27/10   World
"Are you worried that we are passing our debt on to future generations? Well, you need not worry. Before this recession it appeared that absent action, the government's long-term commitments would become a problem in a few decades. I believe the government response to the recession has created budgetary stress sufficient to bring about the crisis much sooner. Our generation - not our grandchildren's - will have to deal with the consequences."

Break free
05/26/10   Montier
"I argue that policy portfolios and various successors (such as risk parity and life-cycle/glide-path funds) are deeply fl awed from an investment perspective. In particular, two common failings they share are a mismeasurement of risk and an indifference to valuation. I conclude that a strategic asset allocation that alters the asset mix based upon the opportunity set offered by Mr. Market makes far more sense from an investment perspective. (In modern parlance, this translates as a benchmark-free, real return focus.)"

Shale gas
05/25/10   World
"If gas stays above $4, a price that lets companies cover costs on existing wells, U.S. output could grow 20 percent to 65 billion cubic feet (1.8 billion cubic meters) a day from 2008 through 2030, says Peter Wells, director of U.K. research firm Neftex Petroleum Consultants Ltd. Shale gas production could quadruple to more than 20 billion cubic feet, he says."

The dangers of DCF
05/23/10   Montier
"Theoretically, discounted cash flow (DCF) is the correct way of valuing an asset. However, as Yogi Berra noted, 'In theory there is no difference between theory and practice. In practice there is.' The implementation of a DCF is riddled with problems. First off, we can't forecast, which kind of puts the kibosh on the whole exercise. Even if we choose to ignore this inconvenient truth, problems with the discount rate still make a mockery of the whole idea of DCF. No wonder DCF has such a poor reputation. The good news is that several alternatives exist. We explore three that avoid forecasting altogether"

How will Greece get off the dole?
05/23/10   World
"What the income figures fail to capture is the relative weakness of Greece's economic institutions. They are not remotely comparable to those of Germany and some of the other better-governed European Union nations, which is why the current crisis will prove so difficult to solve."

Third Avenue Value Q2 2010
05/21/10   Whitman
"It is difficult to function as a value investor unless the value analyst has a firm grasp of economic reality. It is equally difficult to promulgate intelligent financial regulations unless the sponsors of the regulation have a firm grasp of economic reality. Neither the general public, nor legislators and Obama administration officials, seem to have much of a grasp of economic reality, at least when it comes to dealing with troubled financial institutions."

The running of the stockbrokers
05/21/10   Fun
"Europe, 2010, a tradition is born..."

Patient ETF
05/20/10   Tipsheet
"With stocks sagging, it's time to buff up your watch list of quality companies. That way, you might be able to snag a few should they fall well into bargain territory. Vito's list is a good place to start."

The very bad luck of the Irish
05/20/10   World
"With the European Central Bank announcing that it has bought more than $20 billion of mostly high-risk euro zone government debt in one week, its new strategy is crystal clear: We will take the risk from bank balance sheets and give it to the central bank, and we expect Portugal-Ireland-Italy-Greece-Spain to cut fiscal spending sharply and pull themselves out of this mess through austerity. But the bank's head, Jean-Claude Trichet, faces a potential major issue: the task assigned to the profligate nations could be impossible. Some of these nations may be stuck in a downward debt spiral that makes greater economic decline ever more likely."

Rogoff criticizes debt strategies
05/19/10   World
"Despite the headwinds of poor jobs growth and a troubled housing market, the U.S. will avoid a double dip recession, according to Kenneth Rogoff, the Thomas D. Cabot Professor of Public Policy, Harvard University."

Overoptimistic for a generation
05/17/10   Brokers
"For the past quarter century, equity analysts' earnings-growth estimates have been almost 100% too high."

Tyler Cowen on prizes
05/17/10   Economics
"Tyler Cowen is a professor of economics and director of the Mercatus Center at George Mason University. He writes for MarginalRevolution.com"

Metric mania
05/17/10   Behaviour
"In the realm of public policy, we live in an age of numbers. To hold teachers accountable, we examine their students' test scores. To improve medical care, we quantify the effectiveness of different treatments. There is much to be said for such efforts, which are often backed by cutting-edge reformers. But do wehold an outsize belief in our ability to gauge complex phenomena, measure outcomes and come up with compelling numerical evidence? A well-known quotation usually attributed to Einstein is 'Not everything that can be counted counts, and not everything that counts can be counted.' I'd amend it to a less eloquent, more prosaic statement: Unless we know how things are counted, we don't know if it's wise to count on the numbers."

Do bonuses create cheaters?
05/17/10   Behaviour
"The common practice of granting bonuses to people who hit a certain target is supposed to boost their productivity. Turns out, it may be encouraging them to cheat, according to a new paper by University of Guelph and Ryerson University researchers."

Malcolm Gladwell keynote address
05/17/10   World
"Bestselling author Malcolm Gladwell (The Tipping Point, Outliers) addresses the Options Industry Conference."

Value investing flip books
05/16/10   Stingy Investing
"The flip book helps to highlight a core problem for investors. Namely, the urge to swap out of a good strategy during periods of underperformance which happen frequently and can last for several years. So, be warned. Oh, and also have a little fun with the flip books."

The difficult choices facing Europe
05/16/10   World
"Pimco's chief executive Mohamed El-Erian considers the painful options facing policy makers now that the massive interventions already appear to be stalling"

Complexity in financial systems
05/16/10   Markets
"We can probably all agree that modern day financial systems are complex, but what that actually means isn't something that everyone agrees on. Typically, though, a system characterised by complexity isn't something that anyone's designed - it emerges, it adapts spontaneously and it produces stunningly unexpected outcomes when no one's expecting them. Which, let's face it, sounds a lot like modern finance. The problem is that many economists are focusing on how they manage this system when, in reality, it's impossible to do so. It's like trying to contain swine flu using a butterfly net."

Gross profitability as a predictor
05/12/10   Value Investing
"Controlling for gross profitability dramatically improves the performance of value strategies, especially among large, liquid stocks. A value-weighted portfolio that is long (short) the extreme high gross profit-to-assets, high book-to-market (low gross profit-to-assets, low book-to-market) produced by a double sort on the two ratios generates an average monthly excess return of 1.16%"

The case for doom and gloom
05/12/10   World
"Brenner's analysis of the current downturn can be boiled down to a fairly simple point: that the underlying cause of the current downturn lies in the 'real' economy of private goods and service production rather than in the financial sector, and that the current remedies - from government spending and tax cuts to financial regulation - will not lead to the kind of robust growth and employment that the United States enjoyed after World War II and fleetingly in the late 1990s. These remedies won't succeed because they won't get at what has caused the slowdown in the real economy: global overcapacity in tradeable goods production."

Meeting notes
05/11/10   Value Investing
"The Inoculated Investor has a series of handy notes from the Berkshire, Markel, Wesco and VIC meetings"

Silencing the whistleblowers
05/11/10   Management
"Amid the frenzy of the nation's mortgage boom, the back-of-the-hand treatment that Parmer describes wasn't out of the ordinary. Parmer was one of a small band of in-house gumshoes at various financial institutions who uncovered evidence of corruption in the mortgage business - including made-up addresses, pyramid schemes, and organized criminal rings - and tried to warn their employers that this wave of fraud threatened consumers as well as the stability of the financial system. Instead of heeding their warnings, they say, company officials ignored them, harassed them, demoted them, or fired them."

Equity premium an artifact?
05/11/10   Markets
"Before the twentieth century, stocks were in many ways an immature financial instrument; they should have carried a premium, because they were risky. As the twentieth century wore on, they matured--thanks in part to the New Deal era reforms that toughened up on disclosure and market rules for buying and selling shares in public companies. But the generation who lived through the Great Depression still thought of the stock market as speculative."

Pref's musings
05/11/10   Markets
"I suspect that there will be a certain amount of evidence that stop-loss orders will be implicated to at least some degree. Stop loss orders are the most idiotic order type known to man (if you're willing to sell something at $45, why the hell aren't you selling at $50? It makes no sense!) but have immense popularity."

The bond return puzzle
05/11/10   Bonds
"High Yield bonds highlight the most fundamental problem in finance: that risk is not positively related to expected returns, and this fact is not empirically obvious. This strikes at the heart of finance, because 'risk' is a rationalization for many things, but after 50 years, remains like dark matter, a convenient assumption for an empirical 'anomaly'."

Don't lose faith in markets
05/09/10   Markets
"One claim is that trading activity like this makes people "lose faith" in the market. Don't lose faith in the market - lose faith in market orders!"

Graham and Doddsville spring 2010
05/09/10   Value Investing
"This issue features an interview with Glenn Greenberg, founder and portfolio manager at Brave Warrior Capital. Mr. Greenberg outlines his high concentration, low turnover investment approach, with a focus on growing, high quality companies that also offer attractive and defensible free cash flow yields."

When the Global Debt Shuffle Hits Home
05/09/10   Zweig
"The U.S. now has a heavier debt burden than several of the overleveraged countries that have been branded with the scornful nickname "the PIIGS." Portugal's debt, according to the IMF, is 85.9% of its GDP; Ireland's, 78.8%; Italy, 118.6%; Greece, 124.1%; Spain, 66.9%. Perhaps there should be a new acronym, with the U.S. added to Portugal, Ireland, Italy, Greece and Spain: "PIG IS U.S.""

The momentum echo
05/09/10   Markets
"The 12-Month Echo factor does significantly better than either the 12-month or 6-month factor. And it blows a 3-month return factor out of the water. The table indicates the data at the back-end of an intermediate momentum factor is more important to returns than the near-term data."

The Goldilocks recovery
05/09/10   World
"Strict financial regulation and a new commodity boom have turned 'boring' Canada into an economic star."

The future of public debt
05/08/10   World
"Since the start of the financial crisis, industrial country public debt levels have increased dramatically. And they are set to continue rising for the foreseeable future. A number of countries face the prospect of large and rising future costs related to the ageing of their populations. In this paper, we examine what current fiscal policy and expected future age-related spending imply for the path of debt/GDP ratios over the next several decades. Our projections of public debt ratios lead us to conclude that the path pursued by fiscal authorities in a number of industrial countries is unsustainable. Drastic measures are necessary to check the rapid growth of current and future liabilities of governments and reduce their adverse consequences for long-term growth and monetary stability."

Europe finds the old rules still apply
05/06/10   World
"A recurring theme of my academic research with Carmen Reinhart is that 'graduation' from emerging market status is a long, painful process that can take 75 years or more to complete. Twenty years without, say, a sovereign debt crisis is significant, but hardly enough definitively to declare a country a 'graduate'. Greece resolved its last sovereign default only in the mid-1960s and Portugal had an International Monetary Fund programme as recently as 1984. (Spain's modern history is much better, despite holding the record - more than 12 - for most independent sovereign default episodes.)"

iShares ETFs becoming more expensive
05/05/10   Indexing
"BlackRock Asset Management is sending a notice to unitholders of iShares exchange traded funds that, effective July 1, 2010, the management expense ratio of a long list of iShares Funds are increasing by 0.01% to 0.03%"

Value Destruction
05/05/10   Tipsheet
"Biglari Holdings's (BH) Biglari wasn't content with slapping his name on a company he recently gained control of. No siree. He also moved to line his pockets with a big performance fee ..."

The disposition effect
05/02/10   Behaviour
"Benjamin Graham once said, "An investor's chief problem, even his worst enemy, is likely to be himself." This is nowhere more true than when it comes to deciding to buy or sell a stock. We have an uncanny ability to buy stocks that are poor investments and sell stocks that are good investments. In essence, we buy high and sell low. In general, investors tend to shoot themselves in the foot - because they follow their instincts."

Greek wealth and taxes
05/02/10   World
"In the wealthy, northern suburbs of this city, where summer temperatures often hit the high 90s, just 324 residents checked the box on their tax returns admitting that they owned pools. So tax investigators studied satellite photos of the area - a sprawling collection of expensive villas tucked behind tall gates - and came back with a decidedly different number: 16,974 pools. "

Live Buffett Blog
05/01/10   Buffett
"Part of the mystique of the meeting derives from the fact that Buffett doesn.t allow the event to be recorded, so the Wall Street Journal will blog the meeting in real time. It.s almost as good as being there."

Great moments in financial regulation
05/01/10   Law
"We should be skeptical about expecting a regulator to make accurate, one-size-fits-all judgments about the merit of specific financial products. For example, before 1996, certain initial public offerings of stocks were subject to merit review in certain states, where the state decided if a security is a "bad" investment and thus not appropriate to be offered to its citizens. In fact, this is exactly what happened to Apple Computer when it first went public in 1980. Massachusetts prohibited the offering of Apple shares because they were "too risky," and Apple did not even bother to offer its shares in Illinois due to strict state laws on new issues. What if federal bureaucrats had had the power to impose their judgment on a "risky" financial product (such as an IPO) on a nationwide scale, or every state followed Massachusetts' lead? Would Apple have become the successful company that it is today?"

ETFs running off in all directions
05/01/10   Indexing
"I sympathize with marketers, who need new features to differentiate themselves from competitors. My fear is that like many 20-year-olds who are out trying new things for the first time, they will make mistakes, maybe write off a few cars, maybe worse. In this case, though, this 20-year-old will be using your money."

Do your homework
04/29/10   Hallett
"The average mutual fund investor pays about 2 per cent annually in management fees, operating expenses and taxes. The average investor in TSX-traded ETFs pays closer to 0.4 per cent a year. The average potential cost savings, then, are about 1.6 per cent per annum. But this is only available to do-it-yourself (DIY) investors. Otherwise, investors who need professional advice have to pay for it either through higher product fees or fees paid to an adviser in addition to ETF expenses. The 2 per cent average mutual fund fee generally includes compensation for advisers, whereas ETF fees do not include the cost of obtaining advice. So-called fee-based or fee-only advisers charge a fee equal to 1 per cent to 1.4 per cent of your portfolio value. Add that to ETF fees and taxes and you've got total annual fees of 1.5 per cent to 1.9 per cent annually. Wave goodbye to that fee advantage."

The arithmetic of bank solvency
04/29/10   World
"All banks more or less anywhere get their finances entwined with the finances of the sovereign. No sovereign will (or in my opinion should) allow a mass run on banks but they can only stop such a run if their own credit is good. But this link between sovereign solvency and bank-system solvency means that bank funding costs at a minimum are bounded at the lower end by sovereign borrowing costs."

The X PRIZE and Risk
04/28/10   World
"Diamandis is on a mission to open space for all humanity, and he embraces the risk inherent to such an undertaking. "A true breakthrough requires tremendous levels of risk," says Diamandis. "It's really in the entrepreneurial sector that people are willing to risk their lives, risk their fortunes, their reputations, to do something they fundamentally believe they can do.""

Levin vs. Wall Street
04/28/10   Markets
"No one on any side of this debate appreciates the casino analogy, but I think it's still the most useful way to think about this question: when you place a bet on the Super Bowl, the casino is taking the other side of that bet. In many cases, it'll balance the bets it makes on both sides of the trade, so that it's exposed to no risk and it collects the certain profit from the spread. Regardless, though, any individual bettor knows that if he wins, the casino loses, and vice versa. That is, he knows the casino is on the other side of the trade. Levin seems to be saying that this means there's a conflict of interest between the casino and the bettor, and that it's illegitimate for the casino to take the bet. But there's no conflict, because everyone knows what the deal is. And as long as the bet's honest, and as long as the price is fair, the casino is doing right by the customer, because the customer is getting exactly what he wants: a chance to speculate."

Winters lecture
04/28/10   Value Investing
"David J. Winters, the managing director of Wintergreen Advisers, LLC talks to UWO class"

Asymmetric information based on work?
04/27/10   Academia
"Using a novel dataset covering all individual investors' stock market transactions in Norway over a 10-year period, we analyze whether individual investors have a preference for professionally close stocks, and whether they make an excess return on such investments. After excluding own-company and previous employer stock, investors hold on average 11 % of their portfolio in stocks within their two-digit industry of employment. Given the poor hedging properties of professionally close stocks, one would expect such investments to be associated with asymmetric information and abnormally high returns. In contrast, all our estimates of abnormal returns are negative, in many cases statistically significant. Overconfidence seems the most likely explanation for why individuals excessively trade in professionally close stocks."

The return of housing
04/27/10   Real Estate
"That brought a dramatic change in the first quarter of 2010. "All of a sudden," says Castleman, "demand stabilized at around 60,000 units a quarter, and stayed there." To be sure, that's an extremely low number. Castleman estimates that in a normal economy, around twice that many units should be selling. But housing starts, by the end of 2009, had dropped to an astounding 30,000 a quarter, an extraordinary one-fourth of what the market normally requires. "Now builders are seeing, for the first time in years, that they don't have enough houses either finished or under construction to meet demand," says Castleman. Result: In Metrostudy's markets, housing starts spiked by 44% in the first quarter of 2010, versus the same period last year."

The city that got swapped
04/27/10   Derivatives
"A decade ago, the mayor of Saint-Etienne, France, hit on a novel way to help pay for urban renewal: currency and interest rate swaps. He was a hero for a while. Then came the crash. Now he's the ex-mayor of a town facing financial disaster "

GM's phony bailout payback
04/27/10   Government
"In short, GM is using government money to pay back government money to get more government money. And at a 2 percent lower interest rate at that."

Its worst ideas
04/27/10   Markets
"People, pundits and politicians looking for financial-crisis culprits should turn their sights to the professors who bear so much responsibility for it. To borrow a phrase from professor Burton Malkiel, a random walk down Wall Street reveals that some of its biggest disasters have come from ideas hatched in the ivory tower."

No money for you
04/26/10   Government
"Entrepreneurs who want to put principles before profits - even after their companies go public - may soon have the legal cover to do just that. On Apr. 13, Maryland Governor Martin O'Malley signed a law creating legal entities known as "benefit corporations" and giving them greater protection from shareholder lawsuits. California and Vermont have similar bills in the works and legislators in at least three other states, including New York, are considering them. While many entrepreneurs applaud the measures, corporate governance experts worry about the rights of shareholders."

The party's over
04/25/10   World
"So will ours be the Chinese century? Probably not. China has just about reached high tide, and will soon begin a long painful process of falling back."

Risks hide in plain sight
04/25/10   Behaviour
"The good news: By presenting a simplified emphasis on fees, the researchers tripled the number of investors who favored the lowest-cost funds. The bad news: That tripling brought the proportion up only to 9% from 3%. "We still ended up with a 91% failure rate," says Prof. Laibson. Encouraged to focus on fees, investors nevertheless fixated on - and chased - past performance."

Nudges gone wrong
04/24/10   Behaviour
"But this starts to sound an awful lot like fine-tuned social engineering, which gets us away from the original vision of simple nudges making a better world. And it starts to sound exactly like the type of heavy-handed governing that Republicans may be quietly rebelling against by turning up their thermostats." [Spot the questionable math for extra fun.]

The beholden state
04/21/10   Government
"How public employees became members of the elite class in a declining California offers a cautionary tale to the rest of the country, where the same process is happening in slower motion."

ETF clutter
04/17/10   Indexing
"For starters, when investors are looking for "simple and transparent," ETFs are no longer the default. There still are many clean, easy-to-understand ETFs to be had, but they're harder to find among the proliferation of new products. Indeed, ETFs no longer take a back seat to closed-end funds or mutual funds when it comes to complexity, opaqueness and fine print."

The new paternalism
04/17/10   Behaviour
"Real people are susceptible to cognitive biases that can lead to poor decisions. It's only natural to want to help them make better choices. But no one is immune to bias. Not social scientists, and certainly not policymakers. In translating behavioral science into policy, we may be led astray by the very same cognitive defects we wish to correct. New paternalist policies, and indeed the intellectual framework of new paternalism itself, create a serious risk of slippery slopes toward ever more intrusive paternalism."

James Chanos interview
04/15/10   World
"James Chanos, President, Kynikos Associates. He is the man who predicted the Enron downfall and now predicting a housing bubble in China,"

Shocked sleuths discover shorts
04/15/10   Markets
"It's important to remember that with so many people in the world, just calling a historical event is not sufficient because there are always people predicting massive failure or success to any policy. The key is whether they right for the right reasons, as in Schiff's case, or right for the wrong reasons, as in Roubini or Taleb's cases."

They're clipping your dividends
04/15/10   Dividends
"Come next January the favorable 15% rate on dividends will expire, making them subject to taxation as "ordinary income." At the same time the maximum rate is kicking up from 35% to 39.6%. The third thing that will happen in 2011 is the resurrection of a rule that ostensibly limits deductions but for the majority of taxpayers is nothing but a boost in their tax bracket. This rule adds 1.2 percentage points to your rate. In 2013 comes a fourth tax increase: a 3.8% surtax on investment income. Add it up. Dividends that used to be taxed at 15% are set to be taxed at 44.6%."

Fun tax facts
04/15/10   Taxes
"Centuries ago, when the Papal State dominated Tuscany, these rulers imposed an extremely high tax on salt. As a form of protest, Tuscan bakers began to make their bread without salt. Gradually, the taste for bread made entirely without salt became widespread, and to this day, Tuscan bread is salt less"

Nudge this
04/15/10   Government
"In the Weekly Standard, Andrew Ferguson notes the paradox of behavioral economics, that proving people are often irrational then begs the question as to why we think some subset of intellectuals or regulators are more rational"

The story BCG offered me $16,000 not to tell
04/15/10   Management
"I got the feeling that our clients were simply trying to mimic successful businesses, and that as consultants, our earnings came from having the luck of being included in an elaborate cargo-cult ritual."

Mohnish Pabrai interview
04/12/10   Value Investing
"'All man's miseries stem from his inability to sit in a room alone and do nothing.' And all I'd like to do to adapt Pascal is, 'All investment managers' miseries stem from the inability to sit alone in a room and do nothing.'"

Measuring investor sentiment
04/11/10   Academia
"We investigate a proxy for monthly shifts between bond funds and equity funds in the USA: aggregate net exchanges of equity funds. This measure (which is negatively related to changes in VIX) is positively contemporaneously correlated with aggregate stock market excess returns: One standard deviation of net exchanges is related to 1.95% of market excess return. Our main new finding is that 85% (all) of the contemporaneous relation is reversed within four (ten) months. The effect is stronger in smaller stocks and in growth stocks. These findings support the notion of "noise" in aggregate market prices induced by investor sentiment."

Don't bet the farm on the housing
04/11/10   Real Estate
"The question now is whether a strong case has been built for a new bull market since the home-price turning point in May 2009. Though there is no way to be precise, I don.t believe it has."

Short First Solar
04/09/10   Stocks
"A technology, to be a really great investment, must do two things. It must change part of the world in a useful way - a big part of the world is better of course - but you can be surprisingly profitable in small niches. And it must keep the competition out. "

Why house value won't rise
04/08/10   Real Estate
"Like any other well-functioning industry, the construction industry experiences technological improvements and increased efficiency. In the computer industry, technology has meant that affordable laptops have computing power that would have been exorbitantly expensive in 1980. As a result, no one ever buys a computer thinking that it will rise in value. The real cost of building a home declined by about 3 percent in both the 1980s and the 1990s. In principle, declining construction costs could also lead homes to become more affordable year after year."

Creativity: a crime of passion
04/08/10   Behaviour
"Creativity seems to be the "buzz word" of the 2000s. Society values it, companies need it, and employers want it. Or do they? What society claims to want and what is actually rewarded in practice are two different things. We claim to want innovation, but are innovation and creativity actually encouraged, or even allowed in most environments? What types of creative behaviors are rewarded by society, and what types are punished?"

Capital can't be measured
04/05/10   Accounting
"Bank capital cannot be measured. Think about that until you really get it. 'Large complex financial institutions' report leverage ratios and 'tier one' capital and all kinds of aromatic stuff. But those numbers are meaningless. For any large complex financial institution levered at the House-proposed limit of 15x, a reasonable confidence interval surrounding its estimate of bank capital would be greater than 100% of the reported value. In English, we cannot distinguish 'well capitalized' from insolvent banks, even in good times, and regardless of their formal statements."

Grant vs Rosenberg
04/04/10   Grant
"Terrific debate on whether US Treasuries are overvalued between James Grant and David Rosenberg"

April ROB
04/04/10   Media
I'd like to thank The Globe and Mail for providing a free digital version of their ROB magazine. Now I don't have to pay for the paper copy anymore. Get it before the newspaper files for bankruptcy . . .

Time to rebalance
04/04/10   World
"America's economy will undergo one of its biggest transformations in decades. This macroeconomic shift from debt and consumption to saving and exports will bring microeconomic changes too: different lifestyles, and different jobs in different places. This special report will describe that transformation, and explain why it will be tricky."

How Texas escaped the real estate crisis
04/04/10   Real Estate
"If there's one thing that Congress can do to help protect borrowers from the worst lending excesses that fueled the mortgage and financial crises, it's to follow the Lone Star State's lead and put the brakes on "cash-out" refinancing and home-equity lending."

Coal crackdown
04/04/10   Government
"The EPA has set new limits on water pollution caused by coal mining, only days after President Obama angered environmentalists by opening up huge swaths of coastline to offshore drilling. The drilling story received louder coverage, but the mining announcement should have a far larger impact on America's energy future."

Collapse of complex business models
04/03/10   Markets
"In such systems, there is no way to make things a little bit simpler - the whole edifice becomes a huge, interlocking system not readily amenable to change. Tainter doesn't regard the sudden decoherence of these societies as either a tragedy or a mistake - '[U]nder a situation of declining marginal returns collapse may be the most appropriate response', to use his pitiless phrase. Furthermore, even when moderate adjustments could be made, they tend to be resisted, because any simplification discomfits elites. When the value of complexity turns negative, a society plagued by an inability to react remains as complex as ever, right up to the moment where it becomes suddenly and dramatically simpler, which is to say right up to the moment of collapse. Collapse is simply the last remaining method of simplification."

Why envy dominates greed
03/29/10   Behaviour
"Economists generally think of self interest as maximizing the present value of one.s consumption, or wealth, independent of others. Wealth can be generalized to include not just their financial assets, but the present value of their labor income and even public goods. Adam Smith emphasized a self-interest that also recognized social position and regard for society as a whole, but this was well before anyone thought of writing down a utility function, which is a mathematically precise formulation of how people define their self interest. But what if economists have it all wrong, that self interest is primarily about status, and only incidentally correlated with wealth?"

Chou's 2009 letter
03/26/10   Value Investing
"we believe that investment and non-investment grade corporate bonds are now fully priced. It is similar with equities. Most stocks are now close to being fairly priced and it is harder to find bargains. Although we won't likely see the lows that we saw in February/March of 2009, the risks of investing in equities are greater now."

Hyperbolic Geometry defeats Nazi Spoons
03/26/10   Books
"Worm hunters, Nazi spoons and homicidal robots were crushed in one of Britain.s quirkiest literary contests, as a book that uses crochet to introduce non-Euclidean geometry won the annual Diagram Prize for Oddest Book Title."

Optimal withdrawal rates
03/25/10   Retirement
"Our main practical conclusion is that counseling retirees to set initial spending at constant 4% of their nest egg is consistent with lifecycle theory only under a limited set of mortality-risk aversion and time preference parameters. We show exactly how the optimal behavior in the face of personal longevity risk is a plan that adjusts consumption downward in proportion to survival probabilities - adjusted for pension income and risk aversion - as opposed to blindly withdrawing the same inflation-adjusted income for life."

Reflection on a crisis
03/25/10   Markets
"Daniel Kahnemann and Nassim Taleb discuss biases, the illusion of patterns as well as the perception of risk and denial."

The Canadian banking fallacy
03/25/10   Markets
"Advocates for a Canadian-type banking system argue this success is the outcome of industry structure and strong regulation. The CEOs of Canada's five banks work literally within a few hundred meters of each other in downtown Toronto. This makes it easy to monitor banks. They also have smart-sounding requirements imposed by the government: if you take out a loan over 80% of a home's value, then you must take out mortgage insurance. The banks were required to keep at least 7% tier one capital, and they had a leverage restriction so that total assets relative to equity (and capital) was limited. But is it really true that such constraints necessarily make banks safer, even in Canada?"

Sir John's prophetic memo
03/25/10   Value Investing
"Obsolescence is likely to have a devastating effect in a wide variety of human activities, especially in those where advancement is hindered by labor unions or other bureaucracies or by government regulations. Increasing freedom of competition is likely to cause most established institutions to disappear with the next fifty years, especially in nations where there are limits on free competition. Accelerating competition is likely to cause profit margins to continue to decrease and even become negative in various industries."

Gary Gorton vs. Michael Lewis
03/22/10   Books
"The basic idea is that the repo market had developed as an independent source of funds, and when some AAA rated mortgaged backed securities started to fall in price, this tainted all AAA securities, especially asset backed paper. AAA securities have a 0.01% default rate, so from a bayesian perspective, when you see a default here the probability is not that one was very unfortunate, but rather, the rating was wrong. Perhaps all ratings are wrong?!. Everyone was scrambling to understand these securities work to assess how much they are worth, and found them insanely complicated, so people naturally assumed the root cause could be anything related to 'debt', derivatives, rated securities, was complicated, etc. Everything was painted by the same brush, as when one bad cow tainted with e. coli causes a wholesale destruction of all beef products sold in the US, because one can't be sure. A run on the repo market was a classic bank run, causing the banking system to be insolvent, and lending to sharply contract."

Obama pays more than Buffett
03/22/10   Bonds
"Berkshire Hathaway's 1.4 percent notes due February 2012 yielded 0.89 percent on March 18, 3.5 basis points, or 0.035 percentage point, less than Treasuries, composite prices compiled by Bloomberg show. The Omaha, Nebraska-based company, which is rated Aa2 by Moody's and AA+ by S&P, has about $157 billion of cash and equivalents and about $52 billion of debt. P&G, the world's largest consumer-products maker, saw the yield on its 1.375 percent notes due August 2012 fall to 1.12 percent on March 18, 6 basis points below government debt. The Cincinnati-based company, rated Aa3 by Moody's and AA- by S&P, makes everything from Tide detergent to Swiffer dusters."

Volatility, the last anomaly
03/20/10   Markets
"Despite the mysterious case of the missing anomalies there's one that resolutely refuses to go away, squatting in the middle of the markets like a recalcitrant and extremely ugly toad. Rather ungraciously stocks continue to bounce around like a jitterbugger on speed. Regardless of everything else it's volatility, the last anomaly, that keeps on giving. And then taking away. And then giving back again."

Spending on clothing falls below 3%
03/20/10   Markets
"With significantly falling prices in real terms, clothing has become more and more affordable almost every year, requiring smaller shares of our income, which has freed up disposable income that can now be spent on other consumer goods (think electronics, travel, entertainment, etc.)."

Fix the mistake on the lake
03/20/10   Government
"Like all too many American cities, Cleveland seems locked into a death spiral, shedding people, jobs, and dreams like nobody's business. When it comes to education, business climate, redevelopment, and more, Clevelanders have come to expect the worse. Is a renaissance possible?"

Reward for punishment
03/20/10   Funds
"Short-term redemption fees may prevent investors from frequently trading in and out of mutual funds, which results in an implicit wealth transfer from long- to short-term fund investors. This paper studies the impact of short-term redemption fees of various structures on long-term fund performance. We observe that fund performance is increasing in the magnitude of the fee and the time period during which an investor would be subject to it. Redemption fees are associated with up to a 327 annualized basis point increase in average abnormal returns."

Odds are, it's wrong
03/20/10   Academia
"For better or for worse, science has long been married to mathematics. Generally it has been for the better. Especially since the days of Galileo and Newton, math has nurtured science. Rigorous mathematical methods have secured science.s fidelity to fact and conferred a timeless reliability to its findings. During the past century, though, a mutant form of math has deflected science.s heart from the modes of calculation that had long served so faithfully. Science was seduced by statistics, the math rooted in the same principles that guarantee profits for Las Vegas casinos. Supposedly, the proper use of statistics makes relying on scientific results a safe bet. But in practice, widespread misuse of statistical methods makes science more like a crapshoot."

A Capital Idea
03/20/10   Media
The Canadian Capitalist blog moves in with Money Sense magazine.

Lizard Ballad: Where's Warren?
03/20/10   Buffett
Buffett channeling Axl Rose

Repo 105's antecedents
03/20/10   Accounting
"For those that don.t know Repo 105 was a sale and repurchase agreement by which Lehman parked about 50 billion in assets (presumably assets they did not want to discuss) overnight via a repo transaction so they would not appear on the balance sheet. By now anyone who does not realize that sort of accounting legerdemain is unacceptable is (a) entirely out of touch with reality and (b) self aggrandizing on a magnificent scale. Both are signs of mental illness."

An unconventional glut
03/17/10   World
"Now North America has an unforeseen surfeit of natural gas. The United States' purchases of LNG have dwindled. It has enough gas under its soil to inspire dreams of self-sufficiency. Other parts of the world may also be sitting on lots of gas. Those in the vanguard of this global gas revolution say it will transform the battle against carbon, threaten coal's domination of electricity generation and, by dramatically reducing the power of exporters of oil and conventional gas, turn the geopolitics of energy on its head."

Michael Lewis on Charlie Rose
03/17/10   Books
"An hour with Michael Lewis, author of 'The Big Short'"

Special interest
03/15/10   Taxes
"It's the time of year when a young man's fancy lightly turns to thoughts of deductions and write-offs. One select group of Americans, though, has a more pressing tax-season task on its mind: preserving a lucrative loophole in the I.R.S. code. The provision allows money managers at privately held partnerships - like hedge and private-equity funds - to treat most of the money they make as capital gains rather than as ordinary income. That means that their income is often taxed at fifteen per cent, a much lower rate than it otherwise would be."

You should get a bigger slice of earnings
03/14/10   Dividends
"No investor can be certain that a company will be able to keep creating value in the future. Often, however, you can be sure that a company can safely distribute value in the present. It is high time for companies to cut shareholders a bigger slice of the pie."

Toyota hybrid horror hoax
03/14/10   Crime
"Journalism schools are supposed to teach that skepticism is paramount. "If your mother says it, check it out," goes the old adage. Yet comments on Web sites across the country reveal that practically everyone thought the Prius incident was a hoax--though they couldn't prove it--except for the media. They have been as determined to not investigate Sikes' claims as Sikes was to not stop his car. It's a Toyota media feeding frenzy and the media aren't about to let little things like incredible stories and readily-refutable claims get in the way."

Stop your spaniel eating the milkman
03/14/10   Fun
"As we know, one man once got on one plane in a pair of exploding hiking boots and as a result everyone else in the entire world is now forced to strip naked at airports and hand over their toiletries to a man in a high-visibility jacket. In other words, the behaviour of one man has skewed the concept of everyday life for everyone else. And we are seeing this all the time."

The yes-man problem
03/12/10   Brokers
"The problem: Financial planners are yes-men and -women, asserts a report co-authored by Sendhil Mullainathan, a Harvard professor and top behavioral economist. Most planners, his report finds, reinforce our bad investment behaviors instead of fixing them. And the problem, he says, may be harder to solve than the fee issue."

Could investors use a little magic?
03/12/10   Value Investing
"Graham implied that he had back-tested this formula, saying that investors could expect a 15% or more annualized return plus dividends and minus commission expenses, but he didn't provide clear statistics in his interview for how his formula actually performed. However, according to investment firm Tweedy Browne's pamphlet "What Has Worked in Investing," finance professor Henry Oppenheimer ran Graham's screen for stocks listed on the NYSE and AMEX from 1974 through 1980. Oppenheimer found that an investor employing Graham's method over that time achieved an annual return of 38% compared with 14% per year return calculated by the Center for Research in Securities Prices, or CRSP, of NYSE-AMEX securities. A seven-year period doesn't completely prove the validity of a formula, but that time frame is arguably long enough to suggest that the formula may be onto something."

Is China actually bankrupt?
03/12/10   World
"The nation has erected a complex system for magically making its debts disappear, but a look up China's sleeve shows that its IOUs may equal its GDP."

The Greek debt bubble
03/12/10   World
"Seen in this comparative perspective, Greece is bankrupt today without a great deal more European assistance or without a much more drastic austerity program. Probably they need both."

Most medical studies are wrong
03/09/10   Health
"In a survey of the recent literature, he found that 95 percent of the results of observational studies on human health had failed replication when tested using a rigorous, double blind trial."

Everything is dangerous
03/09/10   Health
"Epidemiologists have as their statistical analysis/scientific method paradigm not to correct for any multiple testing. Also, as part of their scientific paradigm they ask multiple, often hundreds to thousands, of questions of the same data set. Their position is that it is better to miss nothing real than to control the number of false claims they make. The Statisticians paradigm is to control the probability of making a false claim. We have a clash of paradigms. Empirical evidence is that 80-90% of the claims made by epidemiologists are false; these claims do not replicate when retested under rigorous conditions."

James Montier interview
03/08/10   Montier
"Process is the one aspect of investing that we can control. Yet all too often we focus on outcomes rather than process. Yet ironically, the best way of getting good outcomes is to follow a sound process. The research shows that holding people accountable for outcomes tends to lead to suboptimal performance, generally because they spend all their time worrying about the things they can't control. I'd advise a far better approach to assess people on the criteria of adherence to process."

Sears letter
03/08/10   Value Investing
"Some contend that there is an inherent conflict between labor and capital, yet they fail to appreciate that without investment there will be no growth and no jobs. For there to be investment there needs to be an expectation of profit, and, for there to be an expectation of profit, there needs to be hope and belief in the future and confidence in the rules of the game."

The cost conundrum
03/08/10   Health
"As America struggles to extend health-care coverage while curbing health-care costs, we face a decision that is more important than whether we have a public-insurance option, more important than whether we will have a single-payer system in the long run or a mixture of public and private insurance, as we do now. The decision is whether we are going to reward the leaders who are trying to build a new generation of Mayos and Grand Junctions. If we don't, McAllen won't be an outlier. It will be our future."

Lessons of a $618,616 death
03/08/10   Health
"Terence's treatment was expensive. The bills for his seven years of medical care totaled $618,616, almost two-thirds of which was for his final 24 months. Still, no one can say for sure if the treatments helped extend his life."

McElvaine annual
03/06/10   Value Investing
"Going forward, I expect that you will see more money invested outside of Canada and in larger companies. This is not particularly a change; I'm just going back to my Cundill roots to some extent. In the past couple of years, when Canadian ideas were slim, rather than invest outside of Canada, I superconcentrated and stayed invested in small caps. This clearly had painful results. While we will continue to have a significant small-cap portfolio, I am now finding interesting large-cap non-Canadian ideas."

Patient Capital Q4 letter
03/06/10   Value Investing
"In essence do valuations reflect the risk of the current environment and do they provide an acceptable rate of return given those risks? In our estimation, current aggregate equity prices have run far ahead of economic fundamentals."

E.I. will wreck your portfolio
03/04/10   Behaviour
"Now we learn that insensitivity training might also make you a better investor. If emotional intelligence attunes you to the moods of others it can only wreck your portfolio."

Buying earnings and book value
03/02/10   Value Investing
"The paper shows that book-to-price facilitates the determination: for a given earnings yield, book-to-price indicates additional return associated with expected growth."

Betting on the blind side
03/02/10   Value Investing
"Michael Burry always saw the world differently - due, he believed, to the childhood loss of one eye. So when the 32-year-old investor spotted the huge bubble in the subprime-mortgage bond market, in 2004, then created a way to bet against it, he wasn't surprised that no one understood what he was doing. In an excerpt from his new book, The Big Short, the author charts Burry's oddball maneuvers, his almost comical dealings with Goldman Sachs and other banks as the market collapsed, and the true reason for his visionary obsession."

Cut pay for government workers
03/02/10   Government
"Imagine a company that dominates its field. It's been No. 1 in its industry as long as anyone can remember. But lately it's fallen on hard times. Revenue has dropped dramatically. The only thing keeping it afloat is record borrowing based on its stellar credit rating, earned many years ago. Meanwhile, independent analysts have shown that workers at this company earn higher than average wages. Moreover, the workers have skills that are not easily transferable. If this were an airline or an automaker, the solution would be a no-brainer: It would be time for a big pay cut. If the company didn't cut pay, or increased it, creditors and investors would question the seriousness of management."

Buffett casts a wary eye on bankers
03/02/10   Buffett
"Mr. Buffett's letter made a bold suggestion that isn't sitting well with the establishment. 'When stock is the currency being contemplated in an acquisition and when directors are hearing from an advisor, it appears to me that there is only one way to get a rational and balanced discussion,' he wrote. 'Directors should hire a second advisor to make the case against the proposed acquisition, with its fee contingent on the deal not going through.' Of course, acquirers often hire more than one banker to advise a board, to act as a check on the other. But all too often, both banks are given the incentive to recommend the deal."

Buffett in the boardroom
02/27/10   Buffett
"Who wouldn't love to pick up the phone and ask Warren Buffett for advice? People have spent more than $1 million just to have lunch with the man. He was voted the most admired corporate director in America by Directorship magazine in 2008. Chief executives of companies he has a stake in laud his patience, foresight, and ability to capture the essence of a complex financial situation in just a few words. They also like the fact that he usually leaves them alone as long as they're getting the job done. Sometimes Buffett emerges from behind his desk and shows a side of himself that's far less familiar. When he sees something he doesn't like in a company whose shares he owns, the famously passive investor can swing into action to protect his investment - jawboning behind the scenes, scolding, cutting opportunistic deals, even hiring and firing CEOs. For some of those on the receiving end of his activism, it can feel a bit like being attacked by Santa Claus."

Berkshire Hathaway 2009 report
02/27/10   Buffett
"Long ago, Charlie laid out his strongest ambition: 'All I want to know is where I'm going to die, so I'll never go there.' That bit of wisdom was inspired by Jacobi, the great Prussian mathematician, who counseled 'Invert, always invert' as an aid to solving difficult problems. (I can report as well that this inversion approach works on a less lofty level: Sing a country song in reverse, and you will quickly recover your car, house and wife.)"

Canada's marvelous mortgage system
02/26/10   World
"There were some significant differences between Canada and the United States during the recent financial crisis. In general, Canada's banking system proved more prudent, more resilient, and much less prone to excesses. Taking a closer look at these differences might tell us how the United States got into the mess it is in, and illuminate some ideas for future reforms."

Probability of recession
02/23/10   Economy
"The Fed's model (data here) shows that the recession probability peaked during the October 2007 to April 2008 period at around 35-40%, and has been declining since then in almost every month. For January 2010, the recession probability is only 0.82% (less than 1%) and by a year from now in January 2011 the recession probability is only .043%, the lowest reading in more than 26 years (since September 1983)."

Confirmation bias in action
02/23/10   Behaviour
"At least we can all agree it is the other guys' politics and ideologies that are twisting facts and obscuring evidence."

Quantifying qualitative factors
02/23/10   Books
"I've just finished Ian Ayres's book Super Crunchers, which I found via Andrew McAfee's Harvard Business Review blog post, The Future of Decision Making: Less Intuition, More Evidence (discussed in Intuition and the quantitative value investor). Super Crunchers is a more full version of James Montier's 2006 research report, Painting By Numbers: An Ode To Quant, providing several more anecdotes in support of Montier's thesis that simple statistical models outperform the best judgements of experts."

4 ways to fix a broken system
02/23/10   Law
"The land of the free has become a legal minefield, says Philip K. Howard -- especially for teachers and doctors, whose work has been paralyzed by fear of suits. What's the answer? A lawyer himself, Howard has four propositions for simplifying US law."

Too many scientists?
02/22/10   Academia
"American science education lags behind that of many other nations, right? So why does it produce so many talented young researchers who cannot find a job in their chosen field of study?"

The SEC enabled this charade
02/22/10   Accounting
"The issue isn't derivatives; it's all financial transactions whose objective is to deceive or to weaken financial transparency."

Lowering the boom on leverage
02/22/10   Debt
"For those who worry that limiting leverage is somehow inconsistent with American tradition, it is worth remembering that the nation's founders strictly limited bank leverage in their own time, frequently at less than 4-to-1. Although bank runs remained a problem in early America because of the absence of deposit insurance, the dangers of high leverage were already well appreciated. Let's not lose sight of that wisdom now."

Dubai 1,000 Times
02/22/10   World
"Local-government officials have wasted stimulus funds by replacing infrastructure that was fine in the first place. State media complained in May 2009 that party chiefs in Jianyang, Sichuan province, decided to help boost the local economy by rebuilding a bridge that was in such good condition it had emerged unscathed a year earlier from the earthquake that killed 70,000 people. The so-called Bridge of Strength withstood a demolition crew that tried to blast it to pieces with dynamite, the official China Daily reported."

Tax system full of it
02/22/10   Taxes
"Canada's tax system has become so complex and confusing, and revenue staff so unsympathetic, that a judge has awarded legal costs to an Ontario couple despite ruling against their case with the Canada Revenue Agency."

The trillion dollar gap
02/20/10   Government
"A $1 trillion gap. That is what exists between the $3.35 trillion in pension, health care and other retirement benefits states have promised their current and retired workers as of fiscal year 2008 and the $2.35 trillion they have on hand to pay for them, according to a new report by the Pew Center on the States. In fact, this figure likely underestimates the bill coming due for states. public sector retirement benefit obligations: Because most states assess their retirement plans on June 30, our calculation does not fully reflect severe investment declines in pension funds in the second half of 2008 before the modest recovery in 2009."

Basically, it's over
02/19/10   Munger
"Of course, the most effective political opposition to change came from the gambling casinos themselves. This was not surprising, as at least one casino was located in each legislative district. The casinos resented being compared with cancer when they saw themselves as part of a long-established industry that provided harmless pleasure while improving the thinking skills of its customers."

Inflation won't solve our debt problems
02/19/10   Government
"The more powerful argument against inflating away debt is that it will not work, says Alan Auerbach, an economics professor at the University of California, Berkeley. Why? Because so much of our long-term spending obligations are indexed to inflation."

ETFs were off the mark in 2009
02/19/10   Indexing
"In 2009, ETFs missed their targets by an average of 1.25 percentage points, a gap more than twice as wide as the 0.52-percentage-point average they posted in 2008, according to a study of ETF returns released this week by Morgan Stanley."

Money just a shared illusion
02/17/10   Fun
"The U.S. economy ceased to function this week after unexpected existential remarks by Federal Reserve chairman Ben Bernanke shocked Americans into realizing that money is, in fact, just a meaningless and intangible social construct."

Was it all just a bad dream?
02/17/10   Montier
"This is where we encounter a lot of the pseudoscience of finance, e.g., measures such as Value-At-Risk (VaR). The idea that if we can quantify risk we can control it is one of the great fallacies of modern finance. VaR tells us how much you can expect to lose with a given probability, i.e., the maximum daily loss with a 95% probability. Such risk management techniques are akin to buying a car with an airbag that is guaranteed to work unless you crash! Talk about the illusion of safety."

Elders favor more regulation
02/17/10   Government
"Put aside for a moment the populist pressure to regulate banking and trading. Ask the elder statesmen of these industries - giants like George Soros, Nicholas F. Brady, John S. Reed, William H. Donaldson and John C. Bogle - where they stand on regulation, and they will bowl you over with their populism."

When do smart prices get dumb?
02/17/10   Economy
"Tomorrow's power will come from renewables via a $7-billion deal with Samsung to install wind turbines in the Great Lakes, and to provide solar energy as well. Many will applaud the addition of this clean and renewable source of power to the grid. Fewer will applaud the 19-cent-per-kilowatt-hour price tag that'll come along with it. As they say in stock brokerage, find a strong enough wind, and even pigs can fly. Pay 19 cents per kilowatt hour for power, and you can let the wind turn on the lights. But at that price, how long will you leave them on?"

Free online tools
02/17/10   Stingy Investing
"Looking to add stocks to your portfolio? Free online screeners might help. Just plug in your selection criteria and the software dips into a giant database to find stocks fitting the desired metrics."

Greek tax-dodgers
02/16/10   World
"The government is seeking to tap more revenue from a society in which 95 percent of taxpayers declare annual income of less than 30,000 euros. The Bank of Greece estimates a campaign against evasion and corruption could glean as much as 5 billion euros a year."

Flaherty's mortgage changes
02/16/10   Real Estate
"On Tuesday, the Department of Finance announced three changes to the standards governing government-backed mortgages, that come into force April 19. Here are a summary of the changes." [Too little too late]

Canadian family finances
02/16/10   Economy
"Average debt loads climbed to $96,100 in 2009 - In contrast to past recessions, households continued to borrow more this time. The debt to income ratio jumped to a new high of 145%."

Foreclosures seen still hitting prices
02/16/10   Real Estate
"Some borrowers are catching up on payments after having their loan terms modified, but S&P says current trends suggest that 70% of such borrowers eventually will redefault."

U.S. housing aid winds down
02/16/10   Real Estate
"Over the next six months, the federal government plans to wind down many of its emergency programs for housing. Then it will become clear if the market can function on its own. People here are pretty sure the answer will be no."

The new cash cows
02/16/10   Academia
"In other words, enrolling in college is a bit like joining a health club. And as with a health club, the revenue comes from signing people up, not from encouraging them to use the services."

Greece's Goldman Sachs swaps
02/16/10   World
"EU regulators have blessed the use of derivatives contracts to let countries curb their deficits. In 2001, the Commission, the EU's regulatory arm, approved Italy's use of derivatives that helped to reduce its budget deficit in 1997. Italy swapped fixed payments on a three-year, yen-denominated bond in 1996, for a floating rate, allowing it to temporarily cut the amount of interest paid on the debt." [Yikes!]

Low savings are the problem
02/16/10   Retirement
"The average contribution to a RRSP was $5,412 but the median contribution was only $2,780. The contributions used up just 6.0% of total contribution room available. The data suggests that the vast majority of Canadians have accumulated vast amounts of RRSP contribution room. Only a tiny fraction of Canadians have used up all their contribution room and would benefit from any boost in RRSP limits."

Your banking may be more expensive
02/16/10   Thrift
"When you lose your job, the last thing you need is for your expenses to increase. Yet, at some banks, that's exactly what can happen with your checking account."

Greece: our debt, your problem
02/16/10   World
"So here's the deal: No matter what happens, the debt is now at a level where its growth has reached escape velocity. Even if Greece were to run zero deficit, ultimately we are heading to default. We can default now or we can default later."

Quadrophobia: rounding of EPS data
02/13/10   Accounting
"We hypothesize that earnings management causes quadrophobia, the under-representation of the number four in the first post-decimal digit of EPS data. We demonstrate that quadrophobia is pervasive, persistent, and follows economically rational patterns. Consistent with analyst coverage being a determinant of earnings management, quadrophobia increases (declines) when companies gain (lose) analyst coverage, and is more frequent when earnings are close to analyst forecasts. Persistent quadrophobes are more likely to restate financials and to be sued in SEC proceedings alleging accounting violations. Quadrophobia, even if itself legal, therefore appears to signal a propensity to engage in problematic accounting practices."

Charlie on the crisis
02/12/10   Munger
"Charles T. Munger, the Vice-Chairman of Berkshire Hathaway Corporation, discusses the current economic crisis with Professor Joseph A. Grundfest."

Derivatives should be banished
02/11/10   Derivatives
"The only firms that will be able to sell the insurance will be firms deemed too big to fail. That is, you wouldn't buy this kind of insurance from a firm you believed might also face a liquidity risk. You would only buy it from a firm you thought was protected from liquidity risk, and that kind of protection ultimately must come from the US government. So, ultimately, the sellers would be making private profits from the existence of public guarantees. They get all the upside, while the taxpayer gets all the risk."

Be a sceptical economist
02/11/10   Behaviour
"One of the biggest problems is one that psychology has faced since it began, to do with the authenticity of its experiments. If you take a bunch of people, shut them in a darkened room and make them do odd things, out of context, you might expect them to behave a bit peculiarly. Psychologists, on the other hand, tend to live in darkened rooms and regard doing odd things in them, often involving small, furry animals, as quite normal. So they see nothing wrong in this and are quite happy to write up the results of these experiments in order to help deepen our knowledge of human behaviour."

Buffett takes on Chicago chokepoint
02/11/10   Buffett
"Chicago, whose railroads made it hog butcher for the world a century ago, is a tangle of bottlenecks where a quarter of the nation's rail freight stalls while trying to navigate the city. 'We can't keep running trains from Los Angeles to Chicago in 55 hours and then take 36 hours to get a rail car from one side of Chicago to the next,' said Matt Rose, chief executive officer of Burlington Northern Santa Fe Corp. 'We either need to fix Chicago or avoid it.'"

Maida runs new AlphaPro ETF
02/10/10   Indexing
"Mr. Maida, who will pick stocks for HAP North American Value ETF HAV-t , is the founder of investment counselling firm Patient Capital Management Inc. that caters to institutional and wealthy clients. In 1999, he left Trimark Financial Corp. where he ran the giant Canadian stock funds."

Short Canada
02/10/10   World
"Although I have mentioned the enormous property bubble in Canada on numerous occasions, I have also stated a belief that Canada as a whole was better off than the US. Not so fast ..."

Doing the math on coupons
02/10/10   Thrift
"If motivation is an issue, the next time you find yourself facing a stack of coupon booklets and flyers don't ask yourself if you can be bothered. Try asking yourself if you'd like to earn more than $100 an hour for a job you can do, at home, while sitting on the sofa watching TV."

Japan fades into the future
02/10/10   World
"If Japan does not do it then aging and death is inevitable. The working population will be stuck looking after and funding the huge numbers of retired. Japan's industrial growth - now anemic - will collapse entirely with its population. The great Japanese industrialization experiment will walk slowly into the setting sun aided by a walking stick." [Warning: Some harsh language.]

The big lie about the 'life of the mind'
02/10/10   Academia
"Some professors tell students to go to graduate school "only if you can't imagine doing anything else." But they usually are saying that to students who have been inside an educational institution for their entire lives. They simply do not know what else is out there." [Which is a shame because there are a great many fun things to do in this world.]

Think again about commodities
02/09/10   Markets
"You've probably heard over and over again that commodities provide a great hedge against inflation. It sounds plausible - until you look at the evidence."

What drives long-term returns?
02/09/10   Markets
"The MSCI World Index annualized gross index return for the total 35-year time span was 11.0%. The biggest component of this return was inflation at 4.2%, contributing more than one third of the total return. Other important components were dividend income (2.9%), emphasizing the importance of dividend reinvestment in long-term investing, and real book value growth (2.0%). Price to book growth contributed the least (1.5%)."

Crony Capitalism
02/09/10   Government
"John Stossel's program on crony capitalism."

Global household leverage
02/09/10   Real Estate
"Household leverage in the United States and many industrial countries increased dramatically in the decade prior to 2007. Countries with the largest increases in household leverage tended to experience the fastest rises in house prices over the same period. These same countries tended to experience the biggest declines in household consumption once house prices started falling."

Underdogs have more motivation?
02/09/10   Behaviour
"Bosses and coaches who manage groups competing against lower-status rivals should use that fact to motivate the people at their company or team."

What happens in the amygdala
02/09/10   Behaviour
""As you get older, you get less loss-averse," De Martino says, explaining that even the older control subjects were less fearful of loss. "Your perspective on life changes because you have fewer years to live." This effect could stem from age-related reductions in the volume of the amygdala - as we age, our brains shrink. De Martino says in addition to age, other factors such as income and education are also at play."

ETFs may hide tax surprise
02/09/10   Indexing
"Do your research. You really do need to read the fine print in an ETF's prospectus. Ary Rosenbaum, an associate attorney with the law firm of Meyer, Suozzi, English & Klein says there are three questions to ask yourself: "What is the capital gains treatment of the ETF? What is the tax implication of the ETF that may influence end of or beginning of the year tax strategy? And if the ETF is not plain vanilla, what are the tax rules for the underlying assets within the ETF?""

America's broken equity culture
02/09/10   Markets
"Why did investors respond to a nearly 70% rally by pulling money out of domestic-equity mutual funds? The picture that is now emerging, courtesy of the latest data, is positive for the stock market over the short-term, but worrisome for the longer-term."

Vito Maida Interview
02/08/10   Value Investing
"Jonathan Chevreau interviews Vito Maida of Patient Capital Management."

Seven states of energy debt
02/08/10   Government
"I've identified seven large US states by four criteria that are sure to cause trouble for Washington's political class at least for the next 3 years, through the 2012 elections. These are states with big populations, very high rates of unemployment, and which have already had to borrow big to pay unemployment claims. In addition, as a kind of Gregor.us kicker, I've thrown in a fourth criteria to identify those states that are large net importers of energy. Because the step change to higher energy prices played, and continues to play, such a large role in the developed world's financial crisis it's instructive to identify those US states that will struggle for years against the rising tide of higher energy costs."

What is liquidity?
02/08/10   Markets
"The great Peter Lynch would buy small cap stocks for Magellan, with strict orders on price. Then he would let them sit, while they gained in value on average. Marty Whitman buys in 'safe and cheap' small cap stocks that are illiquid and holds them until their value is recognized. If you have a strong balance sheet or patient investors, take advantage of it, and buy investments that are less liquid, where value may take a while to obtain."

Europe risks another depression
02/08/10   World
"The entirely pointless G7 meeting this weekend only served to underline the fact that Europe is again entering a serious economic crisis."

A new bubble
02/08/10   Real Estate
"As the U.S. struggles to get out of its housing slump, its neighbor to the north faces a different challenge: Canada's housing recovery has been so rapid that some here are worrying about a bubble."

Earl Jones: In Trust
02/06/10   Crime
"Disgraced Montreal financial advisor Earl Jones awaits sentencing for orchestrating a Ponzi scheme that defrauded his investors of $50 million for more than two decades. The fifth estate investigates Jones' life, how he created his scheme and how he was able to get away with fraud for so long."

Buffett on farming superhighway
02/06/10   Buffett
"Buffett became the second-richest American by investing in businesses he expects to grow for decades. He's said his $26 billion takeover of railroad Burlington Northern Santa Fe Corp., announced in November, will benefit Berkshire 'over the next century.' CTB, which Berkshire bought in 2002, may produce profits beyond the year 2200, Buffett, 79, said in the video."

Japanese liquidation value
02/05/10   Graham
"The fundamental problem in 1932 America, according to Graham, was that investors weren't paying attention to the assets owned by the company, instead focussing exclusively on 'earning power'"

Six RRSP pitfalls
02/05/10   Taxes
"It's RRSP season, and you're going to get a lot of advice about how to maximize your contributions, borrowing to contribute, the benefits of contributing, and how to invest inside your registered retirement savings plan. It's all good stuff when the advice comes from the right sources. But I want to talk about the six most common mistakes that people make with their RRSPs. If you avoid these blunders, you'll save tax, create greater retirement savings for yourself, and protect those assets."

The 'lost decade'
02/05/10   Accounting
"In sum, there has been no justice, and thus, no lessons learned or changes made. And so naturally, the theme continues to roll on with products like leveraged ETFs - long on advertised promises, and short on explanations of their inherent shortcomings. After these products lose steam, the theme will be recycled with the same conclusion, that the promise of higher returns was just too good to be true."

Quants' risk-free ideas sink market
02/05/10   Markets
"To become a potentially market- destroying 'it' group on Wall Street, you need some arrogance, enough brains to justify making huge financial bets, utter cluelessness about lessons learned from finance's booms and busts, and a sincere belief that your unique contributions to Wall Street will mean, ahem, that this time it really is different, so old truths can be ignored."

Top 200 Canadian Stocks for 2010
02/02/10   Stingy Investing
"Our five-year results are similarly stellar. If you had bought equal amounts of the All-Star stocks and rolled your capital gains into the new team each subsequent year, you'd be sitting on a 19% average annual return. By way of comparison, that's more than 14 percentage points higher than the annual return of the S&P/TSX Composite, which sported 4.7% annual gains over the same period. It's been quite the ride, and it got me to reminiscing. Several years ago a former professor of mine came to visit with my performance record in hand. 'Did you know that you've outperformed most mutual funds?' he asked. I didn't. But it was a gratifying observation. That memory prompted me to look up Canada's mutual fund performance over the past five years. It turns out that the Top 200 All-Stars beat every single Canadian equity mutual fund over that period. We topped the best by about 3 percentage points a year and the second best by about 7 percentage points a year. The median Canadian equity fund trailed by 14 percentage points a year."

Comparing taxes on RRSPs and TFSAs
02/02/10   Taxes
"Comparing marginal effective tax rates across income levels suggests that many Canadians with savings in tax-deferred vehicles, like Registered Retirement Savings Plans, should put more future saving in tax-prepaid savings plans, particularly Tax-Free Savings Accounts."

Reported earnings versus "owner earnings"
02/01/10   Markets
"Importantly, the ability of companies to increase book value over time has been a critical determinant of long-term earnings growth, and is likely to be even more important in an economy where debt financing is increasingly constrained. The long-term relationship between earnings and book value is very clear, with actual reported earnings fluctuating reliably around a cyclical norm of about 13.6% of book value. Economic booms can certainly boost return on equity (earnings / book value), and recessions can depress return on equity, but over the full economic cycle, it is dangerous to assume that these temporary departures from the norm will be sustained for long."

Garry Kasparov, cyborg
02/01/10   Behaviour
"What I love about Kasparov's algorithm - 'Weak human + machine + better process was superior to a strong computer alone and ... superior to a strong human + machine + inferior process' - is that it suggests serious rewards accrue to those who figure out the best way to use thought-enhancing software. (Or rather, those who figure out a way that's best for them; people always use tools in slightly different, idiosyncratic ways.) The process matters as much as the software itself. How often do you check it? When do you trust the help it's offering, and when do you ignore it?"

In defense of home bias
02/01/10   Behaviour
"Ideally, shouldn.t investors seek out the stocks that are likely to perform the best, regardless of where they are located in our world? Ideally, yes. Practically, there are difficulties."

Loosen up, tightwads!
02/01/10   Dividends
"Many big companies with the financial wherewithal to pay dividends are being stingy about payouts -- for no good reason. By hoarding cash, the likes of Apple, Google, Cisco, Amazon, eBay, IBM and Amgen are doing their shareholders a disservice -- and it's time for that to change."

Efficient markets theory disproved
02/01/10   Fun
"But I'm a connoisseur of economic irrationality. And so I bent down and picked up the paper. On one side, the grim visage of Queen Elizabeth. On the other, Charles Darwin. It was a 10 pound note, worth about $16.25. Just lying on the floor, unmolested by Nobel Prize-winning economists, CEOs of Fortune 500 companies, and financial journalists."

Justice, medieval style
02/01/10   Behaviour
"Modern observers have roundly condemned ordeals for being cruel and arbitrary. Ordeals seem to reflect everything that was wrong with the Dark Ages. They're an icon of medieval barbarism and backwardness. But a closer look suggests something very different: The ordeal system worked surprisingly well. It accurately determined who was guilty and who was innocent, sorting genuine criminals from those who had been wrongly accused. Stranger still, the ordeal system suggests that pervasive superstition can be good for society. Medieval legal systems leveraged citizens. superstitious beliefs through ordeals, making it possible to secure criminal justice where it would have otherwise been impossible to do so. Some superstitions, at least, may evolve and persist for a good reason: They help us accomplish goals we couldn't otherwise accomplish, or accomplish them more cheaply."

All those little Stuyvesant Towns
02/01/10   Real Estate
"In a letter warning Vantage of impending litigation, Mr. Cuomo's office contended that Vantage, which has bought more than 125 buildings in Queens, Harlem and other areas since 2006, had engaged in a 'systemic pattern of harassment' to generate significant tenant turnover. Increasing turnover was central to Vantage's business strategy, the attorney general's office said, so that it could charge much higher rents after renovating the newly vacant apartments."

What Toronto can teach New York and London
02/01/10   World
"This tendency to react to the mere mention of Canada with either yawns or guffaws may be why, as the world struggles to figure out what went wrong in 2007 and 2008, not much international attention is being devoted to figuring out what went right in Canada. Canada is the only G7 country to survive the financial crisis without a state bail-out for its financial sector. Two of the world.s 15 most highly valued financial institutions - a list dominated by China - are Canadian and a recent World Economic Forum report rated the Canadian banking system the world's soundest."

A bust with precedent
01/31/10   Real Estate
"The original wave of securitizations took place in the 1920s, when the United States went on the greatest building boom ever. Many investors saw how rapidly real estate prices were rising and wanted in on the action. The builders and brokers were only too happy to oblige."

Selling puts naked
01/30/10   Stocks
"Like other Canadian insurers, Manulife was sideswiped during the financial crisis due to its exposure to guaranteed annuity products it had sold to clients across North America and Asia. Most have issued significant amounts of new shares to raise their capital levels since stock markets plunged in the fall of 2008. A major player in the business, Manulife hadn't hedged its segregated funds. That exposure created a capital risk that attracted the attention -- and intervention -- of the Office of the Superintendent of Financial Institutions (OSFI), Canada's financial services regulator."

Unlock the housing market
01/30/10   Real Estate
"In the United States, you can find and bid on a house using an iPhone. So why is it that in Canada, much of the information prospective home owners need is a tightly held secret, unlocked only by real estate agents? It's the question at the heart of a dispute between the industry and the Competition Bureau -- the resolution of which could radically change how houses are bought and sold"

Paying zero for public services
01/30/10   Crime
"For people to speak up against corruption that has become institutionalized within society, they must know that there are others who are just as fed up and frustrated with the system. Once they realize that they are not alone, they also realize that this battle is not unbeatable. Then, a path opens up - a path that can pave the way for relatively simple ideas like the zero rupee notes to turn into a powerful social statement against petty corruption."

$10 an hour with 2 kids? IRS pounces
01/30/10   Taxes
"Rachel Porcaro knows she's hardly rich. When you're a single mom making 10 bucks an hour, you don't need government experts to tell you how broke you are. But that's what happened. The government not only told Porcaro she was poor. They said she was too poor to make it in Seattle."

A Greek bailout, and soon?
01/29/10   World
"In Brussels policy circles, the question asked about a bailout of Greece used to be: are European Union governments willing to do this? Now, I can report, the question among top EU officials has changed to: how do we do this?"

5 Stingy Stocks for 2010
01/29/10   Stingy Investing
"It's been a good year for Stingy Stocks. The markets still have a way to go before breaking even from the big bust, but the Stingy Stocks are very close to staging a full recovery thanks to 64.5% gains this year."

The restaurant-failure myth
01/27/10   Stocks
"His research - consistent with similar studies - found that about one in four restaurants close or change ownership within their first year of business. Over three years, that number rises to three in five."

Why Canada's housing bubble will burst
01/27/10   Real Estate
"Reading the newspapers these days, you have to wonder whether Canada was on another planet when the global credit crisis hit. House prices have actually increased in some provinces and now there is a shortage of houses for sale in southern Ontario. Credit is flowing everywhere. But what few Canadians realize is that the housing market has avoided collapse (prices are down 32 per cent in the U.S.) because the Harper Conservatives directed the CMHC to change the mortgage rules to effectively make the Canadian government the biggest sub-prime lender in the world."

Ten stocks I wouldn't touch
01/27/10   Dorfman
"These companies, in my judgment, have some of the worst balance sheets in the U.S. The first five companies mentioned above have negative net worth; that is, their liabilities exceed their assets. Among the 727 U.S. companies with a stock-market value of $3 billion or more, only 17 have that unfortunate distinction. The next five companies have positive net worth (stockholders' equity) but their total debt is at least five times equity, a trait shared by 26 of those 727 companies."

Chanticleer's Q4
01/27/10   Value Investing
"Waiting for the undiscovered, undervalued stock to approach intrinsic value can seem like you're a fisherman waiting for the fish to bite. Sometimes you just don't know when or how value will be realized but you suspect that dinner will eventually find its way into your boat."

Could California really default?
01/27/10   Debt
"One reason these investors had fled new issues, of course, is because munis are supposed to be conservative investments that offer only a modest return to their holders in exchange for being able to sleep peacefully at night. A loss of confidence in this market doesn't occur quickly but is a long-term process, and politicians can exacerbate the uncertainty when their rhetoric becomes more and more bombastic and their assurances steadily more unrealistic, something that's now becoming commonplace among California officials."

Hayek vs. Keynes Rap
01/26/10   Economics
"'Fear the Boom and Bust' a Hayek vs. Keynes Rap Anthem"

Leviathan stirs again
01/25/10   Government
"The gap between American public spending and Canada's has tumbled from 15 percentage points in 1992 to just two percentage points today."

International housing affordability
01/25/10   Real Estate
"Vancouver remained the least affordable market of any size in the surveyed nations, at 9.3, worsening from 8.4 last year. Toronto joined Vancouver as severely unaffordable, with a Median Multiple of 5.2. However, Barrie, within the Toronto region was moderately unaffordable, at 3.4. Victoria, Abbotsford and Kelowna (all in British Columbia) were also severely unaffordable. Housing affordability continues to deteriorate in Montreal (Median Multiple of 4.9), where an agricultural urban growth boundary has seriously constrained development on the urban fringe. The most affordable major market in Canada was Ottawa, with a Median Multiple of 3.8 (moderately unaffordable). However, housing affordability has deteriorated materially in Ottawa-Gatineau, which was affordable as late as 2007 (Median Multiple of 3.0). The most affordable markets in Canada were Thunder Bay and Windsor (2.2), followed by Moncton (2.5), Saguenay and Saint John (NB) at 3.0."

Tell me I'm wrong
01/24/10   Markets
"One thing is indisputable: the rally in financial markets worldwide has outpaced the fundamentals. At the beginning of 2009, most onlookers expected a generally weak economy and were concerned that the behavior of consumers and banks would remain conservative. They were 100% right, and fundamentals are still tenuous. And yet, the rally has exceeded all expectations of which I'm aware."

Oil windfalls and living standards
01/24/10   World
"When a country or a community discovers oil, should they rejoice or mourn? Should citizens be thrilled or worried when their governments receive fiscal windfalls? It might seem that the answers to these questions are obvious. How could finding an abundance of natural resources or stumbling on greater resources for the government to spend in the community be anything other than wonderful news? Yet economists are increasingly sceptical and many of them openly entertain the seemingly paradoxical notion that resources and windfalls may actually be bad news. In fact, some go so far as to speak of the "curse of natural resources""

The sweetest usurious bastards
01/24/10   Management
"But it was the nature of the people I met that most stuck in memory. This was a business where if Jesus was alive he would pull down the Temple over them. It was precisely the sort of business the bible rails against. It offended my decency. But the people were lovely. I met management and a store owner - and - frankly they seemed exactly the sort of people you would like to have Friday drinks with. I liked them. This alarmed me of course - because I expected them to be scum. And maybe they are - but I couldn't tell. They were the sweetest usurious bastards (notwithstanding allegations in consumer complaints about the company)."

Underwater, but will they leave the pool?
01/24/10   Real Estate
"A provocative paper by Brent White, a law professor at the University of Arizona, makes the case that borrowers are actually suffering from a 'norm asymmetry.' In other words, they think they are obligated to repay their loans even if it is not in their financial interest to do so, while their lenders are free to do whatever maximizes profits. It's as if borrowers are playing in a poker game in which they are the only ones who think bluffing is unethical."

Paul Volcker
01/24/10   Government
"In mid 2009, he joked that the only useful recent banking innovation was the invention of the ATM; by late last year, this was no longer presented in jest and he was deploring excesses in risk-taking and bonuses."

Better off deadbeat
01/21/10   Debt
"While most Americans with unpaid bills dread the collector's call, Cunningham sees them as lucrative opportunities. Many collection and credit card companies, intentionally or not, violate little-known consumer rights laws, and Cunningham's favorite pastime is catching them doing so and then suing them. In fact, it's a profitable side job."

Asset Mixer Update
01/20/10   Stingy Investing
"We've just updated the popular Stingy Investor Asset Mixer and Periodic Table of Annual Returns for Canadians to include both nominal and real (or inflation-adjusted) returns for 2009."

Illinois enters a state of insolvency
01/19/10   Government
"The sharp rise in pension payments is the biggest factor pushing Illinois toward what a legislative task force last November called "a 'tipping point' beyond which it will be impossible to reverse the fiscal slide into bankruptcy." The little-noticed report on the state's pension problems warned that "the radical cost-cutting and huge tax increases necessary to pay all the deferred costs from the past would become so large that many businesses and individuals would be driven out of Illinois, thereby magnifying the vicious cycle of contracting state services, increasing taxes, and loss of the state's tax base.""

China's silicon ceiling
01/18/10   World
"Can China get rich without becoming free? History suggests it can't."

Money for nothing
01/18/10   Books
"I'm not even Andrew Ross Sorkin, the superstar financial writer at the New York Times. The advance for my new book wasn't in the millions of dollars. It wasn't even in the high six figures. Instead, we're talking more the, um, low five figures. After you deduct my agent's commission and the costs involved in research and writing, my take was in the very low five figures. This is, I'm sorry to say, more typical for authors. Indeed, most writers don't get published at all. Only giants like Sorkin or Palin command the great publishing sums. It raises a question that financial writers, for obvious questions, rarely ask: Should you really take financial advice from someone foolish enough to write for a living?"

Hoisington Q4 letter
01/18/10   Markets
"In 2009, the book This Time is Different.Eight Centuries of Financial Folly, by Reinhart and Rogoff, shed new light on the role of debt by compiling a database that looked at financial crises in 66 countries over a period of 800 years. The main standard in explaining more than 250 crises studied is whether debt is excessive relative to national income, even though idiosyncrasies apply in each case. They reiterate that this old rule (excessive debt) continues to apply, and this time is not different."

How America can rise again
01/18/10   World
"Are the fears of this moment our era's version of the 'missile gap'? Are they anything more than a combination of the two staple ingredients of doom-and-darkness statements through the whole course of our history? One of those ingredients is exaggerated complaint by whichever group is out of political power - those who thought America should be spelled with a 'k' under Nixon or Reagan, those who attend 'tea bag' rallies against the Obama administration now. The other is what historians call the bracing 'jeremiad' tradition of harsh warnings that reveal a faith that America can be better than it is. Football coaches roar and storm in their locker-room speeches at halftime to fire up the team, and American politicians, editorialists, and activists of various sorts have roared and stormed precisely because they have known this is the way the nation is roused to action."

Investors keep fooling themselves
01/16/10   Zweig
"Historically, inflation has eaten away three percentage points of return a year. Investment expenses and taxes each have cut returns by roughly one to two percentage points a year. All told, those costs reduce annual returns by five to seven points. So, in order to earn 6% for clients after inflation, fees and taxes, these financial planners will somehow have to pick investments that generate 11% or 13% a year before costs. Where will they find such huge gains? Since 1926, according to Ibbotson Associates, U.S. stocks have earned an annual average of 9.8%. Their long-term, net-net-net return is under 4%. All other major assets earned even less. If, like most people, you mix in some bonds and cash, your net-net-net is likely to be more like 2%."

The self-fulfilling prophecy
01/16/10   Behaviour
"Can you convince people that something is good merely by telling them that other people like it?"

Hated stocks beat loved stocks
01/14/10   Dorfman
"For 11 of the past 12 years, I have studied the performance of analysts. four favorite stocks, and the fate of the four they most scorned. My analysis covers 1998 through 2009, except for 2008, when I was temporarily retired as a columnist. Their favorites, on average, were flat during those years while the four stocks they hated most gained about 6 percent annually."

Why so many Americans are broke
01/14/10   Thrift
"Bookstores are full of books about getting out of debt. Why, then, are so many Americans struggling to get by? One reason, according to Connecticut College Psychology Professor Stuart Vyse, is that when it comes to money, people are not as rational as many economists - and authors - think. In his book Going Broke: Why Americans Can't Hold on to Their Money, Vyse cites studies that consistently show that people commonly make mental mistakes when it comes to their money. This realization is the foundation of behavioral economics, which holds that people behave differently than in the supremely logical fashion that classical economics predicts."

Keys to success
01/12/10   Funds
"Berkshire has really figured out how to behave with large insurance exposures that could potentially pay out billions from catastrophic events. There is a huge benefit to having so many non-insurance operating businesses affiliated with their insurance businesses, especially large utilities and railroads, where you are highly confident that you are not going to take a big hit. You can't have a bunch of operating businesses that could potentially lose much and also face a Katrina or a Wilma. That's where you have brilliance."

Less intuition, more evidence
01/12/10   Behaviour
"Those of us who aren't wine snobs or speculators probably don't care too much about the prices of first-growth Bordeaux, but most of us would benefit from accurate predictions about such things as academic performance in college; diagnoses of throat infections and gastrointestinal disorders; occupational choice; and whether or not someone is going to stay in a job, become a juvenile delinquent, or commit suicide. I chose those seemingly random topics because they're ones where statistically-based algorithms have demonstrated at least a 17 percent advantage over the judgments of human experts. But aren't there at least as many areas where the humans beat the algorithms? Apparently not. A 2000 paper surveyed 136 studies in which human judgment was compared to algorithmic prediction. Sixty-five of the studies found no real difference between the two, and 63 found that the equation performed significantly better than the person. Only eight of the studies found that people were significantly better predictors of the task at hand. If you're keeping score, that's just under a 6% win rate for the people and their intuition, and a 46% rate of clear losses."

An immodest proposal
01/12/10   Taxes
"In other words, the estate tax is really a capital gains tax, but triggered by death, not sale of the capital asset. So why not eliminate the estate tax, but then have the heirs inherit not only the stock in Amalgamated Widget but granddad's cost basis as well? Then, when Junior sells a million shares in order to pursue his dream of winning back the America's Cup or whatever, he has to pay a substantial capital gains tax on those shares. A possible compromise would be to set the capital gains on inherited assets at a higher rate than on assets bought by the person himself. This would allow the Democrats to feel all warm and fuzzy for having still socked it to the rich and allow the Republicans to claim credit for having eliminated an unfair, arbitrary, expensive, and economically pernicious tax."

The 'other' imbalance and the financial crisis
01/12/10   Markets
"I argue instead that the root imbalance was of a different kind: The entire world had an insatiable demand for safe debt instruments that put an enormous pressure on the U.S. financial system and its incentives (and this was facilitated by regulatory mistakes). The crisis itself was the result of the negative feedback loop between the initial tremors in the financial industry created to bridge the safe - assets gap and the panic associated with the chaotic unraveling of this complex industry. Essentially, the financial sector was able to create 'safe' assets from the securitization of lower quality ones, but at the cost of exposing the economy to a systemic panic."

In China, fear of a real estate bubble
01/12/10   World
"With property prices soaring in key cities, many investors and bankers worry that China has the next great real estate bubble waiting to be popped."

The hidden persuaders of fast food
01/12/10   Behaviour
"The Starbucks menu uses the "rule of three." The menu offers three sizes of coffees, given the enigmatic names of Tall, Grande, and Venti. (They're 12, 16, and 20 ounces respectively; 24 ounces for cold Venti drinks, to allow for ice.) Since Starbucks newbies won't know what they're getting, they tend to order the middle choice, Grande. In the psychology literature, this is known as "extremeness aversion" - people instinctively favor a middle choice, figuring it's safer. Guess what? You've just ordered two cups of expensive coffee. The Grande's sixteen ounces is two regular cups."

How Visa dominates a market
01/11/10   Stocks
"Every day, millions of Americans stand at store checkout counters and make a seemingly random decision: after swiping their debit card, they choose whether to punch in a code, or to sign their name. It is a pointless distinction to most consumers, since the price is the same either way. But behind the scenes, billions of dollars are at stake."

Endless oil
01/09/10   World
"Even if the new technologies add just a few percentage points to the recovery rate, such gains add years to global supply and boost the industry's profits. So the technology of coaxing oil out of the ground is constantly improving."

The disposable worker
01/09/10   Economy
"When employment in the U.S. eventually recovers, it's likely to be because American workers swallow hard and accept lower pay. That has been the pattern for decades now: Shockingly, pay for production and nonsupervisory workers - 80% of the private workforce - is 9% lower than it was in 1973, adjusted for inflation."

Walk away from your mortgage!
01/09/10   Real Estate
"Mortgage holders do sign a promissory note, which is a promise to pay. But the contract explicitly details the penalty for nonpayment - surrender of the property. The borrower isn't escaping the consequences; he is suffering them."

Chavez devalues Bolivar 50%
01/09/10   World
"Chavez is trying to maintain spending for his 21st century socialist revolution as South America's largest oil exporter fails to emerge from its first recession in six years. The government is seeking to stem its falling popularity and the highest inflation rate among 78 economies tracked by Bloomberg ahead of parliamentary elections scheduled for September."

Technology not always a godsend
01/08/10   Brokers
"If you're a client of the online brokerage Scotia iTrade, you'll have an idea of what I'm driving at in warning about technology risk. Scotia iTrade is what Bank of Nova Scotia renamed E*Trade Canada after scooping it up back in 2008. Last month, Scotiabank set about merging iTrade's back office record-keeping operation with the bank's own system. Complaints to this column from iTrade customers began rolling in on Dec. 11 and they've continued right into the new year."

The worst footnote of 2009
01/08/10   Accounting
"Voting for the worst footnote of 2009 ended last night and footnoted readers have chosen the disclosure by Chesapeake Energy (CHK) that it had spent $12.1 million to purchase Chairman and CEO Aubrey McClendon.s antique map collection."

The Iceland rebellion
01/07/10   World
"In many countries, taxpayers are rightly cranky over the idea that their governments are bailing out banks and others -- including their own regulators and central bankers -- who helped create the 2008 global financial meltdown. Iceland appears to be setting a new standard of taxpayer response that politicians everywhere might want to note."

Crash in China
01/07/10   World
"James S. Chanos built one of the largest fortunes on Wall Street by foreseeing the collapse of Enron and other high-flying companies whose stories were too good to be true. Now Mr. Chanos, a wealthy hedge fund investor, is working to bust the myth of the biggest conglomerate of all: China Inc."

Improve results with checklists
01/06/10   Books
"What's a low-tech way to improve the performance of everyone from doctors to investors to airline pilots? According to Atul Gawande, it's the humble checklist."

Buffett gets Krafty
01/06/10   Buffett
"The billionaire's warning against a bid for Cadbury could actually help Kraft nab the chocolate maker."

Government replaced jobs
01/06/10   Government
"In the just-so story of the evolution of our economy, our old manufacturing based economy has been replaced by an innovative knowledge economy. That's not quite true."

Food fighter
01/06/10   Management
"The right-wing hippie is a rare bird, and it's fair to say that most of Whole Foods' shoppers have trouble conceiving of it. They tend to be of a different stripe, politically and philosophically, and they were either oblivious or dimly aware of Mackey's views, until the moment, this summer, when Mackey published an op-ed piece in the Wall Street Journal asserting that the government should not be in the business of providing health care. This was hardly a radical view, and yet in the gathering heat of the health-care debate the op-ed, virally distributed via the left-leaning blogs, raised a fury."

Our white collar nation
01/05/10   World
"Farm productivity has exploded, increasing 1.9% per year over the last half of the century. At that rate, every 100 years, the same inputs on a farm produce 6.5 times as much foodstuffs. The percentage of the population engaged in farming dropped from 40% to under 2%, and yet we became a great exporting power in agricultural products. Similarly, manufacturing productivity rose 1.3%, on average, over the course of the second half of the 20th century."

Money for nothing
01/05/10   Books
"Should you really take financial advice from someone foolish enough to write for a living? Run the numbers. If a typical author earns, say, $3 per book sold and the book sells 20,000 copies, then that's $60,000 in gross income -- before costs. But that may be for a year's work. We're talking maybe $30 an hour."

Note to Kevin O'Leary
01/05/10   World
"Mr. O'Leary likes to say that he wants to put his money in countries that have high GDP growth rates such as China and India, not developed markets in North America and Europe that have anemic growth. Mr. O'Leary should stop confusing economic growth with stock market returns and brush up on the vast quantities of academic research out there that shows that, if anything, the correlation between GDP growth and equity returns is negative"

Currency-neutral trap
01/04/10   Funds
"Over the past 4 years, XSP has trailed the returns of IVV by an annualized rate of 2.99%. A Canadian investor betting that the C$ would appreciate against the USD and opting XSP over holding IVV directly would have been right on the first count but made no money on the bet. The C$ appreciated at an annualized 2.73% against the USD but the tracking error of XSP wiped out all the gains."

Fruitful decade for many in the world
01/03/10   World
"It may not feel that way right now, but the last 10 years may go down in world history as a big success. That idea may be hard to accept in the United States. After all, it was the decade of 9/11, the wars in Iraq and Afghanistan, and the financial crisis, all dramatic and painful events. But in economic terms, at least, the decade was a remarkably good one for many people around the globe."

What's a bailed-out banker worth?
01/03/10   Government
"How people are paid at the top in a free-market system has always been a contentious issue, especially in bad times. Babe Ruth.s most famous quip was not about baseball but about salaries. When asked in 1930 if it was right that he should be making more money than President Hoover, he replied, 'I had a better year than he did.'"

A map of vanishing employment
01/03/10   Economy
"The economic crisis, which has claimed more than 5 million jobs since the recession began, did not strike the entire country at once. A map of employment gains or losses by county tells the story of how those job losses first struck in the most vulnerable regions and then spread rapidly to the rest of the country."

The economic 'experts'
01/03/10   Economics
"In much the same way, economics is a science which employs some of the world's most intelligent people and most powerful computers in order to prove the bleeding obvious. When I first started writing about the subject, one excited academic told me to look into behavioural economics, which he described as the most "exciting and radical" of all the fields of economic research. Its most edgy, controversial finding? That people occasionally behave irrationally, driven by emotion rather than reason. Well, duh."

The states and the stimulus
01/03/10   Government
"Remember how $200 billion in federal stimulus cash was supposed to save the states from fiscal calamity? Well, hold on to your paychecks, because a big story of 2010 will be how all that free money has set the states up for an even bigger mess this year and into the future."

The marshmallow and the cherry
01/02/10   Behaviour
"Earlier in the year Jonah Lehrer explained in the New Yorker how cool deferred gratification is and how we need to teach it to our kids, the younger the better. Now, in the New York Times, John Tierney suggests that it's really an insidious habit for grownups, sacrificing real enjoyment for the mirage of an even better future. Can everything good be bad for you?"

Carpe Diem? Maybe tomorrow
01/02/10   Behaviour
"For once, social scientists have discovered a flaw in the human psyche that will not be tedious to correct. You may not even need a support group. You could try on your own by starting with this simple New Year's resolution: Have fun ... now!"

The lost decade
01/02/10   Markets
"Mr. Shiller says our mass psychology is much more one of speculation and risk-taking than it was a generation or two ago. We've come to rely on rising markets to create our wealth and well-being, at the expense of savings. The result? An increasingly rapid succession of boom-and-bust markets."

Loan effort adding to housing woes
01/02/10   Government
"The Obama administration.s $75 billion program to protect homeowners from foreclosure has been widely pronounced a disappointment, and some economists and real estate experts now contend it has done more harm than good."

Economists are cheapskates
01/02/10   Thrift
"Academic economists gather in Atlanta this weekend for their annual meetings, always held the first weekend after New Year's Day. That's not only because it coincides with holidays at most universities. A post-holiday lull in business travel also puts hotel rates near the lowest point of the year."

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