abnormalreturns March 29th, 2010
Sometimes it takes a good old fashioned spat to remind you what really matters. The Henry Blodget-Felix Salmon argument over the proper form (and function) financial journalism should take reminds us that there is a significant gap between what happens in the realm of financial journalism and its offshoot punditry and what happens in actual portfolios.*
Of more interest was a piece this weekend at Ultimi Barbarorum that takes a look this gap between financial journalism and actual market participants. (We recommend you read it in its entirety.) Baruch’s point being that the incentives for the media are very different from some one running money. Member of the media need to “look smart” no matter the market outcome. While noting the important role financial journalists play, Baruch notes:
But in the end journalists are explainers, commentators. They are dependent on market participants to provide them with things to write about. They review what others do. They work with the huge advantage of hindsight. And when it comes to giving advice about what what should be done, most media commentators are no better than the rest of us. Probably worse; they don’t get as much practice at it.
Even when market participants are in the media they have another handicap as well. As we have discussed before they are likely “talking their book.” That is they are discussing investments in which they already have some economic interest. This makes their advice should be taken with a grain of salt.
The bottom is that you and you alone are responsible for your investments. This includes any fiduciary you may hire to run your money as well. This point is noted again by Baruch at Ultimi Barbarorum where he writes:
Much more than philosophy, investing should be a solitary activity. A group of people or colleagues you can check your ideas with is a good thing, but you must take responsibility for your investments yourself. You will receive conflicting advice, all of which will sound plausible but most of which is wrong.
For most individual investors he thinks that the hurdles to investment competence are too high and recommends that most people would be better off with a paid professional to handle their investments. While not absolving of your responsibility to your portfolio it does have the beneficial side effect of freeing up some of your time to actually enjoy your life.
There is a broad range of information and commentary available in the econoblogosphere and mainstream media. It ranges from the vague and unhelpful all the way to specific trade advice. Some of it is informative and useful. Some of it is downright dangerous. The challenge for the investor is to take advantage of what is out there without being caught up in the noise and contradictory advice.
There is only so much we can control in our portfolios. The markets are in a certain sense going to do what they are going to do. What you can control is how you consume financial media and how you use it in managing your own portfolio. Because you, and you alone, are ultimately responsible for its performance.
*See also this piece by Damien Hoffman on whether long form financial journalism is dying over at Wall St. Cheat Sheet.
Sometimes it takes a good old fashioned spat to remind you what really matters. The Henry Blodget-Felix Salmon argument over the proper form (and function) financial journalism should take reminds us that there is a significant gap between what happens in the realm of financial journalism and its offshoot punditry and what happens in actual portfolios.*
Of more interest was a piece this weekend at Ultimi Barbarorum that takes a look this gap between financial journalism and actual market participants. (We recommend you read it in its entirety.) Baruch’s point being that the incentives for the media are very different from some one running money. Member of the media need to “look smart” no matter the market outcome. While noting the important role financial journalists play, Baruch notes:
But in the end journalists are explainers, commentators. They are dependent on market participants to provide them with things to write about. They review what others do. They work with the huge advantage of hindsight. And when it comes to giving advice about what what should be done, most media commentators are no better than the rest of us. Probably worse; they don’t get as much practice at it.
Even when market participants are in the media they have another handicap as well. As we have discussed before they are likely “talking their book.” That is they are discussing investments in which they already have some economic interest. This makes their advice should be taken with a grain of salt.
The bottom is that you and you alone are responsible for your investments. This includes any fiduciary you may hire to run your money as well. This point is noted again by Baruch at Ultimi Barbarorum where he writes:
Much more than philosophy, investing should be a solitary activity. A group of people or colleagues you can check your ideas with is a good thing, but you must take responsibility for your investments yourself. You will receive conflicting advice, all of which will sound plausible but most of which is wrong.
For most individual investors he thinks that the hurdles to investment competence are too high and recommends that most people would be better off with a paid professional to handle their investments. While not absolving of your responsibility to your portfolio it does have the beneficial side effect of freeing up some of your time to actually enjoy your life.
There is a broad range of information and commentary available in the econoblogosphere and mainstream media. It ranges from the vague and unhelpful all the way to specific trade advice. Some of it is informative and useful. Some of it is downright dangerous. The challenge for the investor is to take advantage of what is out there without being caught up in the noise and contradictory advice.
There is only so much we can control in our portfolios. The markets are in a certain sense going to do what they are going to do. What you can control is how you consume financial media and how you use it in managing your own portfolio. Because you, and you alone, are ultimately responsible for its performance.
*See also this piece by Damien Hoffman on whether long form financial journalism is dying over at Wall St. Cheat Sheet.
12/01: Virtual economics
This is an extract from an article on economics in virtual worlds. Even working through the logic is worthwhile.
Edward Castronova had hit bottom. Three years ago, the thirty-eight-year-old economist was, by his own account, an academic failure. He had chosen an unpopular field—welfare research—and published only a handful of papers that, as far as he could tell, “had never influenced anybody.” He’d scraped together a professorship at the Fullerton campus of California State University, a school that did not even grant Ph.D.s. He lived in a lunar, vacant suburb. He’d once dreamed of being a major economics thinker but now faced the grim sense that he might already have hit his plateau. “I’m a schmo at a state school,” he thought. And since his wife worked in another city, he was, on top of it all, lonely.
To fill his evenings, Castronova did what he’d always done: he played video games. In April 2001, he paid a $10 monthly fee to a multiplayer online game called EverQuest. More than 450,000 players worldwide log into EverQuest’s “virtual world.” They each pick a medieval character to play, such as a warrior or a blacksmith or a “healer,” then band together in errant quests to slay magical beasts; their avatars appear as tiny, inch-tall characters striding across a Tolkienesque land. Soon, Castronova was playing EverQuest several hours a night.
Then he noticed something curious: EverQuest had its own economy, a bustling trade in virtual goods. Players generate goods as they play, often by killing creatures for their treasure and trading it. The longer they play, the more powerful they get—but everyone starts the game at Level 1, barely strong enough to kill rats or bunnies and harvest their fur. Castronova would sell his fur to other characters who’d pay him with “platinum pieces,” the artificial currency inside the game. It was a tough slog, so he was always stunned by the opulence of the richest players. EverQuest had been launched in 1999, and some veteran players now owned entire castles filled with treasures from their quests.
Things got even more interesting when Castronova learned about the “player auctions.” EverQuest players would sometimes tire of the game, and decide to sell off their characters or virtual possessions at an online auction site such as eBay. When Castronova checked the auction sites, he saw that a Belt of the Great Turtle or a Robe of Primordial Waters might fetch $40; powerful characters would go for several hundred or more. And sometimes people would sell off 500,000-fold bags of platinum pieces for as much as $1,000.
As Castronova stared at the auction listings, he recognized with a shock what he was looking at. It was a form of currency trading. Each item had a value in virtual “platinum pieces”; when it was sold on eBay, someone was paying cold, hard American cash for it. That meant the platinum piece was worth something in real currency. EverQuest’s economy actually had real-world value.
He began calculating frantically. He gathered data on 616 auctions, observing how much each item sold for in US dollars. When he averaged the results, he was stunned to discover that the EverQuest platinum piece was worth about one cent US—higher than the Japanese yen or the Italian lira. With that information, he could figure out how fast the EverQuest economy was growing. Since players were killing monsters or skinning bunnies every day, they were, in effect, creating wealth. Crunching more numbers, Castronova found that the average player was generating 319 platinum pieces each hour he or she was in the game—the equivalent of $3.42 (US) per hour. “That’s higher than the minimum wage in most countries,” he marvelled.
Then he performed one final analysis: the Gross National Product of EverQuest, measured by how much wealth all the players together created in a single year inside the game. It turned out to be $2,266 per capita. By World Bank rankings, that made EverQuest richer than India, Bulgaria, or China, and nearly as wealthy as Russia.
It was the seventy-seventh richest country in the world. And it didn’t even exist.
Castronova sat back in his chair in his cramped home office, and the weird enormity of his findings dawned on him. Many economists define their careers by studying a country. He had discovered one.
Edward Castronova had hit bottom. Three years ago, the thirty-eight-year-old economist was, by his own account, an academic failure. He had chosen an unpopular field—welfare research—and published only a handful of papers that, as far as he could tell, “had never influenced anybody.” He’d scraped together a professorship at the Fullerton campus of California State University, a school that did not even grant Ph.D.s. He lived in a lunar, vacant suburb. He’d once dreamed of being a major economics thinker but now faced the grim sense that he might already have hit his plateau. “I’m a schmo at a state school,” he thought. And since his wife worked in another city, he was, on top of it all, lonely.
To fill his evenings, Castronova did what he’d always done: he played video games. In April 2001, he paid a $10 monthly fee to a multiplayer online game called EverQuest. More than 450,000 players worldwide log into EverQuest’s “virtual world.” They each pick a medieval character to play, such as a warrior or a blacksmith or a “healer,” then band together in errant quests to slay magical beasts; their avatars appear as tiny, inch-tall characters striding across a Tolkienesque land. Soon, Castronova was playing EverQuest several hours a night.
Then he noticed something curious: EverQuest had its own economy, a bustling trade in virtual goods. Players generate goods as they play, often by killing creatures for their treasure and trading it. The longer they play, the more powerful they get—but everyone starts the game at Level 1, barely strong enough to kill rats or bunnies and harvest their fur. Castronova would sell his fur to other characters who’d pay him with “platinum pieces,” the artificial currency inside the game. It was a tough slog, so he was always stunned by the opulence of the richest players. EverQuest had been launched in 1999, and some veteran players now owned entire castles filled with treasures from their quests.
Things got even more interesting when Castronova learned about the “player auctions.” EverQuest players would sometimes tire of the game, and decide to sell off their characters or virtual possessions at an online auction site such as eBay. When Castronova checked the auction sites, he saw that a Belt of the Great Turtle or a Robe of Primordial Waters might fetch $40; powerful characters would go for several hundred or more. And sometimes people would sell off 500,000-fold bags of platinum pieces for as much as $1,000.
As Castronova stared at the auction listings, he recognized with a shock what he was looking at. It was a form of currency trading. Each item had a value in virtual “platinum pieces”; when it was sold on eBay, someone was paying cold, hard American cash for it. That meant the platinum piece was worth something in real currency. EverQuest’s economy actually had real-world value.
He began calculating frantically. He gathered data on 616 auctions, observing how much each item sold for in US dollars. When he averaged the results, he was stunned to discover that the EverQuest platinum piece was worth about one cent US—higher than the Japanese yen or the Italian lira. With that information, he could figure out how fast the EverQuest economy was growing. Since players were killing monsters or skinning bunnies every day, they were, in effect, creating wealth. Crunching more numbers, Castronova found that the average player was generating 319 platinum pieces each hour he or she was in the game—the equivalent of $3.42 (US) per hour. “That’s higher than the minimum wage in most countries,” he marvelled.
Then he performed one final analysis: the Gross National Product of EverQuest, measured by how much wealth all the players together created in a single year inside the game. It turned out to be $2,266 per capita. By World Bank rankings, that made EverQuest richer than India, Bulgaria, or China, and nearly as wealthy as Russia.
It was the seventy-seventh richest country in the world. And it didn’t even exist.
Castronova sat back in his chair in his cramped home office, and the weird enormity of his findings dawned on him. Many economists define their careers by studying a country. He had discovered one.
22/11: Scenarios as a tool
Numbers are not all there is to financial analysis.... this McKinsey piece deals with scenario building as a tool.
Although it is surprisingly hard to create good ones, they help you ask the right questions and prepare for the unexpected. That is hugely valuable.
NOVEMBER 2009 • Charles Roxburgh
Scenarios are a powerful tool in the strategist’s armory. They are particularly useful in developing strategies to navigate the kinds of extreme events we have recently seen in the world economy. Scenarios enable the strategist to steer a course between the false certainty of a single forecast and the confused paralysis that often strike in troubled times. When well executed, scenarios boast a range of advantages—but they can also set traps for the unwary.
Although it is surprisingly hard to create good ones, they help you ask the right questions and prepare for the unexpected. That is hugely valuable.
NOVEMBER 2009 • Charles Roxburgh
Scenarios are a powerful tool in the strategist’s armory. They are particularly useful in developing strategies to navigate the kinds of extreme events we have recently seen in the world economy. Scenarios enable the strategist to steer a course between the false certainty of a single forecast and the confused paralysis that often strike in troubled times. When well executed, scenarios boast a range of advantages—but they can also set traps for the unwary.
The power of good sense Joe Grundfest brought to the SEC has long gone – unfortunately.
October 6, 2009, 11:30 am NYT Dealbook
Joseph A. Grundfest is the W.A. Franke professor of law and business and co-director of the Arthur and Toni Rembe Rock Center for Corporate Governance at Stanford Law School.
Public policy reflects the common wisdom. Legislation cannot pass the House of Representatives unless half the members support it. It takes a 60 percent supermajority to avoid a Senate filibuster. Can wisdom get more common than that?
October 6, 2009, 11:30 am NYT Dealbook
Joseph A. Grundfest is the W.A. Franke professor of law and business and co-director of the Arthur and Toni Rembe Rock Center for Corporate Governance at Stanford Law School.
Public policy reflects the common wisdom. Legislation cannot pass the House of Representatives unless half the members support it. It takes a 60 percent supermajority to avoid a Senate filibuster. Can wisdom get more common than that?
20/09: Peter Bernstein - RIP
Peter Bernstein, author of Capital Ideas: the Improbable Origins of Wall Street, Against the Gods: the Remarkable Story of Risk and editor of the Journal of Portfolio Management recently passed away. Mr Bernstein was a towering intellect, a grand researcher and summariser but most of all a brilliant communicator. I have long lost count of the ideas which were clarified for me by reading his work....
I have just received the obituaries written in the JOPM and I reproduce some from the "big names" - and his admirers were many and all "big". Their words are worth reading for all of us who are students of finance and investment.
I have just received the obituaries written in the JOPM and I reproduce some from the "big names" - and his admirers were many and all "big". Their words are worth reading for all of us who are students of finance and investment.
Alan Moran
Herald Sun 27th June, 2009
World share markets took another nosedive this week triggered by the World Bank's publication of downbeat growth forecasts.
For 2009, the World Bank sees US real income falling by 3 per cent, with Europe and Japan down by 4.5 per cent and 6.8 per cent respectively.
Many discussions of auto company economics include the assertion that SUVs and pickup trucks are more profitable than small cars, and so a shift from the former to the latter – as discussed by Felix Salmon, for example – will not be good for the auto companies, particularly GM and Chrysler (since they are in the news these days). I accept that as a historical statement, but I don’t understand why that is the case.
16/02: Advice....
This type of question has become increasingly common and always strikes me as odd in the sense that:
Given that private property right dependent trade at every level from the purchase of bread to international import and export is the defining trait of capitalism I see no sign of less trade or of people putting a stop to exchange for mutual benefit; and furthermore,
The question seems to suggest that this is all a matter of choice - one simply picks ones economic arrangement of choice from the selection thrown up by history and proceeds to "be" a capitalist or socialist.
It is, in short a non question.....
Nonetheless this article from the NZ Herald (23 Jan 2009) is more than food for thought as a description of present processes. Note in particular the warnings from PIMCO Chief El-Erian......
Given that private property right dependent trade at every level from the purchase of bread to international import and export is the defining trait of capitalism I see no sign of less trade or of people putting a stop to exchange for mutual benefit; and furthermore,
The question seems to suggest that this is all a matter of choice - one simply picks ones economic arrangement of choice from the selection thrown up by history and proceeds to "be" a capitalist or socialist.
It is, in short a non question.....
Nonetheless this article from the NZ Herald (23 Jan 2009) is more than food for thought as a description of present processes. Note in particular the warnings from PIMCO Chief El-Erian......
It is a relatively common assumption that margins in retailing are "fat". Here are the average retail pre tax margins for N.Z. over the last seven ( 7 ) years...
Notice too, that some "favourite "hates" - petrol retailing and liquor rank last - while the vanity industry and the subsidised and protected pharmaceutical industry ranks first.
Notice too, that some "favourite "hates" - petrol retailing and liquor rank last - while the vanity industry and the subsidised and protected pharmaceutical industry ranks first.
