There seems to be consensus that conventional economic models did a poor job predicting the magnitude of the last crisis and that we need to do better. In today's Wall Street Journal, we see the beginnings of one response:http://online.wsj.com/article/SB10001424052702303891804575576523458637864.html?mod=WSJ_economy_LeftTopHighlightsIn short, a physicist, a psychoanalyst and an economist believe that they can build a bigger model that captures the complexities of the real world and does a better job of forecasting the future. Good luck with that! While I wish them well, my response is that this...
The insider trading scandal: Thoughts about the hedge fund business
As many of you are aware, the last week has been filled with news stories about imminent arrests in an insider trading scandal that supposedly entangles multiple hedge funds and bankers at a couple of large investment banks. I am being leery about naming names, even though they are now in the public domain, since these selective leaks can be devastating not only to the individuals named but also to the entities that they represent. While some may feel that "they" deserve this, I think we still live in a country where you are innocent until proven guilty.So, I am going to use this story to...
How do you evaluate risk taking?
The GM IPO is the news of the week. The fact that GM has been able to go public and that the government may not only get its money back on its investment but may even make a profit has led to some celebration in the White House:http://www.whitehouse.gov/photos-and-video/video/2010/11/18/president-obama-gm-ipoI don't begrudge the White House its victory dance that the GM bet looks like it has paid off, but it is an auspicious moment to examine how we judge risk taking, in general. As I see it, risk taking can be judged on four dimensions.1. Outcome: The nature of risk taking is that you win some...
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Amateur Athletics
This post spans two topics I love - finance and sports- and what triggered it was the hullabaloo over Cam Newton, Auburn's quarterback, and the purported attempts by his father to extract money from Auburn. The National Collegiate Athletic Association (NCAA) will be the ultimate arbiter on whether rules were broken and the penalties that will follow, but this entire debate about college sports strikes me as hypocrisy of the highest order.Let us start with basic facts. College sports in the United States is big business and big money, generating hundreds of millions of dollars in revenues for the...
The secret to investment success: Self Awareness?
I know that there are many who claim to have found the secret ingredient to investment success, though few actually deliver. However, I want to present an unconventional ingredient that I think most academics and practitioners miss when they talk about investment strategies: your personal make-up as an individual.In one of my books, Investment Philosophies, I start with a puzzle. There are many different investment philosophies out there and they range the spectrum both in the tools they use (charts for some, fundamental analysis for others..) and their views on markets (markets learn too slowly,...
QE2 or the Titanic?
The big news of the moment (other than the election) is the Fed's decision to inject $ 600 billion into the economy, as a monetary stimulus to get the US out of a recession. Here is Bernanke's rationale:http://www.washingtonpost.com/wp-dyn/content/article/2010/11/03/AR2010110307372.html Will it work? For a monetary stimulus to actually stimulate the economy, it has to change how consumers behave. Since consumers do not get any of the cash directly, the only instrument that the Fed can hope to affect is interest rates. In theory, the monetary stimulus will push down interest rates and thus unleash...
