- The Private Side of Christopher Hitchens: Photos From His Wedding and Beyond - Slate Magazine http://bit.ly/PIpugy
- Lobster prices are collapsing, but market-price lobster meals aren’t getting any cheaper. - Slate Magazine http://bit.ly/MNinDZ
- August 22, 1969: The Beatles' Final Photo Shoot | Brain Pickings http://bit.ly/MMzjKL
- Hire Introverts - Susan Cain - The Atlantic http://bit.ly/MOHWEx
- Nothing to Hide: Why Restaurants Embrace the Open Kitchen | Business | TIME.com http://bit.ly/MOPU0w
- Fishing Lodge Indicator | Dynamic Hedge http://bit.ly/MOQ5ci
- Letters to a Young Trader | Dynamic Hedge http://bit.ly/MORXl5
- Tootsie Roll's Secret Empire http://bit.ly/Pf6Dau
- Best Olympics Photos From London 2012 - Business Insider http://bit.ly/Pf6LqI
- 18 Rules of Living by the Dalai Lama - StumbleUpon http://bit.ly/MPD5TD
- NASA’s Curiosity Rover Gets Moving on Mars http://bit.ly/PjoCN2
Open Strategist
Saturday, August 25, 2012
Links
Time Portal Fallacy
In analyzing a particular trade, investors should consider all paths that the trade could take regardless of their opinion of the outcome. Realistically, this task is extremely complex, and most investors use rules of thumb or just skip the whole process entirely because the task might include calculating the scenarios over small windows of the entire trade’s timeframe which would be fairly taxing.
In reality the trade might take several paths and some of them may prove to be bumpy with M2M volatility, which may be fine to ignore in some cases, but not in others.
In reality the trade might take several paths and some of them may prove to be bumpy with M2M volatility, which may be fine to ignore in some cases, but not in others.
Consider the case in which certain investors are tempted by certain winners if held to maturity and will certainly produce results if some events trigger. Take for example the Greece debt crisis; an investor who is shorting Greek debt might take such a position because he believes that the event will happen but doesn’t know when and what paths the trade might take.
Similarly, people who are selling credit protection on US government debt (a possible end of world scenario?) which will result in a loss only if the US government defaults on its debt obligations. Given this scenario, the trader might argue that, “if that sh*t happens, we’re all screwed anyways, so who cares?”
The problem with such trades isn’t the ultimate hypothesis, but the fact that there might be several paths to it. The US government defaulting might surely be difficult to imagine, but it’s not too hard to imagine the market temporarily implying a significant chance of it happening and that being built into the pricing of the CDS tranche and thus demanding high premia because of the noise traders make which would impact the PnL of the trade and squeeze some people out. This behavior isn’t new though, Keynes noted back in 1932 that “the market can stay irrational longer than you can stay solvent”.
The problem with such trades isn’t the ultimate hypothesis, but the fact that there might be several paths to it. The US government defaulting might surely be difficult to imagine, but it’s not too hard to imagine the market temporarily implying a significant chance of it happening and that being built into the pricing of the CDS tranche and thus demanding high premia because of the noise traders make which would impact the PnL of the trade and squeeze some people out. This behavior isn’t new though, Keynes noted back in 1932 that “the market can stay irrational longer than you can stay solvent”.
Another possible scenario is companies selling put options on their own credit ratings (You’re probably thinking who the hell would do that?). Companies might do this based on the reasoning that if they go bankrupt, their credit ratings won’t mean anything anyways, so might as well make some money along the way.
AIG was widely publicized a few years ago for selling protection on CDOs. AIG repeatedly claimed that the portfolio of CDS was safe on a held-to-maturity basis, but it never mentioned the impact of variances in the fair value of the CDOs which eventually pushed it to the brink of bankruptcy.
AIG was widely publicized a few years ago for selling protection on CDOs. AIG repeatedly claimed that the portfolio of CDS was safe on a held-to-maturity basis, but it never mentioned the impact of variances in the fair value of the CDOs which eventually pushed it to the brink of bankruptcy.
The proper prescription for combating such thinking might be to force oneself to consider the different scenarios over short time frames, and not just to maturity of the trade. But the irony in this is that, investors treat the small windows (let’s say three month windows of a trade which is suppose to last one year) as time portals yet again and forget the paths. While the ultimate outcome of trades might be apparent, the rational calculations to analyze it might be more nuanced.
Analyze well.
Thursday, August 23, 2012
Links
‘Broforce’: 7 startup CEOs now working (out) at Salesforce.com (gallery) | VentureBeat http://bit.ly/MNwlpl
What Percent Are You? - Real Time Economics - WSJ http://bit.ly/pZJs3N
Niall Ferguson and the Rage Against the Thought-Leader Machine - Justin Fox - Harvard Business Review http://bit.ly/PfiHbN
August 22, 1969: The Beatles' Final Photo Shoot | Brain Pickings http://bit.ly/MMzjKL
Lobster prices are collapsing, but market-price lobster meals aren’t getting any cheaper. - Slate Magazine http://bit.ly/MNinDZ
The Private Side of Christopher Hitchens: Photos From His Wedding and Beyond - Slate Magazine http://bit.ly/PIpugy
PROFANITY HEATMAP: People Sure Swear A Lot In Los Angeles - Business Insider http://bit.ly/PbBq7X
Helen Gurley Brown and the Economics of Erotic Capital - Bloomberg http://bit.ly/MLDB56
Mark Twain on Bankers
What the above poster forgets to emphasize is that the banker wants more than just his umbrella back; he wants interest for using it and if he runs out of umbrellas, he wants the government to bail him out and give him some umbrellas for free so that he can go about making money again via lending.
Wednesday, August 22, 2012
Leadership Quotes from Bane[Dark Knight]
CIA Agent: At least you can talk. Who are you?
Bane: It doesn't matter who we are, what matters is our plan.
Bane: Theatricality and deception, powerful agents for the uninitiated. But we are initiated, aren't we Bruce?
Bane: Oh, you think darkness is your ally. You merely adopted the dark; I was born in it, moulded by it. I didn't see the light until I was already a man, by then it was nothing to me but BLINDING!
Bruce Wayne: Where am I?
Bane: Home, where I learned the truth about despair, as will you. There's a reason why this prison is the worst hell on earth... Hope. Every man who has ventured here over the centuries has looked up to the light and imagined climbing to freedom. So easy... So simple... And like shipwrecked men turning to sea water from uncontrollable thirst, many have died trying. I learned here that there can be no true despair without hope.
Source: IMDB
Links
· Blackberry's secret weapon? Let me guess, there is a self destruct button? http://bit.ly/PbwQ9M
· The Almighty Dollar (Raw Image) http://bit.ly/ozkGfo
· BBC News - Afghan rocket attack damages US army chief plane http://bit.ly/MJ1sm3
· BBC News - Afghan rocket attack damages US army chief plane http://bit.ly/MJ1sm3
· Did Monica Lewinsky Really Save Social Security? | History News Network http://bit.ly/PcDOvd
Tuesday, August 21, 2012
Monday, August 20, 2012
Productivity Links
· 10 Things Your Customers Wish You Knew About Them [Infographic] | The Buffer blog: productivity, life hacks, writing, … http://bit.ly/P952Ts
· 7 Habits of Web-Savvy Entrepreneurs http://bit.ly/N9i9kZ
· 10 Weekly Ten Minute Practices to Boost Work Productivity http://bit.ly/wW764r
· 10 Bad Habits You Need to Break to Be More Productive | Time Management Ninja http://bit.ly/OCIA3X
· » How to be Insanely Productive and Still Keep Smiling :zenhabits http://bit.ly/OqStVm
Sunday, August 19, 2012
A poker player on Return on Equity
Most people here have probably heard of David Einhorn , the infamous hedge fund manager who shorted Lehman Brothers. But to most other people who don’t know what a hedge fund is, I’d say that he’s an investor. Everyone knows what an investor is; people who make money buying stocks are investors, and people who lose money while picking stocks are called speculators (or is it the other way around?)
But not only is Einhorn known for his value investing skills, but also for his poker skills, which makes his story very interesting. But are investing and poker similar? Is gambling and investing the same thing? Is winning at investing and gambling purely based on luck? “Not really” says Einhorn, “but sample size matters. Over time, and over thousands of hands against a variety of players, skills win out”.
But let’s get to Einhorn’s opinion on Return on Equity (ROE) today. According to him, there are essentially two types of businesses:
Capital intensive ones and non-capital intensive ones. A capital intensive business is one which requires capital to grow, for example, to build another plant, a manufacturing facility of some sort etc.
Non-capital intensive businesses are those that do not require capital or physical resources to grow. These businesses grow based on intellectual capital and human capital. Examples would be, pharmaceutical companies (which rely on their patents to generate revenue), software firms (which rely on the software they built to generate revenue) and consulting firms (which rely on their people to generate revenue). Most other companies that sell services would qualify as well here.
Einhorn points out that it is irrelevant to worry about ROE for non-capital intensive businesses. If a consulting firm had twice as many desks and office locations, it wouldn’t really mean that per consultant revenue would double, especially considering they travel to client sites to advise them; it would be redundant to add such resources.
It follows from this that the price-to-book value ratio is irrelevant for such companies because they derive their value from brand equity, intellectual and human capital which is not reflected on the balance sheet.
But for these companies, the question becomes ‘what to do with the spare cash?’
They could return the cash generated to the shareholders or do something a lot worse, enter capital-intensive businesses.
Take for example, the infamous ‘investment bank’. Investments banking advisory services are wonderful non-capital intensive businesses. Fee is paid to these banks for their advice and the only important asset is the people who go up and down the elevator.
But once they start lending money to investors, they become a little capital intensive. Then they enter into PE and other illiquid areas and become even more capital intensive. And before you know it, they turn into capital intensive businesses. And the irony is that everyone else is coming to these banks for advice on how to create more shareholder value while these banks themselves dilute their own ROE with capital-intensive activity.
But this doesn’t mean non-capital intensive businesses are always excellent ‘BUYS’. Their high returns attract new entrants and competition ends up driving down the ROE.
Investing based on ROE can be tricky, but David’s point above is definitely worth considering. So what are you investing in, capital intensive or non-capital intensive businesses?
Read More: Einhorn's speech
But not only is Einhorn known for his value investing skills, but also for his poker skills, which makes his story very interesting. But are investing and poker similar? Is gambling and investing the same thing? Is winning at investing and gambling purely based on luck? “Not really” says Einhorn, “but sample size matters. Over time, and over thousands of hands against a variety of players, skills win out”.
But let’s get to Einhorn’s opinion on Return on Equity (ROE) today. According to him, there are essentially two types of businesses:
Capital intensive ones and non-capital intensive ones. A capital intensive business is one which requires capital to grow, for example, to build another plant, a manufacturing facility of some sort etc.
Non-capital intensive businesses are those that do not require capital or physical resources to grow. These businesses grow based on intellectual capital and human capital. Examples would be, pharmaceutical companies (which rely on their patents to generate revenue), software firms (which rely on the software they built to generate revenue) and consulting firms (which rely on their people to generate revenue). Most other companies that sell services would qualify as well here.
Einhorn points out that it is irrelevant to worry about ROE for non-capital intensive businesses. If a consulting firm had twice as many desks and office locations, it wouldn’t really mean that per consultant revenue would double, especially considering they travel to client sites to advise them; it would be redundant to add such resources.
It follows from this that the price-to-book value ratio is irrelevant for such companies because they derive their value from brand equity, intellectual and human capital which is not reflected on the balance sheet.
But for these companies, the question becomes ‘what to do with the spare cash?’
They could return the cash generated to the shareholders or do something a lot worse, enter capital-intensive businesses.
Take for example, the infamous ‘investment bank’. Investments banking advisory services are wonderful non-capital intensive businesses. Fee is paid to these banks for their advice and the only important asset is the people who go up and down the elevator.
But once they start lending money to investors, they become a little capital intensive. Then they enter into PE and other illiquid areas and become even more capital intensive. And before you know it, they turn into capital intensive businesses. And the irony is that everyone else is coming to these banks for advice on how to create more shareholder value while these banks themselves dilute their own ROE with capital-intensive activity.
But this doesn’t mean non-capital intensive businesses are always excellent ‘BUYS’. Their high returns attract new entrants and competition ends up driving down the ROE.
Investing based on ROE can be tricky, but David’s point above is definitely worth considering. So what are you investing in, capital intensive or non-capital intensive businesses?
Friday, August 17, 2012
Links
· Goldman sachs | Five years on ... is it really that bad? http://bit.ly/Ppaemz
· Michigan Begs for $100,000 Engineers After Auto Rebound - Bloomberg http://bit.ly/N0sSFe
· Goldman Sachs Said to Cut More Than 20 in Sales, Trading - Bloomberg http://bit.ly/PpsOLz
· How Harvard is failing its students « mathbabe http://bit.ly/P1WAVZ
· Subway etiquette: applying makeup on the 1 train « mathbabe http://bit.ly/RlY5UO
· Are We All Braggarts Now? http://bit.ly/RlYkiM
· Punishing Cheaters Promotes the Evolution of Cooperation | The Primate Diaries, Scientific American Blog Network http://bit.ly/P1Zvy1
· Abby Joseph Cohen Themes And Risks - Business Insider http://bit.ly/RlYK90
· Down With Shareholder Value http://bit.ly/Or4RBn
· Library Booklists: Adult Fiction: Financial Fiction http://bit.ly/Or4U00
· Where Are You in the Economic Strata? | The Big Picture http://bit.ly/OqYxtM
Taking a break and heading to a beautiful little place called Parry Sound for the weekend. See you all next week!
Thursday, August 16, 2012
Links
· No Alpha: Bain Capital’s Investment Results | The Big Picture http://bit.ly/MZTEh9
· Jim O'Neill's Complete Outlook For The Global Economy And Financial Markets [Slide Deck] - Business Insider http://bit.ly/LdgfAt
· Paying With Square, You'll Want To Ditch Your Credit Card Forever - Business Insider http://bit.ly/MXYWcO
· Special Report - China's answer to subprime bets: the Golden Elephant| Reuters http://bit.ly/MXdb1H
Wednesday, August 15, 2012
Links
· Reddit Users Share 25 Ways To Make Your Life Easier - Business Insider http://bit.ly/MTpSug
· This Harvard Alum Barely Survived College - Business Insider http://bit.ly/MVprzz
· The Five Biggest Myths About Saving Energy in the Summer http://bit.ly/Nu91KW
· How to Brand Yourself [infographic] http://bit.ly/PiVXYC
· 5 Graphs That Show How Crazy It Is to Compare California to Greece - Jordan Weissmann - The Atlantic http://bit.ly/OVsun2
· The 100 Greatest Movie Insults of All Time - YouTube http://bit.ly/MVlevU
· Mars Looks Quite Familiar, if Only on the Surface http://bit.ly/OVs3ZY
Monday, August 13, 2012
Links
· The Secret to Solar Power http://bit.ly/OTcrpL
· Goldman Sachs Leads Split With Obama, as GE Jilts Him Too - Bloomberg http://bit.ly/MPFGOI
· The most curious inventions this summer | A Patent for What?: Something for Everyone - Bloomberg http://bit.ly/ORE7eR
· Autism Speaks NYSE Party - Business Insider http://bit.ly/OQMzLc
· 12 Things Killer Employees Do Before Noon - Business Insider http://buff.ly/OXBhW2
· World’s Richest Gain $7.2 Billion as Buffett Ousts Ortega - Bloomberg http://bit.ly/OQxLfK
· 34 People You Probably Didn't Know Were On Seinfeld http://bit.ly/OC9n1G
Saturday, August 11, 2012
Friday, August 10, 2012
Links
This Video Shows Why Everyone Is In Love With Lolo Jones - Business Insider http://bit.ly/OMZ2zy
Renderings Of One World Trade Center - Business Insider http://bit.ly/OMSb9l
What 36 Olympic Athletes Do For A Living - Business Insider http://bit.ly/OwyhiP
Daily chart Olympics: The sports of yesteryear | The Economist http://bit.ly/PD7T5x
Focus: Online job vacancies | The Economist http://bit.ly/MvDM5A
Triumphant arrival on Mars? Check. What's next for Curiosity? | The Space Shot - CNET News http://bit.ly/OKSpxE
Sheryl Sandberg Leaves Work at 5:30 Every Day — And You Should Too http://bit.ly/Hh5gbN
Thursday, August 9, 2012
Wednesday, August 8, 2012
Links
· Economic History Stories http://bit.ly/MyjcS4
· The Economics of the Olympics, David Henderson | EconLog | Library of Economics and Liberty http://bit.ly/Myf70m
· Austerity At The Olympics: Each "Gold" Medal Contains 1.34% Gold | ZeroHedge http://bit.ly/Q0jOyL
· Please Explain Your Rationale For The Rainbow Cover Letter- Business Insider http://bit.ly/MtUYbJ
· LinkedIn Blog » LinkedIn’s Monster 89% Revenue increase | http://bit.ly/MmZQPQ
· Who Caused The Financial Crisis - Business Insider http://bit.ly/Mt0prt
· The Reverse Psychology of Temptation - Peter Bregman - Harvard Business Review http://bit.ly/PBzVOE
· Video - Olympic Level Rowing With the Winklevoss Twins - WSJ.com http://bit.ly/PBAMPm
· Study: Many Americans die with ‘virtually no financial assets’ - MIT News Office http://bit.ly/OLacHY
US pension plans[chart]
Ironic that a company that specializes in benefits and pensions would have the worst funded pension plan.
Via: Reuters
Tuesday, August 7, 2012
Links
· FT Alphaville » Ye olde (ironic) collateral crunch[Amsterdam1763] http://bit.ly/PvRz6w
· Why Top Young Managers Are in a Nonstop Job Hunt - Harvard Business Review http://bit.ly/M6pes9
· Daily chart Olympics: Going flat out | The Economist http://bit.ly/MpQGSH
· Disrupting The MBA Loan Market | Poets and Quants http://bit.ly/MqLOMY
· RT @StanfordBiz: What a $100,000 MBA Loan Paid Back Over 15 Years Would Cost: Federal Loan vs. @SoFi - http://bit.ly/MsN1Du
· Amazon's New Secret Weapon: Delivery Lockers http://bit.ly/MsOqtZ
· Jenna Jameson on Mitt Romney|"There’s nothing more American, I think, than screwing people you don’t know for money" http://bit.ly/MoST0E
· The Porn Convention - Forbes http://bit.ly/MpBqW3
· VIDEO: Serena Williams Completed The Career Golden Slam And Then Did The C-Walk [VIDEO] - Business Insider http://bit.ly/Pvixev
· Chick-fil-A Day a Reminder That Boycotts Often Backfire - Bloomberg http://bit.ly/OxspZj
Saturday, August 4, 2012
Links
U.S. loves cops and firefighters - but not their pensions| Reuters http://bit.ly/OvS41G
Here Is Why The Navy Is Betting It All On The High Tech Virginia-Class Submarine - Business Insider http://bit.ly/PquToe
Everything That Will Go Extinct In The Next 40 Years - Business Insider http://bit.ly/Nolihe
We've Been Using These Ketchup Cups Totally Wrong - Business Insider http://bit.ly/NosnhU
Chick-fil-A Day a Reminder That Boycotts Often Backfire - Bloomberg http://bit.ly/OxspZj
VIDEO: Serena Williams Completed The Career Golden Slam And Then Did The C-Walk [VIDEO] - Business Insiderhttp://bit.ly/Pvixev
The Porn Convention - Forbes http://bit.ly/MpBqW3
FT Alphaville » Ye olde (ironic) collateral crunch[Amsterdam1763] http://bit.ly/PvRz6w
Friday, August 3, 2012
FW: Keynesian Economics
Feed: The Big Picture
Posted on: Friday, August 03, 2012 2:01 PM
Author: Barry Ritholtz
Subject: Keynesian Economics
I tend to like the idea of Keynesian counter-cyclical spending, but I have to admit this is amusing:
Hat tip Grant Williams, Things That Make You Go Hmmmm. |
Thursday, August 2, 2012
Links
· Apple CEO Tim Cook Likes These 7 Beautiful Things - Business Insider http://bit.ly/OApMDJ
· Questioning El-Erian | Felix Salmon http://bit.ly/M9vU3A
· Q&A: The Gourmand Behind New York's $666 'Douche Burger' - Businessweek http://bit.ly/LVac4D
· Income Inequality Killed The Music Business | The Big Picture http://bit.ly/LXilZG
· When Craigslist Blocks Innovations - Disruptions - NYTimes.com http://bit.ly/Q9z6kZ
· Neuroscience and Moral Responsibility http://bit.ly/Q9z4JH
Wednesday, August 1, 2012
Economic Charts
Interestingly, US households were able to maintain personal savings even in distressed times.
Telecom, Utilities and Financial posted positive earnings surprises:
That’s way too many holidays in the EU:
Business trips on the decline:
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