From the category archives:

Media & Investing

The market is not efficient

June 8, 2009

in Media & Investing

stock-market-not-efficient HT to my friend James, for bringing this to my attention today.  In the last hour, the market ran up dramatically, then quickly dropped.

image

This kind of price movements is hardly an unique occurrence in the world of stock charts, where institutional investors by and large dictate pricing with their gargantuan orders.  The market has been relatively quiet for the whole day, with little data released, nor shocking announcements made.  So either there’s a large investor (or several) out there running up prices, then quickly dumping them.  Alternatively, there’s information or rumours swerving around, privy to a few.

This happens, regularly.

Plus, Joe Nocera is poking holes in the efficient market hypothesis.

Jeremy Grantham from GMO rails:

“The incredibly inaccurate efficient market theory was believed in totality by many of our financial leaders, and believed in part by almost all. It left our economic and government establishment sitting by confidently, even as a lethally dangerous combination of asset bubbles, lax controls, pernicious incentives and wickedly complicated instruments led to our current plight. ‘Surely, none of this could be happening in a rational, efficient world,’ they seemed to be thinking. And the absolutely worst part of this belief set was that it led to a chronic underestimation of the dangers of asset bubbles breaking.”

Academia has largely accepted the theory within the vacuum of its constructed economies, with little challenges.

As Mr. Fox describes it, much of the early academic work that led to the efficient market theory was aimed at simply showing that most predictive stock charts were glorified voodoo — just because a pattern had developed didn’t mean it would continue, or even that it had any real meaning. Dissertations were written showing how 20 randomly chosen stocks outperformed actively managed mutual funds. (Hence the phrase “random walk,” to connote the near impossibility of beating the market regularly.) Mr. Thaler, the Chicago behavioralist, says that evidence on this point — “the no free lunch principle,” he calls it — is clear and convincing.

Addressing market volatility over the 30 years, Grantham says:  Read more...

Times Promotes Me-too Personal Credit Crisis

May 19, 2009

in Media & Investing

personal-credit-crisis-edmund-andrews The New York Times has gone Oprah! Remember last year when she fronted her magazine O with the big “How could I have let myself go” headline? The Times is attempting the same cheap populism with its personal finance focused magazine this past weekend.

One article that stood out and subsequently got a lot of attention was a personal credit crisis “confessional” from one of its own economic reporters.  He has a book to promote, so naturally, the paper is there to serve as the springboard.

Many bloggers have applauded the “insight” and “braveness” of the writer, while heaping a string of other nauseating superlatives to the lengthy excerpt.  I cannot share the same sentiment.

First of all, the irony of an economic reporter having financial difficulties is just screaming for a movie deal, right? Oh wait, the movie had already been made, it was a box office bomb called Confessions of a Shopoholic. Granted, the story in this case is slightly less vapid, but equally inexcusable.

As far back as the early 2000s, Andrews had been reporting on the economy, including alarming signs of predatory lending practices emanating from the housing and mortgage industries.  In June 2004, a mere two months before his purported new chapter in life kicked off with an unaffordable mortgage, Andrews wrote the following gem titled “The ever more graspable, and risky, American dream”. Summarized by the Times in its archive, it says:

Array of mortgages for people with little cash or overstretched budgets has enabled families of modest income to take on debt once beyond their reach to buy homes, spurred by low interest rates and confidence that house prices will continue to rise. Some experts worry that recent first-time buyers will be squeezed by rising interest rates on adjustable-rate mortgages, possibly causing housing prices to wobble in some high-price markets on East and West Coasts.  Read more...

Why Small Investors Don’t Stand a Chance

April 28, 2009

in Media & Investing

small-investor-no-chance Investing is hard for professionals, and even harder for amateur investors.  Especially when success is not measured in a cumulative manner – a dozen years of good work can be undone by a bad quarter.

I have written about the many difficulties of achieving consistent good performance: from minding the myriad of intersecting forces in order to stay above the water, the skills needed to balance long-term investment principles with technical knowledge, to blocking out noises that only confuse investors.  On top of all that, it also serves to see the big picture, particularly forces related to social and demographic shifts.  There is a lot to take in – which would explain why so many of us delegate the task to other people.

Yet for all those financial advice we consume from both paid and free sources: advisors, newspaper columns, personal finance and investment magazines, business TV programs and water-cooler conversations, most small investors find themselves unprepared and worse yet, unprotected from the financial storm that swept through much of the world in the past half year.  After coming across Jeffrey Goldberg’s recent article, I am more convinced than ever that it is next to impossible for a small investor to make it in the stock market.

The small fish gets Jiffy Lube advice

Most of us have assets less than, say, $10 million.  And that’s about the threshold that determines whether one gets the attention of a top-flight money manager, or a print-out from a cookie-cutter computer program.

In the article, Goldberg highlights the pressure to provide conventional advice.

Advisers only recommend what’s conventionally palatable. They tend to say 60 percent stocks, 40 percent bonds, and they’re not likely to move away from that, no matter how extreme valuations are. They’re not likely to move away from it when the market is really high, or really low. A big part of the problem is that there isn’t a perfect answer to any of this. No one can tell you how to allocate your assets 100 percent of the time. The average investor is not getting Warren Buffett to look at his portfolio; he’s getting a printout from a computer model.  Read more...

The Sky is Falling, But Whom to Blame?

March 20, 2009

in Media & Investing,On Learning & Education

finger pointing

The human mind cannot grasp the causes of phenomena in the aggregate. But the need to find these causes is inherent in man’s soul. And the human intellect, without investigating the multiplicity and complexity of the conditions of phenomena, any one of which taken separately may seem to be the cause, snatches at the first, the most intelligible approximation to a cause, and says: “This is the cause!”

Leo Tolstoy, War and Peace [via The Big Picture]

The populist pitch-forking movement has duly commenced, and fingers are pointed in all directions. In a classic case of pot calling the kettle black, all the players are now seizing populist rage to divert attention from itself. The momentum must be maintained, should the public calm down and re-assess, everyone is culpable.

Government

The whole debacle surrounding the AIG bonus is ridiculous. The government passed the legislation with the inserted lines that allowed for bonuses in the first place. Even if Chris Dodd is the culprit, surely it only serves to highlights the incompetence and indifference of the system. If what he’s saying is true (that the administration made him do it), then it shows complicity. This indignant outrage shown by politicians from both sides is nothing but political grandstanding to placate mass anger. Better this mess is channeled towards the evil executives than at the government, right?

The de-regulation of US financial system started with Clinton, and continued with the Bush administration. Policies from ten years ago directly contributed to the California black-out (Enron), and the current mortgage crisis. Without the government’s collusion in both banking deregulation and predatory lending practices, corporate greed would’ve had little opportunity to spread.

It doesn’t take much digging to see the hypocrisy of politicians now railing against exorbitant executive compensation or incompetence. For the most part, those very politicians were responsible for the rise in reckless risk-taking behaviour of those financial Einsteins. Members of the public are beginning to see the thinly-guised witch hunt as a way to deflect blame and secure public support. This kind of shameless and ingratiating behaviour from publicly-elected officials is insulting and condescending: because it pushes accountability away from itself, and props up effigies of greedy corporate executives for the public to burn.  Read more...

What’s a reporter to do?

March 6, 2009

in Media & Investing

Reporter

Jon Stewart tore CNBC a new one this week, sending ripples throughout mainstream media and blogosphere. “CNBC hating is mainstream!” Screams one headline. Then came the slew of media pundits, rushing to defend CNBC and by proxy, itself. This one in particular is especially lengthy and defensive. Below are some of the author’s grievances in face of much critique of financial reporting, and my thoughts on them.

We were ignored, then we were cut

It’s been a lousy decade or so for print publishing, and it’s getting worse. Budgets have been cut, newsrooms slashed. Business reporting in most cities is pretty bad, often an adjunct of local chambers of commerce. In other media, there’s been a turmoil of business models, as the Web crowded in, bringing with it a different style and lots of new bodies. Roles have changed. Anyone with a clue (many without) now writes a column or a blog. The business seems full of younger folks (a function of advancing age perhaps); the era when every newsroom had a cranky wise man with a cigar that had seen it all is sadly over. This is particularly a problem in financial journalism, which demands historical perspective and expertise. To make matters worse, finance has grown dramatically more complex, opaque, global over the past few decades. And despite that complexity, the rise of financial television and financial blogging has simplified coverage to an equity horse race, with an omnipresent pressure to predict. Besides, since when has most journalism at any given time been all that stellar? Who correctly called the Great Depression anyway?

Whoa, easy there with the gripings! The newspaper industry did suffer from a drop in readership (some were made up on the web), and a significant drop in advertising revenue from some of its now-bankrupt clients. But the article failed to mention that the largest contributor newspaper failures are the massive debts incurred between 2006 and 2007. For example, had the Tribune Company not triple its debt in one single transaction in a deal to take LA Times and Chicago Tribune private, they would still be able to report earnings in the 10-20% range of their revenues. But the burden of debt changed all that.  Read more...

Paging common sense, integrity, and accountability?

February 25, 2009

in Media & Investing

Accountability and Integrity Needed

Does the name Abby Cohen ring a bell? It does for me, and it broils my blood. Chances are, if you were at all invested during the tech bubble in the early 2000s, you would recognize the name too. Dubbed “perpetual bull“, she championed the rise of tech and telecom stocks all the way to the stratosphere.

At that time, she was the star analyst at Goldman Sachs. The companies she covered loved her (which should’ve been a warning sigh all by itself), the market loved her, as wave after wave of heart-stopping rises made her outrageous bullish calls nothing but prophetic. In fact, in the midst of the March 2000 sell-off, she was still lauding for another bullish run.

So it bugs me to no end that a few weeks ago, the name Abby Cohen popped up on my screen again. It seems like over the last few years, Ms Cohen was back to her old tricks, spreading her never-ending cheery outlook throughout 2007 and 2008 on any media outlet that would have her. Her standing at Goldman was seemingly undiminished till mid-2008 when she was finally replaced (or self-demoted) in her role as the chief strategist. Yet her name still pops up, ready to hypnotize another generation of ill-informed investors, eager for a quick buck in the casino of stock trading.

My question now is this. How could this happen? How can individuals like Abby Cohen not only survive, but thrive as an analyst, with consistently bad calls on the market? If a supermarket stocker routinely make mistakes while stocking, fail to input the right information into the computer and create nothing but inconvenience for the customers, he would be fired, right? So why can’t the same accountability be applied to a stock market analyst when it is her job to be, at least, be more right than wrong?

It might be negligence, ignorance, or outright incompetence. But the media, so keen on scrutinizing every piece of breaking news on its 24-hour network, seems to lack both the will and the ability to call out the inconsistencies.  Read more...

Believe this, and you’ll sleep better at night

February 24, 2009

in Media & Investing

Market Inefficient Sleep Better at Night

Modern finance has three perspectives on the workings of the stock market. Inefficient, semi-efficient, and perfectly efficient. For the most part, market observers nowadays believe in a semi to perfectly efficient market. That is to say, information regarding a company is priced into its stock almost instantaneously.

Financial statisticians devote years churning out data to prove that the market, for the most part, is extremely efficient in factoring in new information. And stock prices: barring insider information and uncouth accounting manipulation, is an accurate barometer of the intrinsic value of the company.

Except this is hardly the case. The assumption of market rationality can only be taken so far. We have all seen what happened to the market during the tech bubble and the now real estate bubble. Waves of market decline we are witnessing now may very well signal irrational pessimism: there are many businesses now trading well below their intrinsic value.

Now we need to separate the true investors from the speculators.

Most market experts are behind the notion that buying low and selling high is the right approach to investing. In other words, a successful investor should consistently buy at the lowest point in the market and sell at the point of irrational exuberance. Considering nobody has a crystal ball and thus very few can consistently “time” the market successfully, the industry of technical trading sneaks its way into the investing world. Jargon like resistance, support, and moving average enter the popular vocabulary.  Many people go for it hook, line, and sinker, then get burned attempting the impossible. The impossible being trying to outsmart everybody by applying the gambling mentality to investing.

And then there’s Warren Buffet and his disciples. First, they separate the notion of using stock prices to measure the value of a business. They distrust the oscillatory swings of the market and the speculative herd that drive it. Buffet views buying stocks or bonds akin to owning a slice of the business. If the business is sound, why worry about fluctuations in price? Secondly, the timing issue is eliminated. Berkshire Hathaway does not seek to enter the market at the lowest price, nor exist at the top. Instead, BH makes a point of exiting the market as soon as the stocks are thought to be overvalued, thus providing its shareholders a fair return on their investment regardless of their chosen time of exit.  Read more...

Who would you trust with your investments, Lindsay Lohan or Meryl Streep?

February 20, 2009

in Media & Investing

Streep or Lohan to advice you on investmentPuzzling?

Let me explain.

I am a huge gossip hound, I don’t read People or US Weekly, but I do follow a number of gossip bloggers almost religiously. I love one in particular, not only because she’s highly entertaining AND introduced me to Fight Night Lights, but because her insights allowed an outsider like me glimpse into the cynical workings of the entertainment industry. How else could I have come to understand the dire consequences of plastic surgery addiction, passive-aggressive diatribes of an insecure diva, and the many layers of hidden media manipulation that’s unbeknownst to most of us?

Time and time again, the lesson that I take away from the smut is this. The IT boys and girls come and go, but the Meryl Streeps of the world do their jobs, go home, and wake up to see another decade or two of good works ahead of them.

Now, this is not a gossip blog, and there is a point to be made here, I promise. The thing is, just like an actor, an economist or analyst has a very long working life ahead of them (if they are lucky). And like Hollywood, the waters of Wall Street and the investment industry is just as treacherous. It’s hard to get ahead or get noticed in those ultra-competitive and dog-eat-dog kind of environment.

So when an analyst suddenly gets exposure by mastering some new trading anomaly or has a part of his or her research predictions come true, their status is swiftly elevated. It’s not unlike a starving actor in LA, rejected after years of unsuccessful auditions.  His luck turns, he unexpectedly lands a starring part in some Josh Schwartz hit show. And just like that, he becomes household name in a desirable demographic.

But Wall Street, just like Hollywood, is fickle. The media is always looking for a fresh perspective, much the same way Hollywood paparazzi are always on the look-out for fresh faces to sell pictures. The end motivations are the same: getting people’s attention, whether it comes in the form of a contrarian opinion or drunken debauchery on Rodeo Drive. Media looks for controversy, and there are always willing participants.  Read more...

Why cable business news will drive your investments into the ground

February 18, 2009

in Media & Investing

Cable News Bad for InvestmentWhere I used to work, we rotated MSNBC, CNBC and CNN Business in the background non-stop. Every market movement relevant to the energy market was followed, analyzed, and regurgitated on those channels. For the oil trading desk I worked next to, every threat of Iranian oil embargo, every possible hijacking off the Somalian coast, every Nigerian riot, would send the trading guys off in a flurry of activities.

Back in 2007, oil was trending up into infinity and beyond, and everyone was in a great mood. I don’t know about now. But my point here is, these kinds of reporting are great and useful.

For a trader.

But you are not a trader, are you? You don’t trade Forex or options for a living, do you? Because if you are an investor – and I define an investor as someone that holds investing instruments for the medium to long-term, then SHUT OFF the TV. They are worse than useless. They are downright detrimental to your investment portfolio.

The business reporting business, much like the regular media outlet, is like a stage. There is a cast of characters. They play their roles to the T, and they do not improvise. The networks themselves are self-serving media machines that get turned on for one reason and one reason only: to make a profit. Next time you see Maria Bartiromo, Erin Bennett or Becky Quick, you need to realize who’s paying their bills. It’s the advertisers, usually financial service companies that fill up these 10-20 second slots right after they tell you they’ll be “right back”. And who do they return with after the commercial breaks? Oh don’t you know it, it’s the in-house economist/strategist/analyst from those very firms.

Do you see what I see here? I see irreconcilable conflict of interest. I see many of those guests coming on the show with a very clear agenda in promoting a certain investment style, a sector which they are experts (and happen to do business) in. The intentions are not always malicious, but it does place a bit of a gag order on the interviews themselves. After all, should a disagreement arise, how far can an anchor go on challenging their guests’ positions, knowing fully well their counterpart is partially footing her salary.  Read more...

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