mydoghatescats

8 Comments

    • Bill Gross Says 'Jump.' Will the Fed Once Again Say 'How High'? [view article]
      When I'm dictator I will immediately issue an edict BANNING, henceforth and forever more, all euphemisms for borrowing or loaning money.

      No more of this:
      The BFLS (Big Fat Liability Sheet) Corporation announced today that its 31 October 2008 bond offering will be $1 billion.

      They will have to call it what it is:
      The Big Fat Liability Sheet Corporation announced today that it will go to the bond market on October 2008 and attempt to borrow $1 billion.

      When we rename something it matters.

      When I go to the bank to borrow money to buy a house, I say "I took out a mortgage." "It's mortgaged" has taken on a clear meaning: it's not mine until I pay back the loan. This too is euphemistic, but "taking out a mortgage" is a lot closer to the truth (I borrowed money) than "My next bond offering will be $1 billion." That makes it sound like you're the one doing the world, or in this case the capital markets, the favor. Yes, widows and insurance companies and pension funds need a place to put their capital in order to earn a return that matches their liabilities. But they are the ones offering, not the borrower. They are offering cash and you are asking to borrow it.

      Am I crazy? Am I the only one who thinks that one of the reasons we have periodic debt meltdowns is because we are so steeped in debt, we can't even call a loan . . . a loan.

      Elect me dictator and I will implement these changes immediately.       Oct 07 02:54 AM
    • Dividend Investment Myths [view article]
      Intentional or not, what you listed as yearly performance appears to be performance off a recent 52-week low, two very different things. Aug 13 01:21 AM
    • Book Review: 'The Intelligent Portfolio' by Christopher Jones [view article]
      Geoff, thanks again for your valuable work.

      Thanks also for pointing out the Grossman-Stiglitz paradox. When I recently studied MPT this paradox stood out to me. The other folks in my class, when I brought it to their attention, didn't seem all that impressed by my brilliance.

      But in my very own market behavior, though I attempt to be rational, I see ample evidence of the stupid human tricks that are always operative and forever taking nicks out of the efficiency of markets, resulting in mispricings. I don't consider myself a brilliant investor, but I have been actively engaged in the process for over thirty years, studying constantly and managing a portfolio that has grown significantly. I didn't participate fully in the go-go 90s because I never fully trusted what was happening. But that mistrust helped me avoid a lot of the subsequent downside. Once again during this new cycle, I failed to fully participate in the runup following the bubble crash, but once again I am experiencing the innoculation my conservative nature provides when markets tank. I boast here, but my decision making has steadily improved. But I still, far too frequently, make some real boneheaded, very irrational, and quite significant mistakes. And so I know for a fact that I myself make a sizable contribution each year to the ongoing inefficiencies of the market.

      I picture Buffett and friends at one end of the market prowess spectrum, their each and every decision a mighty contribution to the edifice of market efficiency. I picture all the rest of us as a million ducks, some ducks bigger idiots than others, pecking this efficiency to death, or at least breaking off chunks, which fall to the earth as mispriced securites.

      But even Buffett would admit that he can be boneheaded and introduce a mispricing. Whenever I start believing too strongly in the efficiency of markets (or the infallibility of Warren) I remind myself that one day WEB woke up, drove to work and bought Pier One Imports. Bought it from a duck.


       Jun 14 06:14 PM
    • Debating 'Fundamental Weighting' and Indexing [view article]
      Assembling portfolios of companies ordered simply by the price a market has assigned them is perfectly fine as A method of assembling an index. But to give this method some sort of primacy seems self-evidently irrational.

      If you needed to buy 10 hens once a year, you probably you would do okay by simply going to the market, finding the 10-chicken-pen that the market has assigned the greatest value to, and buying those chickens, year in and year out.

      But what if you went back to the market one year and, in addition to just the market price, each pen had another number which was the egg yield: the number of eggs laid during the past year divided by the market price? And another number: new chickens hatched divided by the market price?

      In the former case the market has looked at all the pens and assigned each a value. This value is based part on past performance and part of future expectations. But you have no information how much of the value is based on actual performance and how much is based on expectations. In this case you have information about the entity, the chicken pen, but this information is secondary, derivative. The price is reflective of the value of the chicken pen, but it is not the value.

      In the latter case you still have this secondary, derivative information of market price assigned. But now you have additional information, and this data is primary to the object itself: egg production and fertility numbers.

      Instead of calling it a market cap index it really should be called a "high hopes and expectations" index because, though analysis on the hard fundamental data is part of the price assignation, no effort is made to order market-cap weighted indexes on anything other than that: market value. In this sense these types of indexes are ordered, by varying degrees, on the hopes and prayers of market participants.

      Ordering hens or stocks in accordance with more objective performance measures does not totally expunge the index of hopes and prayers. You are basing this ordering on past performance in the hopes that past is predictive, which often it is not. But there is no doubt less hoping and praying, and therefore more science, inside a fundamental index than inside a cap-weight index.

      There is indeed the problem that ordering indexes on fundamentals introduces overweighting to certain sectors, and these, and other problems, need to be addressed. But as we saw during the last great bubble, there were huge overweightings that happened inside of market-cap weighted indexes as well. What got overweighted was euphoria, irrational exuberance, and stocks getting priced higher and higher, growing more and more "valuable" simply because they kept going up and up, until many of the high priced chickens got their heads chopped off, ran around a little more, ran off a cliff, or simply keeled over, and died.

      Buying a market-cap weighted index isn't as uncertain as buying 2 chickens in a bush, but more uncertain than buying a fundamentally-weighted index, which is closer to buying 1 chicken in hand.

      We are always to some degree, even inside an index, picking stocks. There is a lot of slicing-and-dicing silliness going on around indexing, and more to come, but ordering and packaging securities in accordance with fundamentals such as earnings, sales, book value, or dividends is a valid way to construct an index. To do so is no less valid than ordering an index in lockstep to the values assigned to securities by a herd. Market herds can be smart, and most of the time correct, but sometimes they do stupid things. An index doesn't have to be constructed to slavishly follow them everywhere, even over a cliff, to be correct.       May 24 05:46 PM
    • Debating 'Fundamental Weighting' and Indexing [view article]
      Irony: if or when everyone in the world adopts the efficient market religion and simply buys an index fund, the market will be maximally inefficient because there will be nobody left doing the head scratching analysis that supposedly renders the market efficient in the first place. So there is a symbiotic relationship between active and passive investors. Both need the other to make their version of extracting returns from the market possible. More passive investors means less stock analysis means more market inefficiency. More active investors means information is more fully, more quickly, priced, means more market efficiency. Stock pickers need indexers. Indexers need stock pickers. Both make the other's world go round. May 22 02:38 PM
    • The Religious War Over Indexing [view article]
      It's not my idea of a Saturday well spend, so I have hardly scratched the efficient market academic literature. I am sure that probably this paradox has been addressed. But if not I lay claim, giving it this name:

      Mydoghatescat's Fundamental Paradox Of The Efficient Market Hypothesis       May 10 04:07 PM
    • The Religious War Over Indexing [view article]
      Why would fundamental indexing get priced and stop working but not market cap indexing?

      Every single fundamental investor who gets the efficient market religion and converts to the efficient market faith, subtracts one investor from the pool of price determinators. Taking this to its logical conclusion, suppose everyone gets this religion? Who would then be doing the analytical based, fundamental valuing and head-scratching that, writ large, prices all things knowable into stocks? A growing congregation of EMH converts and passive, market-weighted indexers, will render markets, and these indexes, more inefficient.

      We already saw a good recent example of this phenomena at the end of the last decade. Many people saw how well they could do by simply buying the S&P Index as a shrinking number of stocks, Ciscos, Microsofts, and Oracles, came to dominate that index. It was a crazy time where many factors led to these huge pricing inefficiencies, but indexing contributed its part. Every new $1000 that came pouring into say, the Vanguard 500 fund, meant that Gus Sauter, the manager of these funds, had to buy disproportionately more of these bloated stocks, bloating them further. Value stocks tanked so badly during this time that value managers were leaving the field or getting fired for underperformance.

      So of course, as fundamental indexing becomes popular, and popular it will be, they will not come into their 15 minutes of fame without introducing similar inefficiencies. However they construct these indexes, demand and prices will rise for the issues most heavily weighted, demand and prices will fall for the issues least weighted or not included at all.

      Personally I believe fundamental indexing is going to be huge. I think for awhile the fundamental wind will be at their back. Then the same information cascade that caused market-weighted indexing to do so well in the 90s will begin to feed into the equation, giving them a further assist, then the game will be up until people forget all about it.

      You could say that whenever you get more folks doing fundamental stock analysis you are enabling efficient markets and passive, market-weighted indexing. Conversely, whenever you get more folks investing in passive, market-weighted indexing, as if markets were efficient, you are rendering the process of fundamental stock analysis, and fundamental indexing, more valuable. This phenomena will of course be most evident at extremes of adaptation, but logically at least it would seem to be happening at the margins, always.


       May 10 03:50 PM
    • From The Horse’s Mouth: Yale's Endowment Officer Makes Financial Sense [view article]
      I always look forward to your stuff. I read this one a while ago but I'm working on my CFP and ran across something similar.

      In studying for my CFP we are told to use CV (Coefficient of Variability) or Standard Deviation divided by Return (SDev/Ret) as a comparison tool in picking portfolios. I say your measure, Return divided by Standard Deviation, the inverse of CV, is more intuitive.

      It directly, proportionally measures, as opposed to inversely measures, the thing we are looking for: stability, gain with the least pain, the biggest return-bang for the smallest risk-buck. It also directly measures the degree of foolishness we are exhibiting by believing it can be much much greater than 1 (or what the broad market action of portfolios, passive and active, tell us what is currently feasible).

      Thanks for your great articles. I guess I will always be looking in the rear view mirror when investing, but your work helps me turn around and look out the front.

      I used to be a deck officer in the merchant marine. When I was starting out, I can remember that on more than one occasion a captain would come up on the bridge and catch me with my head glued to the radar on a perfectly sunny, high visibility day. Then they would point to the window and shake their head at my ninnyness for not appreciating that radars, or any tools we create to measure things are all fine and good, but sometimes you need to look out the window at reality.

      If the ratio you describe is unclaimed you should name it: CDS, or Considine's Coefficient of Stability. It's basically just showing the Efficient Frontier, and they already gave out the Nobel Prize for that piece of work, but they name ships after people for far less, so lay claim. And it's a hell of lot more lucid and plainspeaking way to describe the Efficient Frontier than the way it is described in my CFP textbook.

      Hope you sell lots of QPP software. Maybe when I get my CFP and figure out how to use this HP10BII Business Calculator I'll be needing it.       Apr 25 07:20 PM
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