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Cochrane on Alpha-Beta

November 28, 2011 Comments (0)

Quantivity glowing quotes John Cochrane:I tried telling a hedge fund manager, “You don’t have alpha. I can replicate your returns with a value-growth, momentum, currency and term carry, and short-vol strategy.” He said, “‘Exotic beta’ is my alpha. I understand those systematic factors and know how to trade them. You don’t.” He has a point. How many investors have even thought through their exposures to carry-trade or short-volatility “systematic risks,” let alone have the ability to program...

Aristotle's Philosophical Conceit

November 28, 2011 Comments (0)

Aristotle wrote many years ago an anecdote that many erudite people take as gospel, that the thoughtful sages could be rich if they really wanted to. Here he recounts the story of Thales of Melitus (ie, the primordial philosopher 624-546 BC):he knew by his skill in the stars while it was yet winter that there would be a great harvest of olives in the coming year; so, having a little money, he gave deposits for the use of all the olive-presses in Chios and Miletus, which he hired at a low price...

Lewin's Love of Physics

November 28, 2011 Comments (0)

Walter Lewin is an MIT physics professor, and wrote a pretty fun book entitled For the Love of Physics. It's a nice romp through fun facts of physics, such as why rainbows only appear when the sun is behind you. One of the more interesting parts concerns his investigation of Galileo's Square-Cube law.Galileo's Dialogue Concerning Two New Sciences contained what he considered to be one of his most profound insights: the square-cube law. If two cubes are made of the same material then they...

Chance, Effort, and Ability

November 28, 2011 Comments (0)

Here's my local paper's Sunday major opinion piece on wealth inequality, discussing a researcher's model of wealth distribution:He began his research with a simple question: Can chance alone account for wealth concentration?...He assumed that all entrepreneurs began with equal wealth. Returns varied, solely by chance...I'll spare you the calculus, but according to Fargione's model, by the "inexorable effect of chance," and chance alone, "a small proportion of entrepreneurs come to possess...

Real Investors Lag Indices by 6%

November 28, 2011 Comments (0)

I recently discovered there is considerable amount of data documenting how much investors underperform indices, and it's being ignored. In the 2008 Journal of Pension Benefits, N. Scott Pritchard documented that that individual investors have done much worse than the indices that everyone assumes reflect investor returns. He looked at data from 401(k) plans, and found that from 1988 through 2007, while the S&P 500 returned 11.81 percent annually and Treasury bills returned 4.53 percent,...

Happy Halloween!

November 28, 2011 Comments (0)

Everyone likes to mock people who dress up their pets, but my daughter has been saying 'doggy Batman' over and over for the past few days, in pure delight over the sublime ridiculousness of combining a dog, a bat, and a man. Worth every penny. Boys have grown out of Star Wars, and are now 'scary/gross.'

Investors Underperform Indices

November 28, 2011 Comments (0)

mistake (see above)

Shorting Leveraged ETF Pairs

November 28, 2011 Comments (0)

ProShares offers a wildly successful array of Exchange Traded Funds (ETFs) that allows people to easily gain leverage and short targeted subsets of stocks. They trade a lot, and so clearly are satisfying consumer preferences, but probably the more delusional part of investor beliefs. Their explicit goal of targeting a daily benchmark return correlation leaves the secondary consideration less important: maximizing long term return. Thus, they tend to underperform their benchmark over longer...

DailyKos on Good Intentions

November 28, 2011 Comments (0)

I found this funny:While Communists are certainly responsible for more deaths and misery than the Nazis could ever dream of, at least their intentions were good, so I'll give them a pass.The entire article was filled with such observations, making me wonder whether the website was hacked. So, if you cause more death and misery than the Nazis, but have good's ok? [I'm now told it was an attempt at sarcasm. If so, it's stupid sarcasm.]

Calomiris on Underwriting Problems

November 28, 2011 Comments (0)

Charles Calomiris taught me Money and Banking in graduate school, and I thought then he was very wise. Here he is in today's WSJ:In a painstaking forensic analysis of the sources of increased mortgage risk during the 2000s, "The Failure of Models that Predict Failure," Uday Rajan of the University of Michigan, Amit Seru of the University of Chicago and Vikrant Vig of London Business School show that more than half of the mortgage losses that occurred in excess of the rosy forecasts of expected...