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  1. Thursday, April 3rd, 2014
    chasing complexity

    Six years ago, the evidence was rapidly mounting that a new generation of structured products had given investors exposures that they didn’t understand, had given the management teams of the largest financial companies exposures that they didn’t understand, and had given central bankers exposures that they didn’t understand.

    Within a few months it all came crashing down.  Thankfully, we learned our lesson.  Didn’t we?

    That same year, 2008, Lawrence Kochard and Cathleen Rittereiser published Foundation & Endowment Investing.Wiley | The first part of the book is an overview of the institutional investment landscape.  The second is the story of individual chief investment officers and the strategies and stories of their organizations and investment lives.  At one point, the authors referenced The Paradox of Choice,the research puzzle | I wrote three postings on the book.  This links to the first of them. by Barry Schwartz, saying, “The complexity ... continues

  2. Tuesday, March 25th, 2014
    the reluctant portfolio manager

    The last posting reflected on the “business of herding” that is the investment world.the research puzzle | Not that you have to go with the herd, of course, but that it defines the environment.  Now it is time to personalize the issues.

    It has been longer than normal between dispatches, as I finalized my first ebook,Gumroad | You may purchase the book on this site.  Along with it, you receive a subscription to a quarterly newsletter that will be limited to purchasers of the book. prompted by the “letters to a young analyst” that first appeared on this blog.  In addition to the original letters, the ebook contains a new letter, an in-depth resources section for aspiring professionals, and advice and commentary from a number of notable contributors.

    One of those contributors, Aswath Damodaran, wrote:  “Markets are about money and money can twist human beings into pretzels.”  I liked the quote so much that I used it elsewhere in the book in ... continues

  3. Wednesday, February 12th, 2014
    a business of herding

    Last week, Noah Smith prompted a lot of discussion in the blogosphere with his posting, “Does trend-chasing explain financial markets?”Noahpinion | Smith is an assistant finance professor at Stony Brook University and writes for The Atlantic and other publications.  It was complete with a photo of bison charging at the viewer, visually emphasizing the instinctual reaction to join the crowd rather than to stand against it.

    Smith linked to a variety of academic studies about the nature of the stock market, focusing his narrative on two competing philosophies of investor behavior:  “extrapolative expectations” (chasing the trends) and “rational expectations,” the bedrock of most academic finance work.  (Presumably, the debate would be similar with other asset classes, but it always seems to be about stocks.)

    Among the questions prompted by the piece:  Is “trend-chasing by quasi-rational investors . . . the big force behind long-term stock ... continues

  4. Monday, January 27th, 2014
    testing ourselves

    I recently created an online investment “challenge.”CredSpark | The site on which the challenge is found is in beta, so any feedback would be appreciated.  The questions cover quite a range of topics, some of which can be answered simply on the basis of investment knowledge and some which require awareness of specific market and industry events of 2013.

    It’s hard.  As of this writing, the average number of correct answers (out of 24) is 15, three less than the “passing” bar that I set.  No one has gotten all of the answers right.  Furthermore, of a handful of seasoned investment professionals that voluntarily reported their scores to me, some barely passed and some failed.

    That’s not particularly surprising, in that most people in the industry are specialists, and it is a broad-based test.  In addition, some questions were hard for reasons that had nothing to do with investment expertise.

    Creating the challenge and evaluating the results have ... continues

  5. Monday, December 30th, 2013
    every seven years

    We are in the season of looking back and looking forward, prompted by the turning of a new year that reminds us of the relentless passage of time.

    In many ways, one year doesn’t tell us very much, although you will soon be reading lots of stories about the best asset classes and the best managers of 2013.  In isolation, that information will have little value and may prove to be counterproductive, but it will be hard to resist the pull of recent success.

    In the context of history and its patterns, the results might tell you more.  So, how many years do you need for the evidence to become meaningful?  There are statistical answers to that questionthe research puzzle | Which are often ignored, as this piece on the Sharpe ratio indicates. — or you can observe industry practices (including the apparently magical flip of a switch when a track record reaches three years) — but no precise answers are available.

    Of late, I have been thinking in seven-year periods.  You ... continues