The futility of active management - Investment News:
"From 1994 through 2008, the average large-cap mutual fund that was in existence for the full 15-year period (some 400 funds) posted an annualized return of 5.61%, compared with 6.46% for the S&P 500.
And because some people claim that active managers are more valuable under the circumstances of a bear market than when the markets are trending up, Standard & Poor's looked at the percentage of mutual funds that failed to outperform their benchmarks between 2004 and 2008 during the last bear market: 66.2% of all domestic funds, 71.9% of all large-cap funds, 79.1% of all mid-cap funds and 85.5% of all small-cap funds."
Monday, March 22, 2010
Thursday, February 25, 2010
Risky business | Penn State News | Business - Centre Daily Times
Risky business | Penn State News | Business - Centre Daily Times:
"The Nittany Lion Fund, a $4.5 million mutual fund managed by Penn State students and advised by finance professor J. Randall Woolridge, teaches students the importance of risk management, ethics and money management in a real-world environment.
Smeal Dean Jim Thomas said the college also plans to add a major in risk management. The addition will be submitted to the Faculty Senate for approval in the near future."
"The Nittany Lion Fund, a $4.5 million mutual fund managed by Penn State students and advised by finance professor J. Randall Woolridge, teaches students the importance of risk management, ethics and money management in a real-world environment.
Smeal Dean Jim Thomas said the college also plans to add a major in risk management. The addition will be submitted to the Faculty Senate for approval in the near future."
Saturday, December 26, 2009
The Intelligent Investor: Golden Pay for CEOs Could Be Bad for Stocks - WSJ.com
The Intelligent Investor: Golden Pay for CEOs Could Be Bad for Stocks - WSJ.com:
"The first study, led by corporate-governance expert Lucian Bebchuk of Harvard Law School, looked at more than 2,000 companies to see what share of the total compensation earned by the top five executives went to the CEO. The researchers call this number—which averages about 35%—the 'CEO pay slice.'
It turns out that the bigger the CEO's slice of the pie, the lower the company's future profitability and market valuation...."
"The first study, led by corporate-governance expert Lucian Bebchuk of Harvard Law School, looked at more than 2,000 companies to see what share of the total compensation earned by the top five executives went to the CEO. The researchers call this number—which averages about 35%—the 'CEO pay slice.'
It turns out that the bigger the CEO's slice of the pie, the lower the company's future profitability and market valuation...."
Wednesday, September 30, 2009
DNA-Based Investing Strategies - Barrons.com
DNA-Based Investing Strategies - Barrons.com: "Science can tell the difference between nature and nurture. Personal investing strategies are based on genes, brain patterns, and human experience. Columnist Jason Zweig goes to the University of Pittsburgh to uncover whether science can tell whether he is more guided by his nature, or by his life."
Wednesday, November 26, 2008
How Scientists Helped Cause Our Financial Crisis
Garbage in, Garbage out. Models are not reality. Models only help explain reality and therefore help our understanding of a reality that is generally too complex to fully grasp.
These ideas are taught in every stats, econometrics, and finance class worth its weight. On every test students use (indeed sometimes overuse) "data limitations", "it uses historical data", and "surprises (or black swans) can occur that would make our model incorrect" as problems with such and such model. And yet somehow, quantitative geniuses (or at least the traders and managers who relied on the models) seeming forgot (uh, looked the other way?) and ignored the problems.
So how did so many smart people seemingly forget? In part they were paid to forget (bonuses, promotions for big successes with little accounting for risks taken--for more of this see Taleb's "Fooled by Randomness".
Scientific America and ClusterStock look at this issue in How Scientists Helped Cause Our Financial Crisis
"In retrospect, the financial planning by our most sophisticated financial institution looks incredibly stupid. Merrill Lynch never included in its plans the risk that its counterparties could demand more collateral. Citigroup proceeded to dive headlong into the mortgage market on the assumption that a national housing decline was impossible. Everyone, it seems, failed to guard against the risk that they might be forced to sell assets to raise capital during a downturn. So it's worth asking: how did so many rich guys get so dumb?"
Scientific America quoted in the same piece:
"The causes of this fiasco are multifold—the Federal Reserve’s easy-money policy played a big role—but the rocket scientists and geeks also bear their share of the blame....The government bailout has already left the U.S. Treasury and Federal Reserve with extraordinary powers. The regulators must ensure that the many lessons of this debacle are not forgotten by the institutions that trade these securities. One important take-home message: capital safety nets (now restored) should never be slashed again, even if a crisis is not looming.
For its part, the quant community needs to undertake a search for better models—perhaps seeking help from behavioral economics, which studies irrationality of investors’ decision making, and from virtual market tools that use “intelligent agents” to mimic more faithfully the ups and downs of the activities of buyers and sellers....risk management models should serve only as aids not substitutes for the critical human factor. Like an airplane, financial models can never be allowed to fly solo."
Remember, models are representations of reality. Economic models, no matter how super, are no more reality than are super models are representations of the average Joe (or Jill or Jim or Jerry or Jane).
These ideas are taught in every stats, econometrics, and finance class worth its weight. On every test students use (indeed sometimes overuse) "data limitations", "it uses historical data", and "surprises (or black swans) can occur that would make our model incorrect" as problems with such and such model. And yet somehow, quantitative geniuses (or at least the traders and managers who relied on the models) seeming forgot (uh, looked the other way?) and ignored the problems.
So how did so many smart people seemingly forget? In part they were paid to forget (bonuses, promotions for big successes with little accounting for risks taken--for more of this see Taleb's "Fooled by Randomness".
Scientific America and ClusterStock look at this issue in How Scientists Helped Cause Our Financial Crisis
"In retrospect, the financial planning by our most sophisticated financial institution looks incredibly stupid. Merrill Lynch never included in its plans the risk that its counterparties could demand more collateral. Citigroup proceeded to dive headlong into the mortgage market on the assumption that a national housing decline was impossible. Everyone, it seems, failed to guard against the risk that they might be forced to sell assets to raise capital during a downturn. So it's worth asking: how did so many rich guys get so dumb?"
Scientific America quoted in the same piece:
"The causes of this fiasco are multifold—the Federal Reserve’s easy-money policy played a big role—but the rocket scientists and geeks also bear their share of the blame....The government bailout has already left the U.S. Treasury and Federal Reserve with extraordinary powers. The regulators must ensure that the many lessons of this debacle are not forgotten by the institutions that trade these securities. One important take-home message: capital safety nets (now restored) should never be slashed again, even if a crisis is not looming.
For its part, the quant community needs to undertake a search for better models—perhaps seeking help from behavioral economics, which studies irrationality of investors’ decision making, and from virtual market tools that use “intelligent agents” to mimic more faithfully the ups and downs of the activities of buyers and sellers....risk management models should serve only as aids not substitutes for the critical human factor. Like an airplane, financial models can never be allowed to fly solo."
Remember, models are representations of reality. Economic models, no matter how super, are no more reality than are super models are representations of the average Joe (or Jill or Jim or Jerry or Jane).
Friday, November 30, 2007
An Airline Shrugs at Oil Prices - New York Times
An Airline Shrugs at Oil Prices - New York Times:
"Southwest owns long-term contracts to buy most of its fuel through 2009 for what it would cost if oil were $51 a barrel. The value of those hedges soared as oil raced above $90 a barrel, and they are now worth more than $2 billion. Those gains will mostly be realized over the next two years. Other major airlines passed on buying all but the shortest-term insurance against high fuel prices..."
That other airlines were not hedging (or at least not hedging long-term) has been one of my pet peeves going back as far as the newsletter days. Sure it costs money to hedge, and sure is not without some risks (see for instance this story on what happened when oil prices fell), but hedging makes too much sense not to do.
How does hedging work? Why? The best explanation I have ever seen comes from an old Corporate text book I once used by Rao (do not think it is still in print and I can not find my copy). In it he described how hedging allows management to worry about what they do well and can control (service, pricing, safety etc) and not what they can not control (oil prices in this case).
An other view (the two views are definitely NOT mutually exclusive) is that hedgers have both better access to capital markets and less need to go when the asset (oil) moves in teh 'wrong' direction. My favorite paper in this area has long been Carter, Rogers, and Simkins.
Of course that said, all of the good I can say about hedging goes out the window if firms use the same derivatives to speculate.
Thanks to Felix over at Conde Nast's Porfolio.com for the heads-up on this one.
"Southwest owns long-term contracts to buy most of its fuel through 2009 for what it would cost if oil were $51 a barrel. The value of those hedges soared as oil raced above $90 a barrel, and they are now worth more than $2 billion. Those gains will mostly be realized over the next two years. Other major airlines passed on buying all but the shortest-term insurance against high fuel prices..."
That other airlines were not hedging (or at least not hedging long-term) has been one of my pet peeves going back as far as the newsletter days. Sure it costs money to hedge, and sure is not without some risks (see for instance this story on what happened when oil prices fell), but hedging makes too much sense not to do.
How does hedging work? Why? The best explanation I have ever seen comes from an old Corporate text book I once used by Rao (do not think it is still in print and I can not find my copy). In it he described how hedging allows management to worry about what they do well and can control (service, pricing, safety etc) and not what they can not control (oil prices in this case).
An other view (the two views are definitely NOT mutually exclusive) is that hedgers have both better access to capital markets and less need to go when the asset (oil) moves in teh 'wrong' direction. My favorite paper in this area has long been Carter, Rogers, and Simkins.
Of course that said, all of the good I can say about hedging goes out the window if firms use the same derivatives to speculate.
Thanks to Felix over at Conde Nast's Porfolio.com for the heads-up on this one.
An Airline Shrugs at Oil Prices - New York Times
An Airline Shrugs at Oil Prices - New York Times:
"Southwest owns long-term contracts to buy most of its fuel through 2009 for what it would cost if oil were $51 a barrel. The value of those hedges soared as oil raced above $90 a barrel, and they are now worth more than $2 billion. Those gains will mostly be realized over the next two years. Other major airlines passed on buying all but the shortest-term insurance against high fuel prices..."
That other airlines were not hedging (or at least not hedging long-term) has been one of my pet peeves going back as far as the newsletter days. Sure it costs money to hedge, and sure is not without some risks (see for instance this story on what happened when oil prices fell), but hedging makes too much sense not to do.
How does hedging work? Why? The best explanation I have ever seen comes from an old Corporate text book I once used by Rao (do not think it is still in print and I can not find my copy). In it he described how hedging allows management to worry about what they do well and can control (service, pricing, safety etc) and not what they can not control (oil prices in this case).
An other view (the two views are definitely NOT mutually exclusive) is that hedgers have both better access to capital markets and less need to go when the asset (oil) moves in teh 'wrong' direction. My favorite paper in this area has long been Carter, Rogers, and Simkins.
Of course that said, all of the good I can say about hedging goes out the window if firms use the same derivatives to speculate.
Thanks to Felix over at Conde Nast's Porfolio.com for the heads-up on this one.
"Southwest owns long-term contracts to buy most of its fuel through 2009 for what it would cost if oil were $51 a barrel. The value of those hedges soared as oil raced above $90 a barrel, and they are now worth more than $2 billion. Those gains will mostly be realized over the next two years. Other major airlines passed on buying all but the shortest-term insurance against high fuel prices..."
That other airlines were not hedging (or at least not hedging long-term) has been one of my pet peeves going back as far as the newsletter days. Sure it costs money to hedge, and sure is not without some risks (see for instance this story on what happened when oil prices fell), but hedging makes too much sense not to do.
How does hedging work? Why? The best explanation I have ever seen comes from an old Corporate text book I once used by Rao (do not think it is still in print and I can not find my copy). In it he described how hedging allows management to worry about what they do well and can control (service, pricing, safety etc) and not what they can not control (oil prices in this case).
An other view (the two views are definitely NOT mutually exclusive) is that hedgers have both better access to capital markets and less need to go when the asset (oil) moves in teh 'wrong' direction. My favorite paper in this area has long been Carter, Rogers, and Simkins.
Of course that said, all of the good I can say about hedging goes out the window if firms use the same derivatives to speculate.
Thanks to Felix over at Conde Nast's Porfolio.com for the heads-up on this one.
Subscribe to:
Posts (Atom)