Tag: Investment

Quarterly Chartbook for the U.S. Economy

Interest rates and stock pricesInvestment analyst and former Lawrence professor Jeff Miller provides a weekly column entitled Weighing the Week Ahead  that employs many charts and offers an array of insights related to both the state of the U.S. economy and investment opportunities.  This week’s version provides a link to a quarterly chartbook assembled by JP Morgan that will give even the most numerate among us plenty of food for thought. One chart of particular interest to investors suggests that when 10 year U.S. Treasuries offer relatively low interest rates (e.g., below 5%), increases in their yield are correlated with increased stock returns.

 

Money in the Market

There has been a recent spate of students asking me for advice on how to “invest” their extra money.   My initial reaction has generally been “in a better hair cut,” but it is probably also useful to tell them how economists think about what’s going on in the equities and securities markets.

So, in that spirit, here are a couple of introductory readings that I would recommend, all available in The Mudd or free online:

Steven Landsburg, “Random Walks and Stock Market Prices: A Primer for Investors,” in The Armchair Economist (initial publication in 1993, updated “for the 21st century” in 2012).

Burton Malkiel, A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing (most recent edition in 2007).

Burton Malkiel, “The Efficient Market Hypothesis and Its Critics,” Journal of Economic Perspectives, 17(1):59-82

Robert J. Shiller “From Efficient Markets Theory to Behavioral Finance,” Journal of Economic Perspectives, 17(1): 83–104.

Again, these are simply very good accounts of how mainstream economists view the financial world, so this is not an endorsement of any particular investment strategy and shouldn’t be taken as investment advice.

Unless it works, in which case by all means I’m happy to take credit.

Our Macroeconomic Future: A Chaos Theory for Investors.

Neel Kashkari, managing director and head of global equities for PIMCO, has recently posited an array of possible scenarios for America and Europe and employs a simplified version of chaos theory to sort through the results. Kashkari was Secretary of Treasury Hank Paulson’s assistant; he worked directly with implementing the Troubled Asset Relief Program (TARP.)  He plays a significant role in Andrew Ross Sorkin’s book Too Big to Fail.  The movie, starring William Hurt, does a nice job reflecting the book.

Western economies (mostly governments and households) have loaded themselves with debt that under most scenarios is not sustainable. Kashkari indicates the following five options policy makers have as well as the potential consequences for investors. Check out his analysis.
1. Austerity and deflation
2. Explicit default
3. Mild inflation
4. Runaway inflation
5. Miraculous growth

Which scenario do you think is most plausible? Least plausible? Do your answers differ for the U.S., Europe, and Japan? Why or why not?

Some Non-Random Investment Advice

So, the Dow is down 635 Monday, then up 430 Tuesday, then down 520 again Wednesday?  What’s a member of the investor class to do?  Should I go bargain hunting and drop my kids’ college funds into Sears stock?  Is it time to buy gold? Or should I get out of the market all together and just park my cash in a bank somewhere?  (Are banks really charging to hold money now?)

Burton Malkiel, author of the extraordinarily influential A Random Walk Down Wall Street, advises you to take a deep breath and let it ride. Here he is in the Wall Street Journal:

My advice for investors is to stay the course. No one has ever become rich by being a long-term bear on the fortunes of the United States, and I doubt that anyone will do so in the future. This is still the most flexible and innovative economy in the world. Indeed, it is in times like this that investors should consider rebalancing their portfolios.  If increases in bond prices and declines in equities have produced an asset allocation that is heavier in fixed income than is appropriate, given your time horizon and tolerance for risk, then sell some bonds and buy stocks. Years from now you will be glad you did.

This is hardly a surprising message coming from Malkiel, who tirelessly points out that index funds routinely outperform professionally managed portfolios.  Indeed, I would say that the median economist believes this to be true. If you haven’t read him yet, you should think about picking up a copy of his book and getting to know it a little bit.

For more on the epic market volatility, check out the always-awesome Political Calculations blog.

Real markets, really interesting panel

On the heels of a fascinating Chicago trip, we have the Investments Summit coming to Lawrence on Saturday, 4:00—6:00, in the Hurvis room. Click the poster for more details. Our panelists bring a variety of backgrounds and experiences:

Charles Saunders ’84, Partner and Senior Portfolio Manager, NorthRoad Capital Management; Dean DuMonthier ’88, Portfolio Manager, Copia Capital; Guy Scott ’88, Co-Portfolio Manager and Executive Vice President, Janus International Equity Fund; Hugh Denison ’68, Portfolio Manager, Heartland Advisors; Markus Specks ’06, Hedge Fund Analyst, Varde Partners, Inc.

In addition to some of the basics of the investment trade, there will be a special focus on high energy prices. How do rising energy prices affect portfolio construction? Which companies suffer or benefit from rising energy prices? This is a great opportunity to learn about issues that are of great interest today, from the perspectives of people who are participating in the markets and who see the most recent developments up-close. See you there!

Investment Advice from a Pro

Hoard nickels.

US five cent coins contain over 7 cents worth of raw material as of this afternoon, mostly copper and of course, nickel. If there is inflation, the prices of metal will increase, and the coin will have 8, 9, 10 cents worth of metal. Pre-1965 dimes contain over $2.42 of metal today, while pre-1965 quarters have over $6 worth of metal.

There is an old saying, “Don’t take any wooden nickels,” which seems ridiculous on the face of it, because why would a “nickel” be made of wood?

Perhaps that was the point.

First LSB event of the year!

The LSB season opens this year with the Alternative Investments and hedge funds event, this coming Sunday. Bob Perille himself is leading this one, and it’s promising to live up to the high standards we have come to expect from him and his colleagues. This year’s event will be different from last year’s, however, so come even if you attended last year. Jason Spaeth is skype-ing in, participating as an LSB panelist for the first time, and he is going to be introducing the industry. Another good reason to come is the actual, real-life, taken-from-the-trenches (or tranches?) offering memoranda that Mr. Perille always brings. You get to work on those in teams, and, in the past, Mr. Perille has offered a prize of $100 for the team with the best presentation on their “mini case study.” So don’t miss your chance to learn something interesting about the world you live in–whether you want to become a private equity whiz or not.

Is it Time for Efficient Markets?

Estrada in a Nutshell

The Wall Street Journal has a piece on whether it is possible to time the market, or whether one should stay in to make sure they are in when the big, tasty gains come along.  The story goes that investors should stay in the market because the lion’s share of gains accrue on only a few days.  If you missed the ten best days over the past 40 years, for instance, you would miss out on half the total gains during that period (yes, you read that correctly).  With that in mind, you’d better be sure to have your stakes on the table when they spin the wheel.

But, there’s a catch.  What if you managed to be out of the market on the ten worst days?  Well, it turns out that missing the ten worst days would have been even better for your portfolio than being in on the ten best days.  Yowza!

This is pretty interesting and all, but the real reason I bring it up is that the hero of the WSJ piece is my graduate school colleague, Javier Estrada.   Professor Estrada is the head of the Department of Financial Management at the International School of Management at  la Universidad de Navarra (that’s in Pamplona, Spain), a widely published scholar in investment and finance, and the author of a couple of popular finance books. Anyone that finds themselves in Spain should stop in and see him, as he is a genuinely friendly and engaging character.  And I never knew he was so well read.

James Dana Memorial Investment Challenge

The James Dana Memorial Investment Challenge has arrived, and it appears to be an excellent opportuntiy for those so inclined.  The details are below, and you have any questions, contact Syed Abbas (syed.k.abbas AT lawrence.edu) for the answers.

Our thanks to Larry Domash, the Lawrence University Investment Group, and Syed for making this happen.

JAMES DANA MEMORIAL INVESTMENT CHALLENGE FOR UNDERCLASSMEN

Larry Domash’81, in collaboration with the Lawrence University Investment Group, is organizing an investment idea competition for underclassmen. Each participant will choose a marketable investment (defined by avaialable market price on a daily basis)  which they believe either long or (shor)t has the highest potential return over the next 12 months. Participants will be responsible for completing a write up on the the investment and identifying the daily pricing source by December 20, 2010.  Additionally, each particpant wil provide a brief written update  as to how the investment is performing and what factors have changed every 2 weeks from January 15 – December 30 2011, this includes when Lawrence is not in session. There here will be 2 winners – the first prize ($2,500.00) will go to the participant which provides the most accurate and articulate bi – weekly update. The second prize ($2,500) will go to the top return over the 12 months ending December 31, 2011.

An information session will be held on October 20th 2010 from 7-8 in the economics “lab,” Briggs 223.

Is BP on the Big Bounce?

When last we visited BP on June 3rd, it’s stock was down from $62 to$36 and appeared to be heading further south.  Indeed, by the end of the month it had bottomed out at $27.05 and it was dark days both on the water and in the markets (unless you had shorted it, of course).

Well, six weeks later and things are looking up.  The stock has risen back to $38, and even peeked its head about $40 recently.  And, there are more and more stories, especially on the financial pages, that the magnitude of the environmental damages simply aren’t going to be as grotesque as anticipated.  (Of course, this is not a consensus opinion).

So where does that leave the company’s fortunes?  There are still momentous uncertainties about the environmental damages and liabilities, which could add to the stock’s volatility.  But on the other hand, if the worst-case scenarios were internalized in the price, and those scenarios haven’t materialized,… this is why I buy index funds.

UPDATE: Evidently, the Financial Times is thinking about this, too.

Review of Invention of Enterprise

GerardoA few weeks ago, despite its substantial girth, I added the new Kaufmann Foundation volume, Invention of Enterprise: Entrepreneurship from Ancient Mesopotamia to Modern Times to the black hole that is my reading list.  The reason for my excitement was the extra-ordinary group of volume editors.  David Landes is a pioneer in entrepreneurship and development, having written the highly-regarded The Wealth and Poverty of Nations. Joel Moykr is the author of a classic in the economic history of technology, The Lever of Riches. And William Baumol has written the seminal article on productive and unproductive entrepreneurship, as well as The Free Market Innovation Machine. Those of you embroiled in our burgeoning I&E curriculum will certainly hear from these gentlemen.

So, with these three pulling together a volume on entrepreneurship for the Kaufmann Foundation, this seemed like a can’t-miss deal.

But, according to Reuven Brenner, it missed.

It doesn’t take much time for him to find fault, either.  He starts out:

Carl Schramm, who wrote the Foreword to this book, and who, through the Kauffman Foundation, paid for it, states clearly that the book is about “entrepreneurship” as people — entrepreneurs in particular — understand the term: Someone who creates a business that, in some respects, differs from existing ones.

Yet, just two pages later, William Baumol writes in his Preface that the book is about both “redistributive” and “productive” entrepreneurship, the former covering warfare, crime, bribes, lobbying — any innovative ideas. Since this covers just about everything from Napoleon and his Code to Robin Hood, and from Muhammad, the merchant and one of the very few of Heavens’ intermediaries on this Earth to 35,000 registered lobbyists in Washington — it is little wonder that most of the 18 chapters, written by 18 different academics are all over the map, and provide little illumination on Schramm’s targeted subject matter.

Continue reading Review of Invention of Enterprise

EconTalk of the Town

Several blogs that I read have pointed to Russ Roberts’ new essay on the financial crisis, Gambling with Other People’s Money.   This from the Executive Summary:

I argue that public-policy decisions have perverted the incentives that naturally create stability in financial markets and the market for housing. Over the last three decades, government policy has coddled creditors, reducing the risk they face from financing bad investments. Not surprisingly, this encouraged risky investments financed by borrowed money. The increasing use of debt mixed with housing policy, monetary policy, and tax policy crippled the housing market and the financial sector. Wall Street is not blameless in this debacle. It lobbied for the policy decisions that created the mess.

In the United States we like to believe we are a capitalist society based on individual responsibility. But we are what we do. Not what we say we are. Not what we wish to be. But what we do. And what we do in the United States is make it easy to gamble with other people’s money—particularly borrowed money—by making sure that almost everybody who makes bad loans gets his money back anyway. The financial crisis of 2008 was a natural result of these perverse incentives. We must return to the natural incentives of profit and loss if we want to prevent future crises.

Roberts, of course, is the voice of EconTalk, a principal at Cafe Hayek, and one of the brains behind the Keynes v. Hayek video.  So, my guess is that this will have some elements of a “government failure” story.

Reminder: LSB Investments Summit Today

There is no bigger LSB supporter than trustee Bob Perille ‘80, who is spearheading today’s LSB investments summit.   Mr. Perille is the managing director at Shamrock Capital and a very sharp cat, indeed.   That should be reason enough to come out today.

But, of course, there’s more.   Mr. Perille will be joined by Alan Allweiss ‘77, Dan Howell ‘74, and Bryan Torcivia ’81.   That’s a lot of talent in one room.

The Summit starts at 3:30 over in the Hurvis room.

Here is Prof. Galambos’ original post on the matter.