Quick – what was the second-worst U.S. stock market drop since the 1930s? What caused it? It wasn’t the pricking of the tech bubble in the early 2000s. It was the bursting of the oil bubble in 1973. Fossil fuels have been the life blood of economic growth for the entire time that economies have been growing – almost 200 years – and they have been responsible for many of their ups and downs.
The belief that detailed quantitative measurement will make performance easier to evaluate, manage efficiently, and improve has survived repeated failures of the doctrine. In fact, the failures serve only to bring forth calls for more of the treatment. Only very rarely is it admitted that quantification doesn’t work and should be scrapped.
The thesis of Chris Hughes’s book Fair Shot: Rethinking Inequality and How We Earn is stated right up front: “Most Americans cannot find $400 in the case of an emergency like a car accident or a hospitalization, yet I was able to make half a billion dollars for three years of work. Something is profoundly wrong with our economy and in our country, and we have to fix it.” But is Hughes’s solution the answer?
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.
When robots and automation have taken over not only the agriculture and manufacturing jobs but even the high-level service jobs, who will drive consumption? Will the economy stagnate? These are the questions posed by Martin Ford in his challenging, important and well-researched book, Rise of the Robots: Technology and the Threat of a Jobless Future.
The “barbell” portfolio has long been considered an investment strategy. Since his fame after the 2010 publication of the book The Black Swan, Nassim Nicholas Taleb has often been associated with the strategy. Recent research illustrates the critical connection between the barbell, core-satellite portfolios and safety-first financial planning – and how advisors can improve on using standard deviation as a measure of risk.
For many years “alpha” – outperformance of the market on a risk-adjusted basis – was the Holy Grail of investment. Almost all money managers claimed they could produce it. It turned out that few could. Now a new Holy Grail: diversification. But there is little agreement as to what it means.
Depending on whom you ask, inequality is driven by globalization, tax policies, crony capitalism or some other macro-economic force. But what if something more sinister is preventing poor people from advancing?
Has the institution of the Nobel Prize in economics been a cause of the global economic woes of the last 20 years – its financial crises, its economic slowdowns and its increasing intra-national inequalities? In their recent book, The Nobel Factor: The Prize in Economics, Social Democracy, and the Market Turn, authors Avner Offer and Gabriel Söderberg make a good, if somewhat haphazard, case that it has.
Can options cost-effectively enhance investment returns? The answer depends partly on whether the investment manager takes an active view and partly on whether the options can be used efficiently to address an investor’s risk preferences.
What is the risk that equity investments wont turn out as well in the long run as we would like them to? This is obviously a very important question. We are often assured that stock investments will eventually pan out because of mean-reversion. However, mean-reversion in securities prices is ill-defined, oversimplified and little more than a physics metaphor.
