The financial industry can measure up by conveying capital to improve the future of humankind; in short, by creating value.
In his controversial book, A Higher Loyalty, James Comey says, “We are experiencing a dangerous time…” a time in which “basic facts are disputed, fundamental truth is questioned, lying is normalized, and unethical behaviour is ignored, excused, or rewarded.” What has precipitated this disastrous ethical decline? I will argue that as much as anything, it is Wall Street.
A Man for All Markets is an autobiographical account of the life and work of Ed Thorp, a brilliant, accomplished, but humble man who figured out how to win at blackjack and roulette and then ran a successful hedge fund.
David Enrich’s The Spider Network is an engaging chronicle of how employees of financial companies conspire to move LIBOR and its offshoots by small amounts for the sole purpose of benefiting derivatives traders who profited from the moves. The book implicitly raises a key question for the financial industry, indeed for the entirety of capitalism: Is there an ethical code that must be followed, apart from and beyond the requirements of the law; or is all that is necessary to be ethical merely to adhere to the law?
For 23 years DALBAR, Inc. has been publishing a research report reaching the conclusion, year after year, that investors underperform the investment vehicles that they invest in due to “poor investor decision making.” Wade Pfau recently discovered, however, that this conclusion is the result of a serious calculation error. Now, using Pfau’s results, I will prove that the evidence actually shows that investors do not underperform their investments.
According to Andrew Ang, a guru of factor-based investing and former chair of the finance and economics division of Columbia Business School’s Data Science Institute, the “anomalies” literature is the scientific foundation for quantitative asset management. But this focus, which was not very scientific to begin with, is proving its utter ruin.
“Determinants of Portfolio Performance,” the seminal 1986 paper on asset allocation by Gary P. Brinson, Randolph Hood, and Gilbert L. Beebower (BHB), is one of the most frequently cited – and misunderstood – examples of financial research. But if you correctly interpret its findings, you will realize that they are absurd.
You may have heard about bitcoin. Spurred on by breathtaking price runups, some clients may even have asked you if they should invest in them, or if it’s safe to buy them and use them to make payments. Most likely you dismissed the whole thing as some sort of a tulip bubble. But it’s not as simple as that.
It has become conventional wisdom that underperformance is due to the irrational investment behavior of individuals. For the creation and propagation of this conventional wisdom, we have DALBAR to thank. Now that Wade Pfau has shown that DALBAR’s research is likely to be worthless because it calculates its numbers wrong, it is time to question whether the conventional wisdom has even a scintilla of meaning.
How is it possible that stock market bubbles are so obvious after they burst, but are almost never identified in advance – except by what seem, after the fact, to have been a highly perspicacious few? A new study found that there is a way to tell before it bursts that the market, or a segment thereof, is in a bubble. But profiting from an investment strategy designed to exploit bubbles is incredibly difficult.