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Article Archive: 2011

A year without fear
12/31/11   Fun
"My danger-avoidance lifestyle worked, and I enjoyed a long string of injury-free years. But I always had a nagging feeling that I was missing out. How can you know if the chance you didn't take was the one that would have enriched your life versus, for example, something that would have ended up with you chewing your own arm off to escape? Enrichment and arm-gnawing look roughly the same when viewed from the start."

Value stock scarcity
12/31/11   Stingy Investing
"Over the past several decades, the value breakpoint has averaged 0.72 - stocks that have a P/B below 0.72 have fallen into the value group those with a P/B above this level have not. As it happens, that's quite close to an old value investing rule of thumb that suggests investors buy stocks only when they trade below 66 per cent of their book value. Unfortunately, there aren't many stocks that pass such a stringent test this year. Indeed, the value breakpoint now sits at a P/B of 1. That's not the highest it's been in recent times but it is well above average, which suggests that value investors should be cautious."

A market that even a skeptic can like
12/31/11   Value Investing
"One of Canada's pickiest and most careful money managers has been on a buying spree lately. Early in July, Vito Maida had the maximum 25-per-cent cash he's permitted to hold in running the Horizons North American Value ETF. Today, while many individual investors are paralyzed with indecision about where to put their money, he's fully invested. 'I would say that this is the first time in a long time that we've been able to construct a portfolio of high-quality companies at very attractive valuations,' Mr. Maida said. Translation for non-hardcore investors: There are some good companies available right now at attractively low prices."

Third Avenue's Q4 2011 letter
12/29/11   Whitman
"In the main body of this letter I discuss, after re-reading Graham and Dodd's writings on Value Investing, how the various Third Avenue Fund managers are followers of Graham and Dodd, and how these managers are different. Before doing that, there is one macro point in which I believe strongly, and of which you should be aware. There is no way that I can see that those countries involved with the Euro can be made credit-worthy unless all European Sovereign Debt is assumed, or guaranteed, by each member country including, especially, Germany. Such an amalgamation would make Euro Sovereign Debt more comparable to U.S. Treasuries than is now the case. I do not know how the forthcoming European upheavals will work out. But cash rich economies with a plethora of investable funds ought to do okay, provided they are opportunistic. It is comforting to know that so much of Third Avenue Management's common stock investments are in companies operating in Hong Kong, mainland China, South Korea, Canada, Brazil, Australia and Sweden."

When reinforcement fails
12/29/11   Behaviour
"In many situations, such reinforcement learning is an essential strategy, allowing people to optimize behavior to fit a constantly changing situation. However, the Israeli scientists discovered that it was a terrible approach in basketball, as learning and performance are "anticorrelated." In other words, players who have just made a three-point shot are much more likely to take another one, but much less likely to make it"

How to make a fortune after 50
12/29/11   Management
"At an age when others might ready for pre-retirement, some folks pass age 50 determined to start a new life in the business world - and succeed beyond their rosiest business plan projections."

Cutting buffett helps sequoia fund
12/29/11   Value Investing
"Ruane ran an unconventional fund, closing Sequoia to new investors in 1982 because he didn't want its size to limit what the fund could buy. It opened again in 2008, three years after Ruane's death. Ruane also held a concentrated portfolio. In 2003, Sequoia had 75 percent of its money in its top six holdings, according to a regulatory filing."

106-year-old stockbroker talks shop
12/26/11   Value Investing
"Irving Kahn has been following the swings of the market since before the Great Depression...and he still does."

A Christmas Carol
12/24/11   Christmas
"Marley was dead: to begin with. There is no doubt whatever about that. The register of his burial was signed by the clergyman, the clerk, the undertaker, and the chief mourner. Scrooge signed it: and Scrooge's name was good upon 'Change, for anything he chose to put his hand to. Old Marley was as dead as a door-nail. Mind! I don't mean to say that I know, of my own knowledge, what there is particularly dead about a door-nail. I might have been inclined, myself, to regard a coffin-nail as the deadest piece of ironmongery in the trade. But the wisdom of our ancestors is in the simile and my unhallowed hands shall not disturb it, or the Country's done for. You will therefore permit me to repeat, emphatically, that Marley was as dead as a door-nail."

What I Like About Scrooge
12/23/11   Christmas
"In this whole world, there is nobody more generous than the miser - the man who could deplete the world's resources but chooses not to. The only difference between miserliness and philanthropy is that the philanthropist serves a favored few while the miser spreads his largess far and wide."

Thoughts on Ebenezer Scrooge
12/23/11   Christmas
"The story goes that Charles Dickens was visiting Edinburgh to give a public reading of his work in 1842, and spent some time looking around the Canongate church graveyard. He saw one grave that made him shudder. The name on the grave was Ebenezer Lennox Scroggie--mean man.' According to Peter Clark, a British political economist who seems the starting point for this story, Dickens misread the inscription. It actually said 'Meal man,' because Scroggie was a corn merchant."

Escaping the well-lit prison
12/23/11   Christmas
"The focus on gifts is something we're all supposed to feel vaguely guilty about, according to certain grim people with very strong views about the Evils of our Commercialized, Materialist Society. In lieu of presents these people give things like certified carbon offsets and donations in your name to International A.N.S.W.E.R. Their kids get seaweed gummy kits and "Peace in Our Time" cooperative board games from the Catalog of Socially Responsible Gifts, and exact revenge by growing up to become arbitrageurs. On the other end of the spectrum are the market ideologues. These are the folks who write earnest monographs on how everybody has the wrong idea about Ebeneezer Scrooge, who was really a thrifty capitalist hero. Their idea of a neat Christmas present is something like a "Who Is John Galt?" doormat - except there isn't one, because John Galt was nobody's doormat, dammit, so instead you get a book on Basel bank-capital requirements and a bookmark in the shape of Ludwig von Mises. Which is not to say that either group is wrong, mind you - merely that, like the madman in Chesterton's "Orthodoxy," they are "trapped in the well-lit prison of one idea...sharpened to one painful point." You want to say to them, look: If British and German soldiers could sing carols together at Ypres in WWI, then the rest of us are entitled to give politics a break for one lousy day. Here, have some peppermint bark."

Smoke Screening
12/23/11   Government
"As you stand in endless lines this holiday season, here's a comforting thought: all those security measures accomplish nothing, at enormous cost. That's the conclusion of Charles C. Mann, who put the T.S.A. to the test with the help of one of America's top security experts."

In Defense of Scrooge
12/22/11   Christmas
"It's Christmas again, time to celebrate the transformation of Ebenezer Scrooge. You know the ritual: boo the curmudgeon initially encountered in Charles Dickens's A Christmas Carol, then cheer the sweetie pie he becomes in the end. It's too bad no one notices that the curmudgeon had a point - quite a few points, in fact."

Stories make me nervous
12/22/11   Behaviour
"I was told to come here and tell you all stories, but what I'd like to do is instead tell you why I'm suspicious of stories, why stories make me nervous. In fact, the more inspired a story makes me feel, very often the more nervous I get. So the best stories are often the trickiest ones."

More 2011 charts
12/21/11   Economy
"What is it about graphs and economics? In a discipline where facts are murky and certainty is elusive, graphs offer a bright light of information and a small confidence that the world can be summed up between two axes."

Do not buy dad a tie
12/21/11   Christmas
"Christmas is not the most wonderful time of the year for economists. The holiday spirit is puzzlingly difficult to model: It plays havoc with the notion of rational utility-maximization. There's so much waste! Price-insensitive travelers pack airports beyond capacity on Dec. 24 only to leave planes empty on Christmas Day. Even worse are the gifts, which represent an abandonment of our efficient system of monetary exchange in favor of a semi-barbaric form of bartering. Still, even the most rational and Scroogey of economists must concede that gift-giving is clearly here to stay. What's needed is a bit of advice: What can economics tell us about efficient gifting so that your loved ones get the most bang for your buck?"

2011 in charts
12/21/11   Economy
"We asked economists, economic policymakers and investors for their favorite charts of 2011. Here's what they gave us."

Wodehouse's lead pipe
12/19/11   World
"Recent real side indicators and financial market movements indicate a striking dichotomy between improving economic indicators here at home and signs that financial markets and economies continue to sour on the other side of the Atlantic. Thus, just as we had come to see the light of an evolving domestic recovery, one senses Europe, and possibly the emerging economies, sneaking up behind us, Wodehousean-pipe in hand, poised to knock us off course."

The truth about wealth
12/19/11   Thrift
"A study by Jonathan A. Parker and Annette Vissing-Jorgensen of Northwestern University found that the beta of the top 1% nearly quadrupled between 1982 and 2007 to 2.39. The top 0.01% had a beta of 3.96, making even the riskiest tech stocks look safe by comparison. Economists and wealth managers say the betas of the rich have likely soared even higher in recent months as markets gyrated sharply."

China local debts dwarf official data
12/19/11   World
""The real problem is the real estate market cannot fall, the price can't go down," he said. "If the property market really falls, the local government financing vehicle problems will really come out. Not only will they have problems, but the banks will have problems." There are signs the market is already declining, with residential property prices falling in November from the previous month in 49 cities of the 70 measured, the worst performance this year. The cities of Guangzhou in the south and Wuhan in central China canceled land sales in the last three months. Tianjin, which isn't among the cities piloting municipal bonds, was reliant on land sales for 41 percent of its income in 2009, according to China Index Academy, a Beijing real-estate research firm. That doesn't bother Xu Hongzhi, the chief accountant for Tianjin Binhai Construction, which is building Yujiapu's transport hub. He said that the company can pay its debts because the area's economy is growing at 10 percent a year. "There is no risk," he said."

Chavez rolls back seizures
12/17/11   World
"Venezuela's President Hugo Chavez is enlisting Mexico's Gruma SAB, French retailer Casino and other international companies to boost supplies of milk, corn flour and cement as shortages threaten to dent his bid for re-election in 2012."

It's all in the index you choose
12/17/11   Stingy Investing
"Canadian and U.S. stock markets get equal treatment on the evening news but it's easy to forget just how different they really are. Investors, though, have had the distinction pressed upon them this year, as the S&P/TSX 60 has slid 14.5 per cent, while the Dow Jones industrial average (DJIA) has risen 6.8 per cent in Canadian dollar terms. To see what's going on, you have to look under the hood. Once you do, the gaps between the two indexes loom large."

Art donation scheme raises questions
12/17/11   Taxes
"The biggest and longest-running financial fiascos in Canada have been 'donate low, deduct high' charitable donation tax-credit schemes. These schemes are all variations on the same theme: The donor purchases something for 'x' dollars and then donates it for 'x plus y' dollars, generating a tax credit that exceeds the original out-of-pocket costs. One of the most outrageous was the art-donation scheme. The participant would, for example, buy a piece of art for $10,000, get it appraised for $30,000, and then donate it to a university or hospital. The donor would receive a tax credit equal to 43.7 per cent of the appraised value, or $13,110, which was $3,110 more than his original cost. Problem is, Canada Revenue Agency has consistently rejected such schemes. To date, it has disallowed a stunning $4.5 billion in donations claimed by more than 130,000 Canadian taxpayers on account of these dodgy deals."

Mutual fund critics missing the big picture
12/17/11   Hallett
"Every time markets bleed red, mutual fund investors and the media become much more price-sensitive. So it's no surprise that print media have featured a barrage of anti-fee articles. Interestingly, Canada's two national papers have united in a recent Investors Group bash-fest. I agree with the broad message, which is to keep an eye on fees. Since fees are pretty transparent and easy to understand, they get most of the attention when trying to explain poor investor performance. But the media and the industry would do investors more good by identifying and trying to remove the handful of barriers to satisfying long-term performance."

Advice and Investor Portfolio Performance
12/17/11   Academia
"This paper investigates whether financial advisers add value to individual investors' portfolio decisions by comparing portfolios of advised and self-directed (execution-only) Dutch individual investors. The results indicate significant differences in characteristics and portfolios between these investor groups, but no evidence of differences in risk-adjusted performance. The findings indicate that portfolios of advised investors are better diversified and carry significantly less idiosyncratic risk. In addition, evidence from an analysis of investors who switch to advice taking indicates that these findings (at least in part) reflect the effect of advisory intervention."

Curbing short sales
12/16/11   Markets
"The New York Fed did a quick study this fall after markets plunged in August when Standard and Poor's decided to downgrade the credit of the United States government. That study, by Hamid Mehran, a Fed economist, and two finance professors from Notre Dame, Robert Battalio and Paul Schultz, also looked at the impact of the 2008 bans on short sales of financial stocks, which were imposed in many countries at the height of the financial crisis. They concluded that there was no evidence that stocks then being sold by short-sellers did worse in August than did shares of other companies, and in fact a little evidence that they did better. That would seem to indicate that short-selling did not play a major role in the market turmoil."

Growth in the age of deleveraging
12/15/11   Debt
"Accumulating the mountain of debt now weighing on advanced economies has been the work of a generation. Across G-7 countries, total non-financial debt has doubled since 1980 to 300 per cent of GDP. Global public debt to global GDP is almost at 80 per cent, equivalent to levels that have historically been associated with widespread sovereign defaults."

Peak credit
12/15/11   Debt
"We've heard about "peak oil." We've heard about other resources, and how production will decline over time. But what of credit?"

Bill Miller had a great run. But did his investors?
12/07/11   Behaviour
"The fund made 16.44% a year in gains and reinvested dividends during that period, but the average investor made only 11.34%. Miller's average investor actually underperformed the S&P (which returned 11.51% annually during his streak), even though his fund way outperformed the index. ... Interestingly, the presumably non-starstruck investors in Vanguard's plain-vanilla S&P 500 index fund (VFINX), which I also asked Morningstar to analyze, fell into the same trap. During Miller's 15-year hot streak, the index fund returned 11.41% -- but its average investor made only 7.96%."

The Long Shadow of German Hyperinflation
12/07/11   History
"The Germans' strict opposition to the monetary financing of governments isn't just petty legalism -- it's a bedrock principle, based in history, which was purposefully built into EU treaties and Bundesbank policies. It's worth revisiting why the memory of hyperinflation has seared itself into the minds of many Germans, and how it's shaping their thinking and the future of the euro itself."

Mandelbrot beats economics on markets
12/06/11   Markets
"Over the past 15 years or so, physicists have demonstrated this in mathematical studies of market volatility. Inspired by work of the mathematician Benoit Mandelbrot in the 1960s, these scientists have used enormous sets of historical data -- hundreds of millions of minute-by-minute prices stretching over more than a decade, and daily and monthly prices over half a century -- to show that large market movements, up or down, follow a single mathematical pattern. Larger movements of, say, 10 percent to 15 percent, are less likely than movements of 3 percent to 5 percent. And the probability of a movement decreases in simple inverse proportion to the cube of its size: If moves of 5 percent or more have a certain likelihood, then moves of 10 percent or more are 8 (2 cubed) times less likely, and moves of 20 percent or more are in turn 8 times even less likely. But they still occur with some regularity. This pattern, it turns out, can be seen in markets for stocks, foreign exchange and futures around the world."

How doctors die
12/06/11   Health
"Years ago, Charlie, a highly respected orthopedist and a mentor of mine, found a lump in his stomach. He had a surgeon explore the area, and the diagnosis was pancreatic cancer. This surgeon was one of the best in the country. He had even invented a new procedure for this exact cancer that could triple a patient's five-year-survival odds - from 5 percent to 15 percent - albeit with a poor quality of life. Charlie was uninterested. He went home the next day, closed his practice, and never set foot in a hospital again. He focused on spending time with family and feeling as good as possible. Several months later, he died at home. He got no chemotherapy, radiation, or surgical treatment. Medicare didn't spend much on him. It's not a frequent topic of discussion, but doctors die, too. And they don't die like the rest of us. What's unusual about them is not how much treatment they get compared to most Americans, but how little. For all the time they spend fending off the deaths of others, they tend to be fairly serene when faced with death themselves. They know exactly what is going to happen, they know the choices, and they generally have access to any sort of medical care they could want. But they go gently."

China's hard landing
12/04/11   World
"Property construction became 'the most important sector in the universe,' in the words of UBS economist Jonathan Anderson. It directly accounts for about 13% of the economy, 20% if one includes related industries like concrete and steel. It also provided 40% of local government revenues through land sales. Worsening inflation forced the government to put on the brakes this year. As with most property busts, transactions dried up, followed by a free fall in prices. Land prices were down 60% year on year in September. Property developers are slashing prices of new homes to stave off bankruptcy."

Teaching the professors how to pick good funds
12/03/11   Stingy Investing
"Imagine standing at a podium in a lecture hall and being questioned by 100 professors for two hours. It's the stuff of student nightmares. But that's exactly where I found myself when I recently addressed a bevy of professors from the University of Toronto on financial matters."

Buying a dollar for fifty cents
12/03/11   Value Investing
"What makes the stock of particular interest to a value investor is the fact that management reports the value of the investment portfolio every quarter and, as of Oct. 31, the investments and cash were valued at $1.15 a share. So, you are effectively buying an actively managed resource portfolio at 50 cents on the dollar."

What Bay Street doesn't want you to hear
12/03/11   Brokers
"A substantial number of do-it-yourself investors are paying for financial advice they are not getting and never will. That's what can happen when you buy mutual funds from an online broker. While you typically pay nothing to buy and sell your funds, the cost of owning them can be identical to what is paid by investors who have advisers. There's almost a conspiracy of silence on this matter in the investment industry and it results from the fact that the status quo serves brokers and fund companies quite well."

U.S. taxman to go easy
12/03/11   Taxes
"Americans living in Canada who've neglected to pay their U.S. taxes are getting a big break from Uncle Sam. The U.S. Internal Revenue Service is poised to waive potentially massive penalties for Americans who agree to come clean and don't owe any taxes, The Globe and Mail has learned."

Unintended consequences: nanny state edition
11/30/11   Government
"Today and tomorrow mark the last days that put-upon parents can satiate their youngsters by simply throwing down $2.18 for a Happy Meal toy. But, thanks to the new law taking effect on Dec. 1, this is no longer permitted. Now, in order to have the privilege of making a 10-cent charitable donation in exchange for the toy, you must buy the Happy Meal. Hilariously, it appears Mar et al., in their desire to keep McDonald's from selling grease and fat to kids with the lure of a toy have now actually incentivized the purchase of that grease and fat -- when, beforehand, a put-upon parent could get out cheaper and healthier with just the damn toy."

How to kill an economy
11/26/11   Government
"Venezuelan President Hugo Chavez's move to expand price controls this week sparked panic purchases by consumers, leading to shortages of everything from coffee to toilet paper."

Is this really the end?
11/26/11   World
"The chances of the euro zone being smashed apart have risen alarmingly, thanks to financial panic, a rapidly weakening economic outlook and pigheaded brinkmanship. The odds of a safe landing are dwindling fast."

Dogs bite back
11/26/11   Dividends
"The Dogs of the Dow are running strong this year. The decades-old strategy, which calls for buying the 10 highest-yielding shares among the 30 Dow Jones Industrial Average members at the end of each year, has returned 5.5% this year through Wednesday, versus a 0.4% decline for the broader Dow."

Charlie Rose interviews Seth Klarman
11/26/11   Value Investing
"Award-winning journalist Charlie Rose interviews Seth Klarman, co-chair of the Facing History and Ourselves Board of Trustees, about his deep commitment to the work of Facing History and his thoughts on philanthropic and financial investment."

House of horrors
11/26/11   Real Estate
"Based on the average of the two measures, home prices are overvalued by about 25% or more in Australia, Belgium, Canada, France, New Zealand, Britain, the Netherlands, Spain and Sweden (see table). Indeed, in the first four of those countries housing looks more overvalued than it was in America at the peak of its bubble."

Friday's deals may not be the best
11/25/11   Pricing
"Professor Etzioni, who teaches computer science at the University of Washington, has directed his considerable intellect at the American ritual of shopping for bargains on Black Friday. After examining billions of prices of consumer electronics, he has decided to spend the busiest shopping day of the year scuba-diving in Bali."

No money for sauerkraut
11/23/11   Bonds
"Germany failed to get bids for 35 percent of the 10-year bonds offered for sale today, propelling borrowing costs in Europe higher and the euro lower on concern the region's debt crisis is driving away investors."

Why taxing the rich won't help
11/23/11   Taxes
"It's tempting to look to our millionaires and demand they pay more in taxes, but the same inconvenient truth applies. When you add up all the money made by all the people who earn more than $1 million a year, it amounts to around $700 billion. But since the millionaires already pay close to $200 billion in taxes, the government would have to increase rates to nearly 100 percent - which is about the worst idea ever - for it to have any real impact."

More corporate tax won't help
11/23/11   Taxes
"A tax rate is one thing. Tax collected is another. Indeed, in Canada progressives like to point out that there's no need for corporate income tax cuts, since the rates in the U.S. are much higher. But no one pays the posted rate in the U.S."

Lessons from Canada's 'basket case' moment
11/23/11   Debt
"Finance officials bit their nails and nervously watched the clock. There were 30 minutes left in a bond auction aimed at funding the deficit and there was not a single bid. Sounds like today's Italy or Greece? No, this was Canada in 1994."

A model for Ontario
11/17/11   Government
"California has long been among America's most extensive taxers and regulators of business. But at the same time, the state had assets that seemed to offset its economic disincentives: a famously sunny climate, a world-class public university system that produced a talented local workforce, sturdy infrastructure that often made doing business easier, and a history of innovative companies. No more. As California has transformed into a relentlessly antibusiness state, those redeeming characteristics haven't been enough to keep firms from leaving. Relocation experts say that the number of companies exiting the state for greener pastures has exploded. In surveys, executives regularly call California one of the country's most toxic business environments and one of the least likely places to open or expand a new company. Many firms still headquartered in California have forsaken expansion there."

I was wrong, and so are you
11/14/11   Behaviour
"The new results invalidated our original result: under the right circumstances, conservatives and libertarians were as likely as anyone on the left to give wrong answers to economic questions. The proper inference from our work is not that one group is more enlightened, or less. It's that "myside bias" - the tendency to judge a statement according to how conveniently it fits with one's settled position - is pervasive among all of America's political groups. The bias is seen in the data, and in my actions."

Congress: Trading stock on inside information?
11/14/11   Government
"The next national election is now less than a year away and congressmen and senators are expending much of their time and their energy raising the millions of dollars in campaign funds they'll need just to hold onto a job that pays $174,000 a year. Few of them are doing it for the salary and all of them will say they are doing it to serve the public. But there are other benefits: Power, prestige, and the opportunity to become a Washington insider with access to information and connections that no one else has, in an environment of privilege where rules that govern the rest of the country, don't always apply to them. When Nancy Pelosi, John Boehner, and other lawmakers wouldn't answer Steve Kroft's questions, he headed to Washington to get some answers about their stock trades. Most former congressmen and senators manage to leave Washington - if they ever leave Washington - with more money in their pockets than they had when they arrived, and as you are about to see, the biggest challenge is often avoiding temptation."

What Graham thought of IBM
11/14/11   Graham
"The word that Warren Buffett has bought 5.4% of International Business Machines came as a surprise to most of his followers, as Buffett has long scorned investments in technology. Buffett's mentor, the great value investor Benjamin Graham, had a long history with IBM."

The real genius of Steve Jobs
11/12/11   Books
"One of the great puzzles of the industrial revolution is why it began in England. Why not France, or Germany? Many reasons have been offered. Britain had plentiful supplies of coal, for instance. It had a good patent system in place. It had relatively high labor costs, which encouraged the search for labor-saving innovations. In an article published earlier this year, however, the economists Ralf Meisenzahl and Joel Mokyr focus on a different explanation: the role of Britain's human-capital advantage - in particular, on a group they call "tweakers." They believe that Britain dominated the industrial revolution because it had a far larger population of skilled engineers and artisans than its competitors: resourceful and creative men who took the signature inventions of the industrial age and tweaked them - refined and perfected them, and made them work."

How a Financial Pro Lost His House
11/12/11   Behaviour
"Everywhere I looked, people were being rewarded for buying as much house as they could possibly afford, and then some. There was this excitement in the air, almost like static. I started to think that if I didn't buy a house right then, I would never be able to afford one. At moments during our house hunt, I felt in my gut that something wasn't right. We'd go to open houses for $400,000 homes and see lines of couples in their late 20s - younger than we were - waiting to get inside. I kept wondering where all the money was coming from. How did all these people make so much? But prices just kept rising, and when people kept buying, that made it seem safer. I knew from my work as a financial adviser that following the crowd could be costly. But like everyone else, I felt safer in a crowd."

What happened to momentum?
11/09/11   Momentum
"The total return to Momentum was impressive for many decades. It's a simple strategy, basically going long past winners and short the losers, hoping they continue to win and lose. Interestingly, the past returns should go only up to the prior month, because there's slight mean-reversion at the one-month horizon, so most people use the returns from months t-12 through t-1. This highlights the non-fractal nature of stock returns, in that there's momentum in the data from 3-18 months, but mean-reversion at the shorter and longer frequencies."

Leveraging + High Payout Funds = Unhappy Ending
11/07/11   Hallett
"The final chapter to the series of articles I've written this year on high-payout investments funds features leveraging. Over the past few years, I have been contacted by several individual investors and financial advisors about strategies they've been proposed or have seen in use involving borrowing to invest in funds that pay out fat monthly distributions. Every inquiry I received described a troubling and strikingly similar plan. Each case involved an investor setting up a line of credit secured by available home equity. The proceeds from the line of credit would be used to invest in one or more T-series or other funds paying out large monthly distributions. Then, the investor would take the distributions in cash - mostly made up of return of capital - either for personal spending or to put toward the investment loan. After some undefined period of time, the expectation is that the remaining investments (i.e. net of cash distributions) would be sufficient to wipe out the loan balance, with hopefully something extra to add some jingle to the investor's jeans."

Rising from the ruins
11/07/11   Real Estate
"The economic landscape is unquestionably littered with the wreckage of the crash. Home prices languish near post-bubble lows, over 30% below peak. The plunge in prices has left nearly a quarter of all mortgage borrowers owing more than the value of their homes nearly 10m are seriously delinquent on their loans or in foreclosure. The hardest-hit markets are ghost neighbourhoods, filled with dilapidated properties. Housing markets are far from healthy. Yet current pessimism seems overdone. A turnaround in sales, prices and construction may be closer than many imagine."

China's vanishing factory bosses
11/05/11   World
"The reckoning began in June, when three factory bosses, confronted with debts they couldn't pay, disappeared without a trace. Spooked, the 'shadow banks' that had become the lenders of last resort - pawn shops, credit companies, in some cases loan sharks who pooled the wealth of individual investors - started calling in more debts. More than more 100 other laoban, as bosses are known in Chinese, fled or went into hiding. Some say the number on the run is twice that, and at least two Wenzhou laoban have jumped off tall buildings to their deaths."

Bill Gates changes the world again
11/03/11   World
"The results have been equally massive: 3.4 million lives saved from hepatitis B, which causes liver cancer, 1.2 million lives from measles, 560,000 from the Hib bacteria, 474,000 from whooping cough, 140,000 from yellow fever and 30,000 from polio. In the past year the new initiatives have prevented another 8,000 deaths from pneumonia and 1,000 from diarrhea."

A new page at Canadian MoneySaver
11/02/11   Thrift
"Mr. Hodson said he likes the current roster of MoneySaver writers, a mix of self-taught experts and advisers and other investment industry people who contribute free of charge. Something else he likes is the longstanding MoneySaver policy of not taking advertising from the financial industry. That kind of independence can be costly in terms of forgone revenue, but Mr. Hodson's Sprott years have left him financially secure enough not to worry about it."

RIM's stock falls below book value
11/02/11   Stocks
"Research In Motion's stock fell below its book value for the first time in nine years, a signal investors consider the BlackBerry maker to be worth less than the net value of its property, patents and other assets."

Bias, blindness and how we think
11/01/11   Behaviour
"In the market, of course, belief in one's superiority has significant consequences. Leaders of large businesses sometimes make huge bets in expensive mergers and acquisitions, acting on the mistaken belief that they can manage the assets of another company better than its current owners do. The stock market commonly responds by downgrading the value of the acquiring firm, because experience has shown that such efforts fail more often than they succeed."

Real estate never goes down ...
10/29/11   Real Estate
"In real terms, the National index is back to Q3 1999 levels, the Composite 20 index is back to July 2000, and the CoreLogic index back to June 2000. In real terms, all appreciation in the last decade is gone." [Or to some time in 1988 by my eye.]

Building the 3-D shelter
10/28/11   Markets
"Unlike "the market," we believe inflation will be a factor in the next decade or two because of the game-changing effects of deficits, debts, and demographics. Combined these three "Ds" could produce hurricane force headwinds to developed world growth and tailwinds to bursts of rising prices as debt levels are manipulated down to more manageable levels."

Irish see opportunity
10/27/11   World
""There's a political problem for the government," said Gavin Blessing, a bond analyst at Collins Stewart Plc in Dublin. "The Greeks, who are seen to be behaving badly, get rewarded, whereas the Irish, the top boys in the class, get nothing.""

The euro deal
10/27/11   World
"Even if the euro zone succeeds in avoiding CDS payouts, this could prove a Pyrrhic victory. If losing half the face value of a bond does not amount to a default, what does? Undermining the value of CDS insurance could deeply distort the market. If banks or other investors lose faith in their ability to hedge risks, they will be tempted to cut back on risk or demand higher yields. So, perversely, sparing a CDS payout on Greece could push up the borrowing costs of other countries."

Control rights and wrongs
10/26/11   History
"Banks are special. That has long been recognised in the design of their ownership, governance and regulation. This special status can have strange consequences. The historical distribution of risks and returns in banking is one. For a century, both risks and returns have been high. But while the risks have typically been borne by wider society, the returns have been harvested by bank shareholders and managers. The experience of the past two decades illustrates well this imbalance. In 1989, the CEOs of the seven largest banks in the United States earned on average $2.8 million. That was almost 100 times the median US household income. By 2007, at the height of the boom, CEO compensation among the largest US banks had risen almost tenfold to $26 million. That was over 500 times the median US household income. Those are high returns by any measure. But so, subsequently, have been the risks. The fall in the share prices of global banks means they are scarcely different in real terms today than in the early 1990s. And it is not just investors licking their wounds. So too is the global economy."

Scammers no match for sense of humour
10/24/11   Crime
"Rob received a call from "Jim" in India. Jim launched into his spiel: Rob's Windows operating system was infected. Rob told Jim he has no windows. Jim insisted that he did. Rob deadpanned that his computer had no windows...nor doors."

The Little State With The Big Mess
10/24/11   Pensions
"In most places, as in Rhode Island, the big issue is pensions. By conventional measures, state and local pensions nationwide now face a combined shortfall of about $3 trillion. Officials argue that, by their accounting, the total is far less. But with pensions, hope often triumphs over experience. Until this year, Rhode Island calculated its pension numbers by assuming that its various funds would post an average annual return on their investments of 8.25 percent the real number for the last decade is about 2.4 percent."

Michael Pettis talks China
10/24/11   World
"A talk by China skeptic Michael Pettis"

BMO set Monthly Income distribution bar too high
10/21/11   Hallett
"With nearly 1/3 of distributions having been taken in cash since 2008, sustainability is a legitimate concern generally and a big concern for any investor relying on this fund's fat payout to pay living expenses. BMO insists the payout is sustainable, an assertion they base on the fund's net inflows. Indeed, while the fund has spent its last two full fiscal years in net redemptions, reinvested distributions have generally kept more money flowing into the fund than leaving. The only exception so far was 2008, when the fund saw net redemptions of $436 million including reinvested distributions. But this speaks only to the mechanics of where the money comes from. When I mention "sustainability" in this context, I'm speaking to the fund's potential to support the payout with a sufficiently high total return. And on that basis, there are good reasons to continue questioning its sustainability."

Economics has met the enemy it's economics
10/19/11   Economics
"What is today known as economics arose out of two larger intellectual traditions that have since been largely abandoned. One is political economy, which is based on the simple idea that economic outcomes are often determined largely by political factors (as well as vice versa). But when political-economy courses first started appearing in Canadian universities in the 1870s, it was still viewed as a small offshoot of a far more important topic: moral philosophy. In The Wealth of Nations (1776), Adam Smith famously argued that the pursuit of enlightened self-interest by individuals and companies could benefit society as a whole. His notion of the market's "invisible hand" laid the groundwork for much of modern neoclassical and neo-liberal, laissez-faire economics. But unlike today's free marketers, Smith didn't believe that the morality of the market was appropriate for society at large. Honesty, discipline, thrift and co-operation, not consumption and unbridled self-interest, were the keys to happiness and social cohesion. Smith's vision was a capitalist economy in a society governed by non-capitalist morality."

Tax math
10/19/11   Taxes
"Let's consider two key areas of the tax code, where "first-stage thinking" allows Buffett to conclude that he's paying a lower tax rate than his secretary. Once we view the picture from the proper perspective and engage in "second-stage thinking," you'll see that Buffett's effective tax rate is much higher than it seems."

The science of irrationality
10/19/11   Behaviour
"Here's a simple arithmetic question: 'A bat and ball cost $1.10. The bat costs $1 more than the ball. How much does the ball cost?' The vast majority of people respond quickly and confidently, insisting the ball costs 10 cents. This answer is both incredibly obvious and utterly wrong. (The correct answer is five cents for the ball and $1.05 for the bat.) What's most impressive is that education doesn't really help more than 50% of students at Harvard, Princeton and the Massachusetts Institute of Technology routinely give the incorrect answer."

Capitol gains
10/15/11   Government
"It's also possible that congressional insiders could have simply stopped reporting potentially dubious transactions once they knew people were paying attention. According to Ziobrowski, the forms still aren't audited, and they're woefully inadequate - for example, Eggers and Hainmueller say there's no clear method for reporting short-selling, one of the major ways to profit from inside information."

A trillion here, $500 billion there
10/15/11   Pensions
"In 2009 Joshua Rauh of the Kellogg School of Management at Northwestern University and Robert Novy-Marx, then at the University of Chicago's Booth School of Business, estimated that the deficit of American state and local-government pension plans was $3.1 trillion. Mr Rauh reckons that the deficit is now $4.4 trillion. In other words, a cool $1.3 trillion has been added in two years."

Longleaf Q3
10/14/11   Value Investing
"I think the future of equities will be roughly the same as their past in particular, common-stock purchases will prove satisfactory when made at appropriate price levels. It may be objected that it is far too cursory and superficial a conclusion that it fails to take into account the new factors and problems that have entered the economic picture in recent years - especially those of ... the movement towards less consumption and zero growth. Perhaps I should add to my list the widespread public mistrust of Wall Street as a whole, engendered by its well-nigh scandalous behavior during recent years in the areas of ethics, financial practices of all sorts, and plain business sense."

Why China won't conquer the world
10/13/11   World
"Its young are incapable, its old are exhausted, and box-ticking bureaucrats make life hell. China, a superpower? First it needs to grow up"

King of the mountain
10/08/11   Markets
"What about the future? In the next six months, the deflation from late 2008 will shortly drop out of our three-year rates. CPI is up by 7% over the past 30 months, which works out to 2.3% per year. If we add our 2% adjustment to create more of an applesto- apples comparison with history, "true" inflation is above 4% and the "true" real interest rate is very low, around - 2%. At these levels, the normal Shiller P/E ratio would be 13 times our 10-year average earnings, which takes us below 800 on the S&P 500 Index."

A Short History of the Income Tax
10/08/11   Taxes
"The other pernicious consequence of the separate corporate and personal income taxes has been a field day for demagogues and the misguided to claim that the rich are not paying their 'fair share.' Warren Buffett recently claimed that he had paid only $6.9 million in taxes last year. But Berkshire Hathaway, of which Mr. Buffett owns 30%, paid $5.6 billion in corporate income taxes. Were Berkshire Hathaway a Subchapter S corporation and exempt from corporate income taxes, Mr. Buffett's personal tax bill would have been 231 times higher, at $1.6 billion. Just as in the late 19th century, the tax code is now hopelessly arbitrary and unfair. It requires a complete overhaul."

The half-a-trillion hole
10/08/11   Pensions
"However US local government funds continue to use the assumed rate of return to discount their liabilities, even as 8% looks more and more chimerical. I have struggled to convince readers of the madness of this approach, so I will try to channel Warren Buffett (in spite of having one-tenth of his brains and one-thousandth of his intellectual credibility). If a promise to make a series of future payments isn't a debt, what is it? If a debt shouldn't be recorded on the balance sheet at cost, how should it be recorded?"

Grandparents scam
10/06/11   Crime
"Last week my 83-year old mother almost became a victim of the "grandparent scam." She picked up the phone and the caller said he was her grandson. When she asked if it was Charles, my son, the caller said yes. Mom sometimes has trouble hearing on the telephone, but she said it sounded just like him. As we later found out, he gave her the classic story. He said he had an accident with a rental car in Montreal and was in jail. He said needed $4,000 wired via Western Union to his court-appointed lawyer to be released and provided a name. The caller asked my mother not to call either my husband or I as we would be too upset. ..."

Why envy dominates greed
10/03/11   Behaviour
"Economists agree that no reasonable risk metric predicts returns within or between any asset class, but always suggest that just implies risk, like fine wine, is very subtle. This is because we know there is a risk premium, because given our conception of utility (increasing at a decreasing rate), there must be a risk premium. Like telling the Journal of Marxist Studies that 'class' is not the best lens to view behavior, telling economists that self interest is primarily envy, not consumption, is simply too dismissive of the foundations they find so compelling to their calling all that human capital is tied to mastery of work that may not work, but at least currently there's hope that another tweak might turn these highly rigorous models into seminal, important work."

Want lower fund fees? Vote with your wallet.
10/03/11   Hallett
"Finance Minister Jim Flaherty has asked the Senate National Finance Committee to examine why prices of many retail goods continue to be higher than in the U.S. while the Canadian dollar has been at (or near) par with the U.S. dollar for a year or more. Just over a week ago, FAIR Canada called on Flaherty to add mutual fund management expense ratios to that list of retail goods. I have a great deal of respect for FAIR. Given that investor advocacy isn't a high-paying job - it pays nothing, sometimes less - FAIR is a much-needed organization. But I think their request and fee comparison miss the mark."

Buffett on taxes
09/30/11   Taxes
"Warren Buffett, the billionaire who runs Berkshire Hathaway Inc., talks about the need for the ultra-rich, who 'make money with money' to pay more in taxes."

California and bust
09/30/11   World
"The smart money says the U.S. economy will splinter, with some states thriving, some states not, and all eyes are on California as the nightmare scenario. After a hair-raising visit with former governor Arnold Schwarzenegger, who explains why the Golden State has cratered, Michael Lewis goes where the buck literally stops - the local level, where the likes of San Jose mayor Chuck Reed and Vallejo and fire chief Paige Meyer are trying to avert even worse catastrophes and rethink what it means to be a society."

A national debt Of $14 trillion? Try $211 trillion
09/30/11   Government
"'We've got 78 million baby boomers who are poised to collect, in about 15 to 20 years, about $40,000 per person. Multiply 78 million by $40,000 - you're talking about more than $3 trillion a year just to give to a portion of the population,' he says. 'That's an enormous bill that's overhanging our heads, and Congress isn't focused on it. ... To eliminate the fiscal gap, Kotlikoff says, the U.S. would have to have tax increases and spending reductions far beyond what's being negotiated right now in Washington. 'What you have to do is either immediately and permanently raise taxes by about two-thirds, or immediately and permanently cut every dollar of spending by 40 percent forever."

What's the use of saving money?
09/29/11   Thrift
"Ritchie Hok, an actuary living in Ottawa, is convinced savers will ultimately wind up paying the price for others' imprudence. At the peak of the U.S. housing bubble, Hok lived in Minneapolis and saw the excesses first-hand. While there he resisted those who urged him to get into the market a wise move given prices are down 40 per cent there. Now that he's in Ottawa, though, he's hearing all the same arguments for why he should take advantage of low rates and buy a house before prices rise even further. He's convinced Canada's housing market is a bubble that will eventually burst, and when it does, policy-makers will rush to people's rescue. "My fear is that most people in Canada are now debtors and not savers, and so governments will enact policies to help them because they make up most of the population," he says. "Savers may get screwed on the way down, too." If Hok is right, the frugal few could be in for even more pain ahead. Why is it again that it pays to save?"

Most S&P 500 stocks yield more than bonds
09/29/11   Stocks
"With the 10-year US Treasury yield now down to a record low level of 1.77% and equities getting crushed, the number of stocks yielding more than Treasuries continues to expand. As of this morning, 52.6% of stocks in the S&P 500 have a higher yield than the 10-year US Treasury. While equity dividends are by no means guaranteed, it seems that with each week that passes more companies are raising dividends than cutting them. This week, Microsoft (MSFT) became the latest mega-cap company to raise its dividend with a 25% hike in its annual payout bringing the yield above 3%."

Bringing down the house
09/27/11   Markets
"In simple terms, the young and middle-aged save for old age by buying assets, often with borrowed money the old sell them to pay for retirement. As the working-age population rises - as it did, for instance, after the baby boom - asset prices rocket because of increased demand. As baby-boomers reach retirement, the reverse may happen."

Chicago economics on trial
09/27/11   Economics
"By now, the Krugmanites are having aneurysms. Our stunted recovery, they insist, is due to government's failure to borrow and spend enough to soak up idle capacity as households and businesses 'deleverage.' In a Keynesian world, when government gooses demand with a burst of deficit spending, the stick figures are supposed to get busy. Businesses are supposed to hire more and invest more. Consumers are supposed to consume more. But what if the stick figures don't respond as the model prescribes? What if businesses react to what they see as a temporary and artificial burst in demand by working their existing workers and equipment harder - or by raising prices? What if businesses and consumers respond to a public-sector borrowing binge by becoming fearful about the financial stability of government itself? What if they run out and join the tea party - the tea party being a real-world manifestation of consumers and employers not behaving in the presence of stimulus the way the Keynesian model says they should?"

Risky business
09/26/11   Stingy Investing
""Igor! My portfolio needs a boost. Fetch me some high risk stocks", declared Frankenstein. You see, the Doc was in a pickle. Castle costs were way up and heating the drafty halls was just the beginning. His once friendly contractors rebelled and started to demand danger pay to fix the lightning machines. To make matters worse, the price of brains was getting, well, ridiculous. But his financial advisor had a solution. The Doctor could fund his exciting experiments by dialling up the risk level on his portfolio and thereby restore his treasury. While you probably don't have a moat to tend, you're likely familiar with the link between risk and returns. In fact, to many it is the most important rule in investing: The more risk you take, the higher your potential returns. But what if it isn't true? What if, in fact, after a certain point, taking on more risk actually lowers your returns?"

Cheap, safe and raring to go
09/24/11   Stingy Investing
"Do you want a bit more zip from your value stocks? Join me as I explore a combo that might put a little more spice in your portfolio. The secret is combining the thrifty fundamentals of value investing with the price trends of momentum investing"

The great debt scare
09/23/11   Debt
"It might not seem that Europe's sovereign-debt crisis and growing concern about the United States' debt position should shake basic economic confidence. But they apparently have. And loss of confidence, by discouraging consumption and investment, can be a self-fulfilling prophecy, causing the economic weakness that is feared. Significant drops in consumer-confidence indices in Europe and North America already reflect this perverse dynamic."

Ireland recovers as Greece sinks
09/21/11   World
"The country is meeting targets set for it by the EU, IMF and European Central Bank as Kenny's government pushes austerity measures through parliament by controlling 113 seats in the 166- seat legislature. By contrast, Papandreou's four-seat majority imperils the implementation of Greece's bailout package. Chatzis, the plastic surgeon, said he moved to Ireland in 2000 in part because the Irish were similar to Greeks in that "they both like to talk and have fun." The difference is "in Greece, the black economy thrives, many people avoid taxes, and you can get one price with a receipt and once price without," he said. "Here, there is respect for the system. People will do what it takes.""

A Ponzi scheme that should be fixed
09/21/11   Government
"You can force young people into Social Security, but if there just aren't enough young people in existence to support current beneficiaries, the system will collapse anyway. When Social Security began making monthly distributions in 1940, there were 160 workers for every senior receiving benefits. In 1950, there were 16.5 today, three in 20 years, there will be but two. Now, the average senior receives in Social Security about a third of what the average worker makes. Applying that ratio retroactively, this means that in 1940, the average worker had to pay only 0.2 percent of his salary to sustain the older folks of his time in 1950, 2 percent today, 11 percent in 20 years, 17 percent. This is a staggering sum, considering that it is in addition to all the other taxes he pays to sustain other functions of government, such as Medicare, whose costs are exploding."

The ultimate asset bubble
09/20/11   Markets
"Gold bought for investment accounted for 38 percent of total demand in 2010, compared with about 4 percent a decade before, the World Gold Council estimates. Holdings in gold- backed ETPs are equal to more than nine years of U.S. mine production. The SPDR Gold Trust, the biggest bullion ETP, exceeded the market capitalization of the SPDR S&P 500 ETF Trust in August, beating what had been the industry's largest exchange-traded fund since 1993."

Trust issues
09/20/11   History
"Hartwick College didn't really mean to annihilate the U.S. economy. A small liberal-arts school in the Catskills, Hartwick is the kind of sleepy institution that local worthies were in the habit of founding back in the 1790s it counts a former ambassador to Belize among its more prominent alumni, and placidly reclines in its berth as the number-174-ranked liberal-arts college in the country. But along with charming buildings and a spring-fed lake, the college once possessed a rather more unusual feature: a slumbering giant of compound interest."

Invest like a minimalist
09/17/11   Hallett
"A 'minimalist' lifestyle usually refers to living only with the basics. The less 'stuff' you have, the less you have to worry about day-to-day and the happier you will be, say proponents. Perhaps you can't part with your new smart phone, your second car or the notion of home ownership. But I am convinced that adopting minimalist-like investing style would set most investors on the path of greater happiness and prosperity."

New generation of cross-border income trusts
09/17/11   Law
"In December 2010, Eagle Energy Trust closed its initial public offering (IPO) of trust units in Canada, resulting in the first of a new generation of cross-border income trusts to access the Canadian capital markets. Since then, Parallel Energy Trust completed its IPO in April 2011 and Argent Energy Trust has recently filed a preliminary prospectus for a proposed IPO. Each of these new trusts owns or will acquire an underlying energy business carried on in the U.S. However, and as discussed in further detail below, there is generally no restriction on other types of U.S. businesses being owned by these income trusts. The suitability of a particular business for these trusts will largely turn on the results of economic modelling based on anticipated deductions in computing U.S. income (i.e., deductions for interest, depreciation, depletion, etc.)"

A milestone in low-cost investing
09/15/11   Brokers
"The golden investing rule of controlling fees to generate bigger returns never makes more sense than it does at challenging times like these for financial markets. So, cost-conscious investors, take note of the introduction of commission-free ETF trading at online brokerage Scotia iTrade. There may not be a cheaper way to invest anywhere."

Opportunity cost
09/14/11   Economics
"And if you drive a typical car more than a mile out of your way for each penny you save on the per-gallon price, it doesn't matter how worthless your time is to you - the gas to get there and back costs more than you save."

Banning market orders goes mainstream
09/14/11   Markets
"Traders Magazing writes about how more brokers are talking about altering market orders so that they automatically get converted to a limit order (with a price a few % away from the inside market) by the receiving broker. As the article notes, this results in some risk to the broker: if they put a price cap on an order that then doesn't get filled. It's also noted that this risk is small and well worth the protection from large errors."

Whitman's Q3 2011 letter
09/14/11   Whitman
"Based, as always, upon a bottom-up, value oriented, approach to analysis, my view of what is happening in the U.S. economy seems to be quite different from the views held by politicians and academics. Third Avenue shareholders, hopefully, might gain insight from understanding my views about the economy and various economic entities, particularly with regard to the U.S. economy, the global economy and, most important to Third Avenue Management, the companies that must contend with both."

Dividends: collect, reinvest, repeat
09/14/11   Dividends
"The market storm of the past few months has produced a bright side: dividend yields are on the rise."

There's no free lunch
09/14/11   Taxes
"It's widely known in tax circles that only 50% of the cost of meals and entertainment, when incurred as a legitimate business expense, is tax-deductible. What's not as well-known, however, is the rationale for this rule. A recent Tax Court decision deals with this rule and delves into the fascinating yet underappreciated world of statutory interpretation."

Is social security a Ponzi scheme?
09/10/11   Government
"Social Security is structured from the point of view of the recipients as if it were an ordinary retirement plan: what you get out depends on what you put in. So it does not look like a redistributionist scheme. In practice it has turned out to be strongly redistributionist, but only because of its Ponzi game aspect, in which each generation takes more out than it put in. Well, the Ponzi game will soon be over, thanks to changing demographics, so that the typical recipient henceforth will get only about as much as he or she put in (and today's young may well get less than they put in)."

The forgotten man
09/10/11   Government
"With equities down sharply, many people are wondering if Uncle Ben and Uncle Sam will once again intervene and turn on the money spigot to prop up equities. Well, before the possible onset of QE3, it's time to consider who's paying for QE2 and all the other intervention strategies to date."

Hedge-fund performance and liquidity risk
09/08/11   Funds
"This paper demonstrates that liquidity risk as measured by the covariation of fund returns with unexpected changes in aggregate liquidity is an important predictor of hedge-fund performance. The results show that funds that significantly load on liquidity risk subsequently outperform low-loading funds by about 6.5% annually, on average, over the period 1994-2009, while negative performance is observed during liquidity crises. The returns are independent of share restriction, pointing to a possible imbalance between the liquidity a fund offers its investors and the liquidity of its underlying positions. Liquidity risk seems to account for a substantial part of hedge-fund performance. The results suggest several practical implications for risk management and manager selection."

The Indian who bailed out Bank of Ireland
09/08/11   Value Investing
"When Bank of Ireland faced an imminent nationalization earlier this summer, a group of North American investors pumped in $1.6 billion to keep it out of the hands of the Irish government, in return for up to a 35% stake in the iconic commercial bank, whose roots date back to 1783. The lead investor in the deal was the Toronto-based Fairfax Financial Holdings Limited, led by Hyderabad-born Prem Watsa, who may be a virtual unknown in the country of his birth, but is fast building a reputation as an investment wizard in his adopted land and also within the global value investing community."

Mega Brands merits attention
09/08/11   Stocks
"To its great credit, management somehow kept the company going while negotiating a recapitalization in 2010, issuing an enormous amount of stock to get rid of most of its debt. Fairfax, Invesco Trimark and the founding Bertrand family participated in the new financing, as did other strong hands, who now own about half the stock."

India says no to $80 toilet paper
09/08/11   Government
"Ordinary conversations over chai in India are now about markets and focus on the contrast between private success and public failure. While the private sector provides cutting-edge services and products to the world, the roads outside are potholed, electricity is patchy and water supply erratic. The difference between the two worlds is accountability: In private life, if you don't work, you don't eat in public life, jobs are effectively for life. Indians believe that they are rising despite the state and are often heard to say that 'India grows at night, when the government sleeps.'"

The case against summer
09/03/11   Fun
"The logical argument contra summertime should be four words long: middle-age men in shorts. Q.E.D. Alas, shorts are being worn year-round by us graying porkers with legs as ugly as stump fences - if stump fences had hairy varicose veins. But there are plenty of other things wrong with summer, starting with the fact that it comes at the wrong time of year."

Asking the right and wrong questions
09/03/11   Brokers
"From a behavioral economics point of view, the field of financial advice is quite strange and not very useful. For the most part, professional financial services rely on clients' answers to two questions: How much of your current salary will you need in retirement? What is your risk attitude on a seven-point scale? From my perspective, these are remarkably useless questions"

The roots of the Sino-Forest mystery
09/03/11   Crime
"Part of what is so astonishing is that Sino-Forest and its business activities failed to arouse serious suspicions or concerns with most investors until June of this year when a short seller named Carson Block and his firm, Muddy Waters LLC, first levelled accusations of fraud against the company."

Get ready to pay billions for hydro pensions
09/02/11   Pensions
"Defenders of these very generous pensions always claim that these employees contribute their fair share into the pension plans, and so deserve them. As taxpayers, we would normally think a 50-50 split of contributions would be fair, with employees contributing 50% and taxpayers matching it. But over the past five years alone, taxpayers have pumped $1.3-billion into the plan, while employees have contributed only $368-million. Not so fair and sure to create serious pension tensions when taxpayers find out what is really happening in these pension Ponzi schemes."

Risk management and sounding crazy
09/02/11   Behaviour
"All this leads me to wondering about Warren Buffett - the greatest fund manager of them all. He is an unusual individual with strange personal predilections. But he sounds so rational. And he is amazingly self-controlled. Indeed his ability to sit on billions of dollars excess cash for years and years at a time waiting for the time to pounce is legendary and extraordinarily hard to duplicate. Buffett says that temperament is more important than brains in investing and I think this is what he means. But it is often Buffett against the world. Buffett is thought of as a has-been by many people. It doesn't matter whether he was avoiding tech stocks in 1998, 1999 and 2000. It does not matter whether he was buying Bank of America now. He is - of course - just mad. The madness is an important part of how Buffett made all that money. But the self control is - I think - more important."

The halo effect
09/01/11   Behaviour
"As management professor Phil Rosenzweig points out in his book 'The Halo Effect,' a soaring stock price can lead investors to regard the company's managers as focused, disciplined and passionate - while, in the negative halo of a falling stock price, the same executives will now seem stubborn, unimaginative and resistant to change. Investors think, at either time, that they are evaluating the stock and the managers independently, but one opinion inevitably colors the other, often leading investors to be too bullish on the upside and too bearish on the downside. The managers haven't changed our perceptions of them have."

A value investor's best friend in China
09/01/11   Value Investing
"My experience with statistically cheap China-based investments has not always been positive. It dates back 20 years or more to the TSX-listed Noble China, which had the Chinese licence for Pabst Blue Ribbon, a particularly tasteless American beer. The whole episode ended in tears for the shareholders. So, I am not about to invest my life savings in American Lorain, but I think that Ben Graham would approve a modest exposure."

Great courses, great profits
08/31/11   Academia
"A teaching company gives the public what the academy no longer supplies: a curriculum in the monuments of human thought."

Betting against flimsy Chinese firms
08/31/11   Crime
""Historically, stock scams are promoters promoting stories. The actual numbers will tell a more truthful story," he said. "If it's a mining company and there is nothing in ground and the numbers don't lie. The people do. The trick here is that the numbers are made up.""

The merry-go-round beats the roller coaster
08/27/11   Stingy Investing
"I have fond summer memories of rushing through the gates of my local amusement park and riding the roller coasters all day long. Up and down, round and round. It was grand fun. Alas, advancing decrepitude makes riding the metal monsters an exercise in nausea these days. They're almost as bad as the stock markets which are currently providing a wild enough ride of their own. If you're also turning a little green, I've some good news. You can hold placid lower-risk stocks and still achieve market-topping returns."

Why McDonald's wins
08/27/11   Management
"Employees and analysts say he's guided by a zeal for satisfying customers, even if it comes at the expense of his own ideas and preferences. A few years ago the company did extensive testing on new coffee-cup lids and rolled out a version that consumers liked -- and that Skinner, who happens to drink a lot of coffee, really didn't. Rather than overrule the masses, Skinner came up with his own solution: He keeps a stash of the old lids on hand."

Tales of when legends leave
08/26/11   Management
"The founder of a successful corporation steps down. Then what? At Ford Motor Co. and Walt Disney Co., long periods of stagnation or decline, followed by renewal. At Wal-Mart Stores Inc., continued success for a time, then new challenges. Now it is Apple Inc.'s turn, following Steve Jobs's resignation as CEO on Wednesday."

Too hefty to handle
08/26/11   Real Estate
"Three years ago, just one out of every nine mortgage-holders borrowed more than 80% of the value of their homes. Today, it's one in six. These are verifiable facts whether they add up to a bubble, I can't say. But given the data and the terrible consequences of real estate bubbles, the Harper government could - at the very least - stop pumping air into the property market. And that means reining in the Canada Mortgage and Housing Corp., the vehicle through which you, dear taxpayer, have assumed the risks for these urban bidding wars and the jumbo mortgages they create."

Buffett's BofA stake
08/25/11   Buffett
"Warren Buffett may have earned $1.3 billion in one day on his $5 billion investment in Bank of America Corp. (BAC)"

Bank of America
08/25/11   Stocks
"Still I am bullish on BofA at these prices. Very bullish. I think the politically driven finance bloggers (Yves Smith at Naked Capitalism) should be seen for their (I think justified) anti-bank agenda. Most of the rest are fitting their analysis around the stock price. There is an awful lot of stock-price doing the analysis here."

Bond market signaling recession? Should we care?
08/23/11   Hallett
"It's certainly possible that the current decline will tip over into official bear market territory. But that shouldn't be surprising since bear markets have historically been clustered. More importantly, a bad economic environment does not equate to a bad investment environment. An economy that looks to be in its darkest days often gives birth to terrific investment opportunities. While we haven't seen widespread indiscriminate selling of stocks - as in 2008 - many great opportunities have emerged. When hunting for investment opportunities, portfolio manager Geoff MacDonald is happy to invest in businesses even if their growth prospects are low or moderate. The key, he says, is not paying for the growth. And there are many quality businesses today that are growing - and should continue to grow - but are priced for zero or negative growth."

Graham's Simple Way: Summer 2011
08/23/11   Stingy Investing
"I like to find interesting value stocks using stock screens. One of the best screens to follow is Benjamin Graham's Simple Way, and its variants, which I've tracked for many years in both the U.S. and Canada."

Advice from Irving Kahn
08/23/11   Value Investing
"At Columbia Business School, Kahn served as an assistant to economist Benjamin Graham, the value-investing guru whose principles of caution and defensive investing inspired a cadre of disciples that includes Warren Buffett. It's an investment strategy born of the beating Graham had taken in '29, and Kahn adopted it as his own. "I stopped wasting time on what people claimed a stock was worth and started looking at the numbers," he says. "This may surprise you, but there were a large number of valuable buys during the Depression.""

A response to Buffett and Obama
08/23/11   Taxes
"Governments have an obligation to spend our tax money on programs that work. They fail at this fundamental task. Do we really need dozens of retraining programs with no measure of performance or results? Do we really need to spend money on solar panels, windmills and battery-operated cars when we have ample energy supplies in this country? Do we really need all the regulations that put an estimated $2 trillion burden on our economy by raising the price of things we buy? Do we really need subsidies for domestic sugar farmers and ethanol producers? Why do we require that public projects pay above-market labor costs? Why do we spend billions on trains that no one will ride? Why do we keep post offices open in places no one lives? Why do we subsidize small airports in communities close to larger ones? Why do we pay government workers above-market rates and outlandish benefits? Do we really need an energy department or an education department at all? Here's my message: Before you 'ask' for more tax money from me and others, raise the $2.2 trillion you already collect each year more fairly and spend it more wisely. Then you'll need less of my money."

The ugly truth
08/23/11   Government
"Based on past behavior of fiscal policy makers, businesses understandably regard the debt ceiling agreement and the political outcome of negotiations between Congress and the president with the suspicion akin to how the British humorist P.G. Wodehouse regarded his aunts: "It is no use telling me there are bad aunts and good aunts," he wrote. "At the core they are all alike. Sooner or later, out pops the cloven hoof." It will be devilishly difficult for businesses to commit to adding significantly to their head count or to meaningful capital expansion in the United States until clarity is achieved on the particulars of how Congress will bend the curve of deficit and debt expansion and the "cloven hooves" are revealed. No amount of monetary accommodation can substitute for that needed clarity. In fact, it can only make it worse if business comes to suspect that the central bank is laying the groundwork for eventually inflating our way out of our fiscal predicament rather than staying above the political fray - thus creating another tranche of uncertainty."

Headwinds for U.S. equity markets
08/22/11   Markets
"Despite theoretical ambiguities, U.S. equity values have been closely related to demographic trends in the past half century. There has been a tight correlation between population dependency ratios, such as the M/O ratio, and the P/E ratio of the U.S. stock market. In the context of the impending retirement of baby boomers over the next two decades, this correlation portends poorly for equity values. Moreover, the demographic changes related to the retirement of the baby boom generation are well known. This suggests that market participants may anticipate that equities will perform poorly in the future, an expectation that can potentially depress current stock prices."

08/22/11   World
"At that rate, according to some back-of-the-envelope calculations by The Economist, it would take about 25 generations for Hong Kong's female population to shrink from 3.75m to just one. Given that Hong Kong's average age of childbearing is 31.4 years, it could expect to give birth to its last woman in the year 2798. (That is some time after its neighbour, Macau, which has a higher reproduction rate, but a much smaller population.) By the same unflinching logic, Japan, Germany,Russia, Italy and Spain will not see out the next millennium. Even China, which has a recorded history stretching back at least 3,700 years, has only about 1,500 years left - if present trends continued unbroken."

How long can home prices keep rising?
08/20/11   Real Estate
"I can't tell you when the housing correction will come. But I can tell you that when it arrives it will be correlated with other bad news. And it's the second correlation that worries me."

American idiots
08/18/11   Government
"What the hell is going on? Standard and Poor's, the bond-rating agency, downgrades the U.S., and the world trembles. The markets here go nuts on the first trading day after the downgrade, losing $1 trillion in value. European Union finance chiefs are playing Whac-a-Mole with members' debt problems. And England ... England was literally burning."

An hour with Warren Buffett
08/18/11   Buffett
"Warren Buffett discusses his New York Times Op-Ed piece 'Stop Coddling the Super-Rich' which calls on Congress to increase taxes on the Super-Rich like himself"

Debt crisis at colleges
08/18/11   Academia
"With mortgage defaults, banks seize and resell the home. But if a degree can't be sold, that doesn't deter the banks. They essentially wrote the student loan law, in which the fine-print says they aren't 'dischargable.' So even if you file for bankruptcy, the payments continue due. Hence these stern word from Barmak Nassirian of the American Association of College Registrars and Admissions Officers. 'You will be hounded for life,' he warns. 'They will garnish your wages. They will intercept your tax refunds. You become ineligible for federal employment.' He adds that any professional license can be revoked and Social Security checks docked when you retire. We can't think of any other statute with such sadistic provisions."

A second great depression, or worse?
08/18/11   History
"According to the National Bureau of Economic Research, falling from peak to trough in each cycle took 11 months between 1945 and 2009 but twice that length of time between 1854 and 1919. The longest decline on record, according to this methodology, was not during the 1930s but rather from October 1873 to March 1879, more than five years of economic decline."

The $25,000 cow
08/18/11   Markets
"What I have in mind is some sort of scheme whereby the government would restrict the supply of opinion in magazines and newspapers to some fixed number of column inches per year, with a view to propping up - er, stabilizing - salaries at a target rate. Naturally I am sensitive to the concerns of magazine readers, not to mention magazine owners, but I don't imagine it would raise the cover price of magazines by more than about 200 per cent or so. No? Foolish? Extortionary? Outrageous? Then allow me to introduce you to the world of supply management: an actual policy pursued by the governments of Canada and the provinces for the past 40 years. Only I'm not talking about comparative fripperies like magazines (we have our own indefensible support programs, though not, ahem, on the same scale). I'm talking about basic foodstuffs, the kind the typical Canadian family eats every day: dairy products (milk, cheese and butter), eggs, and poultry (chicken and turkey), whose prices are maintained, by means of a strict regime of production quotas, at two and three times their market levels."

Buffett misses mark
08/18/11   Taxes
"The United States needs to get out of its box of low growth. Current proposals for tax increases are the wrong medicine. Instead, a rate-reducing cum base-broadening tax reform would be more powerful by reducing the economic cost of taxation. Buffett pays too little tax, not because he's so rich but because the U.S. tax system is so poor."

Stop coddling the super-rich
08/15/11   Buffett
"Last year my federal tax bill - the income tax I paid, as well as payroll taxes paid by me and on my behalf - was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income - and that's actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent. If you make money with money, as some of my super-rich friends do, your percentage may be a bit lower than mine. But if you earn money from a job, your percentage will surely exceed mine - most likely by a lot."

Debt, downgrades, and inflation
08/13/11   Government
"Whether we are watching rioting in Greece, the US debt-ceiling showdown, or even the City of Toronto simply trying to reduce the number of libraries they offer, the issues in each case are exactly the same ..."

The Nixon shock
08/13/11   History
"Burns was replaced by Jimmy Carter in 1978. The following year, with inflation rocketing toward 15 percent, Burns delivered a keynote speech, "The Anguish of Central Banking," in which he argued that central bankers around the world were failing because elected leaders were unwilling to risk displeasing constituents. The new Fed chief, Volcker, did tame inflation unlike Burns, he had the fortitude to subject the country to a brutal recession. But the dilemma faced by Burns - how to withstand the demands of the public for limitless monetary expansion - did not go away. We see it now in the troubles of nations from Greece to Ireland to the U.S. And the anguish that Burns felt is Ben Bernanke's unfortunate inheritance."

Generation Fd
08/13/11   World
"The UN's first ever report on the state of childhood in the industrialized West made unpleasant reading for many of the world's richest nations. But none found it quite so hard to swallow as the Brits, who, old jokes about English cooking aside, discovered that they were eating their own young."

08/11/11   Economics
"If you are not a critic of neoclassical economics, particularly after the 2008 crash, you aren't thinking. The models did not consider the the effects of a big buildup in debt across the economy. They were debt-neutral, which was a big mistake."

Idiots at work: high prices only edition
08/11/11   Markets
"France, Spain, Italy and Belgium will impose bans on short-selling from today to stabilize markets after European banks including Societe Generale SA hit their lowest level since the credit crisis."

The lower stocks go, the more I buy
08/11/11   Buffett
"U.S. Treasuries are still triple-A in that there is no question that we will repay the interest and the principal. Every contract will be repaid. So our bonds are triple-A. Our currency, the dollar, is not triple-A. Our bonds are."

Watsa sees dirty thirties pain ahead
08/10/11   Value Investing
"The U.S. economy appears to be heading toward a lengthy period of deflation such as the one that struck Japan, and there is little policy-makers can do to prevent it, says one of Canada's most accomplished investors. But it isn't just the United States and Europe that Prem Watsa is worried about. The potential bursting of a property bubble in China has him even more concerned. And if Chinese demand for commodities dries up at the same time as U.S. consumers are shutting their wallets, then the global economy is in for a lengthy period of pain."

Debt junkies
08/10/11   Debt
"The world is led by debt junkies who think that debt doesn't matter. They are leading us to a greater crisis where the only thing that does matter is debt, and for political reasons, some governments will not be willing to pay in full."

It's the economy, dummkopf!
08/10/11   World
"With Greece and Ireland in economic shreds, while Portugal, Spain, and perhaps even Italy head south, only one nation can save Europe from financial Armageddon: a highly reluctant Germany. The ironies - like the fact that bankers from D sseldorf were the ultimate patsies in Wall Street's con game - pile up quickly as Michael Lewis investigates German attitudes toward money, excrement, and the country's Nazi past, all of which help explain its peculiar new status."

The difference between AAA and AA+
08/08/11   Bonds
"We simply don't have enough AAA and AA rated data to be statistically confident in these distinctions ex ante, which is why AA+ and AAA rated securities differ very little in their yields, usually by only 10 basis points (0.1%) on average. Here's the data from Moody's, that excludes Munis and ABS"

How debt has defined human history
08/08/11   History
"Since 1971, when the U.S. abandoned the gold standard, and the world has been moving to a system of virtual credit money, we have been entering a new period of history. But it's not entirely unprecedented. In fact, contrary to popular belief, credit has been the predominant form of money in world history."

Who got the margin call?
08/08/11   Funds
"The market is not puking. Some prime broker is puking the stocks held by one or more very large hedge funds. So lets play the game: guess who got the margin call!"

The heady thrill of having nothing to do
08/06/11   Fun
"My period of greatest creative output was during my corporate years, when every meeting felt like a play date with coma patients. I would sit in long meetings, pretending to pay attention while writing computer code in my mind and imagining the anatomically inspired nicknames I would assign to my boss after I won the lottery. Years later, when 'Dilbert' was in thousands of newspapers, people often asked me if I ever imagined being so lucky. I usually said no, because that's the answer people expected. The truth is that I imagined every bit of good fortune that has come my way. But in my imagination I also invented a belt that would allow me to fly and had special permission from Congress to urinate like a bird wherever I wanted. I wake up every morning disappointed that I have to wear pants and walk."

S&P cuts U.S. rating
08/06/11   Bonds
"The U.S. had its AAA credit rating downgraded for the first time by Standard and Poor's, which slammed the nation's political process and said lawmakers failed to cut spending enough to reduce record deficits."

Hunt for dividend stocks
08/05/11   Stingy Investing
"The beach is sparkling in the sun, the water looks inviting, and I'm sitting in front of a computer screen because Mr. Market is once again sliding into depression. But a little panic is invigorating because there are bargains to be had, and I'm on the hunt for a few good dividend stocks."

Moody's sounds the alarm on student borrowing
08/05/11   Academia
"A growing chorus of economists and educators think that the higher education industry will be America's next bubble. Easy credit, high tuition, and poor job prospects have resulted in growing delinquency and default rates on nearly $1 trillion worth of private and federally subsidized loans. Now the ratings agency Moody's has weighed in with a chilling diagnosis: 'Unless students limit their debt burdens, choose fields of study that are in demand, and successfully complete their degrees on time, they will find themselves in worse financial positions and unable to earn the projected income that justified taking out their loans in the first place.'"

Negative nominal interest rates
08/04/11   Bonds
"Bank of New York Mellon Corp. on Thursday took the extraordinary step of telling large clients it will charge them to hold cash."

It's the elderly
08/04/11   Government
"If leadership is the capacity to take people where they need to go - whether or not they realize it or want it - then we've had almost no leadership in these weeks of frustrating and maddening debate over the budget and debt ceiling. There's been an unspoken consensus among President Obama, congressional Democrats and Republicans not to discuss the central issue underlying the standoff. We've heard lots about "compromise" or its absence. We've had dueling budgets with differing mixes of spending cuts and tax increases. But we've heard almost nothing of the main problem that makes the budget so intractable. It's the elderly, stupid."

Why chasing success makes us happy
08/04/11   Books
"As he researched his subject, exploring economics, neuroscience and evolutionary biology, Buchholtz became convinced that much of the modern happiness project was a crock - not just unhelpful economically, but unhealthy and unnatural."

AAA rating is a rarity
08/03/11   Bonds
"But the truth is, even as the government maintained its AAA grade, the markets suggested long ago that the United States was no longer deserving of such a high rating. The credit-default swap market provided one clue. During the financial crisis in early 2009, the price of insurance that would pay off if the United States government defaulted on its debt was similar to that offered for companies ranked just above junk. Even today, the price of insurance on a government default has been higher than that for Colgate Palmolive, the global toothpaste giant, which has a rating two notches below AAA."

A better buyback strategy
08/03/11   Markets
"It appears that stocks that had low returns following their previous buyback, but a high completion rate, see amazing returns following their next buyback."

I've got all the clarity I need
08/03/11   Government
"And then when you have a company like Boeing, you're talking about one of the iconic US companies gets sued by the federal government. If that doesn't get your attention, nothing will. They get sued for investing $2 billion in South Carolina. Last time I saw South Carolina was a part of the United States of America and you get sued for that."

Stiffen audit rules
08/02/11   Accounting
"Normally, repos are accounted for as borrowings, which is what they are. The borrower retains all the upside and downside of the securities in question. The lender gets an interest rate. But Lehman found a loophole in an accounting rule, and concluded that if it put up $105 in collateral for every $100 borrowed, it could claim it really was a sale. At the end of each quarter, the company would decide just how much it needed to beautify its balance sheet, and would do repos to produce the desired result. They would be reversed a few days later."

A little yellow
08/02/11   Stocks
"I will also note that eMails such as the one I received are how the retail perspective transmits to institutional portfolios: I can assure you that in this kind of situation, with dramatic market movements and heavy media coverage, a lot of Portfolio Managers sell (sometimes against their better judgement, if they have any) simply so they won't have to explain their holdings to their clients. The business is, in general, not about performance it's about story telling."

Madoff of the Midwest
08/02/11   Crime
"The indictment charges that from 2005 to 2009, Durham masterminded a Ponzi scheme that defrauded 5,000 investors in Fair Finance out of some $207,246,329, of which only a fraction may be reclaimed. If convicted, Durham and his alleged conspirators could each face 45 years in prison and $3 million in fines. The case is due to go to trial next year, and the court has registered not-guilty pleas for the three defendants, all of whom declined or did not respond to interview requests. But from interviews with numerous associates, a profile of Durham, who Indianapolis has taken to calling the "Midwest Madoff," has emerged. In retrospect, Durham's alleged fraud is almost as impressive for its size as for how obvious it should have been."

Think garage sale
07/30/11   Stingy Investing
"Fling open your closets and clear out your basement because it's garage sale time. If all goes well you might be able to shift the contents down the street. In my neighbourhood, you also get the chance to buy sugary pools in flaky cups from the friendly butter-tart lady. But the humble garage sale yields more than sugar-rush-inducing treats. It can offer lessons for stock investors."

Debt crisis is worse than you think
07/28/11   Debt
"An honest assessment of the country's projected revenue and expenses over the next generation would show a reality different from the apocalyptic visions conjured by both Democrats and Republicans during the debt-ceiling debate. It would be much worse."

The clash of generations
07/26/11   Debt
"Anyone who thinks that this economic crisis, if prolonged, won't also hasten a global power shift has never heard of the Golden Rule: He who has the gold, sets the rules. "We are so used to the Americans providing the solutions for Europe and leading," said Vassilis T. Karatzas, a Greek money manager. "But what happens when we are both in the same boat?" What happens is that both the American and European dreams hang in the balance. Either we both put our nations on more sustainable growth paths - which requires cutting, taxing and investing for the future - or we're looking at a world in which democracies are going to turn on themselves and fight over shrinking pies, with China having a growing say over how big the slices will be."

How to tax the rich
07/26/11   Fun
"Whenever I feel as if I'm on a path toward certain doom, which happens every time I pay attention to the news, I like to imagine that some lonely genius will come up with a clever solution to save the world. Imagination is a wonderful thing. I don't have much control over the big realities, such as the economy, but I'm an expert at programming my own delusions. I make no apology for that. A well-crafted delusion can be a delicious guilty pleasure. And best of all, it's totally free. As a public service, today I will teach you how to wrap yourself in a warm blanket of imagined solutions for the government's fiscal dilemma."

Rental complex
07/26/11   Real Estate
"The belief that we're not responsible adults until we own our home, whether or not we can afford it, has distorted and stigmatized the cheaper and safer alternative: renting."

A contrarian case for following the herd
07/23/11   Momentum
"Price momentum has succeeded in the face of a couple of intuitive objections. One is that buying winners inherently conflicts with a contrarian philosophy that is deeply ingrained within many successful investors. The second is that the simplicity of analysis needed to build a portfolio is troubling to adherents of the belief that markets are at least reasonably efficient. While the skeptics may lurk in the shadows when the strategy is successful, they are eager to speak up when momentum fails. And it is hard for the practitioners of a momentum strategy to launch a vigorous defense while looking foolish for having recently lost money with a portfolio of stocks bought simply on the basis of having recently gone up."

Mining the portfolio
07/22/11   Stocks
"Mining the portfolio, in essence, is taking information and news from current portfolio holdings, and using it, and the second order effects stemming from that information, to allocate capital in other investments."

Is he economically rational?
07/22/11   Management
"I think of it as training to understand managements - see if they act like owners maximizing long-term profits, or as workers aiming to maximize their pay packets. You will earn more with companies that think like owners."

Catch and release
07/22/11   Crime
"Spencer Lanthier, who serves on a variety of boards, recently asserted during a speech in Toronto that, despite recent advances in regulation and enforcement, large frauds still unfold in Canada largely with impunity. He claimed this country has "the weakest standards of enforcement in the G8." Other critics routinely call for speedier investigations, more charges and more serious punishments. Even IMET superintendent Dean Buzza concedes that his units haven't lived up to expectations. "We overpromised and underachieved," he says."

Nothing for money
07/22/11   Crime
"While the major stock exchanges, securities regulators and police have made significant progress in the past dozen years purging the old-style boiler rooms and pump-and-dump schemes from the public markets, the marketing of suspect securities continues to thrive in the private domain. Typically, a company advertises or otherwise promotes a particular venture to investors, usually at a fixed price and for a fixed term. At the end of the term, the asset (usually real estate) is meant to be sold, and investors get their money. Sometimes, it begins producing an income stream for the investors. At least, that's how it works in theory."

07/18/11   Funds
"Among the index-beaters, Mawer Canadian Equity, which is run by Jim Hall of Mawer Investment Management Inc., led the way with a 7.1-per-cent gain. Mr. Hall has been cautious on commodity stocks, a stance that helped his fund gain 8.5 per cent for the first six months of this year. A common thread among many of the outperformers was low fees, with most charging well below 2 per cent."

Fund facts risk and suitability get thumbs-down
07/16/11   Funds
"A new regulatory initiative - i.e. Mutual Fund Point of Sale - was launched this year in an attempt to better inform investors about the investment funds in which they invest. The key feature of this Point of Sale initiative was to provide an investor-friendly 2-4 page document called Fund Facts summarizing each fund's most important information. The idea was based on the observation that only a tiny minority of investors ever read a fund's simplified prospectus (i.e. the document that lays out all of a fund's details). There was no shortage of opinions on this Point of Sale initiative - a collaboration of various financial regulators - while it was in the planning stages. (Including one from yours truly.) But now the first stream of Fund Facts documents have been rolled out and a central repository has been set up at to house some documents. Unfortunately, Fund Facts continues to suffer weaknesses in the two most important areas for investors and their financial advisors."

Misvalued Chinese land
07/16/11   Real Estate
"In the little-known Chinese city of Loudi - which is home to 4m people - there is a 1.2bn yuan ($185m) leisure project currently being developed, money for which was raised through bonds guaranteed by land valued at $1.5m an acre. Those prices, says Bloomberg, are comparable to acreage values in one of Chicago's plushest suburban neighbourhoods."

The AAA bubble
07/16/11   Bonds
"The AAA bubble re-inflates and suddenly sovereign debt becomes the major force driving the world's triple-A supply. The turmoil of 2008 shunted some investors from ABS into safer sovereign debt, it's true. But you also had a plethora of incoming bank regulation to purposefully herd investors towards holding more government bonds, plus a glut of central bank liquidity facilities accepting government IOUs as collateral. Where ABS dissipated, sovereign debt stood in to fill the gap. And more. It's one reason why the sovereign crisis is well and truly painful."

Debt endangers growth
07/14/11   Debt
"Our empirical research on the history of financial crises and the relationship between growth and public liabilities supports the view that current debt trajectories are a risk to long-term growth and stability, with many advanced economies already reaching or exceeding the important marker of 90 percent of GDP."

Depleted pension fund rattles Rhode Island
07/13/11   Pensions
"The city, just north of Providence, is small and poor, but over the years it has promised police officers and firefighters retirement benefits like those offered in big, rich states like California and New York. These uniformed workers can retire after just 20 years of service, receive free health care in retirement, and qualify for full disability pensions when only partly disabled. Just over one square mile, Central Falls has a tightly packed population, filled mostly with immigrant families, that struggles on a median household income of less than $33,520 a year, according to the Census Bureau's 2005-9 American Community Survey. The typical single-family house, after a recent revaluation, is worth about $130,000. It is hard to see how anyone thought such an impoverished tax base could come up with an additional $80 million for retirement benefits. If the city were contributing the recommended amount to the plan each year, it would take 57 percent of local property tax revenue."

How to make college cheaper
07/13/11   Academia
"Derek Bok, a former president of Harvard, once observed that "universities share one characteristic with compulsive gamblers and exiled royalty: there is never enough money to satisfy their desires." This is a bit hard on compulsive gamblers and exiled royals. America's universities have raised their fees five times as fast as inflation over the past 30 years. Student debt in America exceeds credit-card debt. Yet still the universities keep sending begging letters to alumni and philanthropists. This insatiable appetite for money was bad enough during the boom years. It is truly irritating now that middle-class incomes are stagnant and students are struggling to find good jobs. Hence a flurry of new thinking about higher education. Are universities inevitably expensive? Vance Fried, of Oklahoma State University, recently conducted a fascinating thought experiment, backed up by detailed calculations. Is it possible to provide a first-class undergraduate education for $6,700 a year rather than the $25,900 charged by public research universities or the $51,500 charged by their private peers? He concluded that it is."

Everyone else is biased
07/11/11   Behaviour
"Yet he forgets the most profound behavioral bias in this literature that is delightfully recursive: We think we are better than average at not being biased in thinking that we're better than average."

If you pay peanuts for ETFs ...
07/11/11   Indexing
"Having crunched the numbers, Chris Flood over at FTfm points out that ETF providers may be generating profit margins that are more than four times higher than the traditional mutual funds industry - even despite the products being marketed as "low cost"."

How rising rates may affect bonds
07/09/11   Hallett
"While many have been calling for the end of the bond bull market and the damage that awaits bond-heavy investors, I have rarely seen any quantification of the potential losses that bond investors could suffer. So, I ran some simple calculations."

Once Greece goes...
07/09/11   World
"The economic crisis in Greece is the most important thing to have happened in Europe since the Balkan wars. That isn't because Greece is economically central to the European order: at barely 3 per cent of Eurozone GDP, the Greek economy could vanish without trace and scarcely be missed by anyone else. The dangers posed by the imminent Greek default are all to do with how it happens."

A free checkup for low-cost investors
07/09/11   Funds
"Here's some free advice for you. If you're interested in building a portfolio with low-cost mutual funds, you can sometimes get ongoing investment advice at no extra charge. Wondering how much you should invest in stocks and bonds, or how much global diversification you should have? This is exactly the kind of free advice that is available when you buy funds directly from Leith Wheeler Investment Counsel, Matco Financial, Mawer Investment Management, Phillips, Hager and North and Steadyhand Investment Funds."

Mr. Innovation and his buddy, Mr. Great Idea
07/09/11   Markets
"Imagine you have $500,000 to feed, shelter and clothe your family for the next 30 years. You need to invest this money to protect your family against inflation. Now, imagine Mr. Innovation shows up on your doorstep and says, "I have a business to sell you and the price I put on it is $500,000." You reply, "As it turns out, I have that sum to invest, so tell me about your business." He responds: "All you need to know is that a bunch of PhDs have analyzed the business's historical share-price movements. Based on their super-computer algorithms, they believe its price will be higher in three months' time. So give me your money." Would you do it? My guess is no. Would it surprise you to hear that billions of dollars change hands on the stock market every day based on this approach?"

Dodger mania
07/06/11   Government
"The result has been a vicious circle: because tax evasion is so common, people trust the system less, which makes them less willing to pay taxes. And, because so many don't chip in, the government has had to raise taxes on those who do. That only increases the incentive to cheat, since there tends to be a correlation between higher tax rates and higher rates of tax evasion."

Only millionaires should invest in bonds
07/06/11   Bonds
"A Bond ETF will have a management expense ratio of 25-35bp. The bid-offer spread on seven year bonds purchased in amount of $5,000 will almost certainly exceed this. Additionally, there will be costs associated with further trading, unless you spend amounts exactly equal to your coupon income."

Fear and loathing in the Eurozone
07/04/11   World
"The problem, as Mundell anticipated, is that if the shocks to the system are not random and are specifically and continually related to one country the concept of currency union begins to fall apart. In particular, if specific countries are characterised by lack of price flexibility and rigid labor laws restricting wage adjustment in response to lack of competitiveness the only alternative is to transfer money from one region to another: and potentially to keep on doing it, till the voters squeak."

A culture of trust
07/02/11   Behaviour
"Trust, or the lack of it, certainly matters when it comes to commerce. Knack and Keefer, for instance, showed that for a 10% rise in "trust", as they define it, a country showed a near 1% increase in annual per capital growth, and that civic co-operation was also positively correlated with economic growth. There are multiple possible reasons for this, but if trust is generally reciprocated then the need for all sorts of costly protection mechanisms to defend against being cheated - everything from contracts to security guards and from burglar alarms to prenups - go away. When Buchan and colleagues looked at this issue they also found that the degree of trust people exhibited between each other increased with the amount of personal communication between them, no matter how irrelevant. What it seems is that simply getting to know someone is sufficient to promote trust and, with it, reciprocity: we find it harder to cheat people we have a personal relationship with."

Wrong number
07/02/11   Government
"The cast-iron nature of this pensions guarantee ought, you might think, to be reflected in pension accounting. But states are allowed a more generous accounting treatment than private-sector employers. They can discount their liabilities on the basis of the assumed rate of return (8% is standard) on the assets in their pension funds. Companies have to use the (lower) yield on an AA-rated corporate bond. So the present value of a state's liabilities is lower than it would be if private-sector rules applied, even though the rights of public-sector workers are greater."

Too much of a good thing
07/02/11   Indexing
"The number of ETFs has swelled to 2,747. Within equities, there are ETFs based on small-cap companies, value shares, individual industries and every conceivable combination of countries and regions. In bonds, there are ETFs linked to government, corporate and high-yield debt and paper of varying maturities. Some ETFs are based on commodity indices and property markets, others are designed to appeal to the environmentally conscious or to devout Muslims. There are leveraged ETFs which offer a geared return on a given index, inverse ETFs which aim to go down when a benchmark goes up (and vice versa) and, inevitably, leveraged inverse ETFs. For some, this is a worrying trend, with echoes of the subprime housing crisis, in which financial innovation went out of control. That crisis, too, had its origins in invention with a benign aim: the packaging of mortgages for use as securities for bonds was intended to reduce borrowing costs and disperse risk. Eventually, however, that simple idea transmuted into complex collateralised debt obligations and lower lending standards."

The joy of cash
06/28/11   Montier
"Long ago, Keynes argued that the "central principle of investment is to go contrary to general opinion, on the grounds that, if everyone is agreed about its merits, the investment is inevitably too dear and therefore unattractive." This powerful statement of the need for contrarianism is frequently ignored, with disturbing alacrity, by many investors. The latest example in the long line of such behavior may well be the general enthusiasm for so-called tail risk protection. The range of tail risk protection products seems to be exploding. Investment banks are offering "solutions" (investment bank speak for high-fee products) to investors and fund management companies are launching "black swan" funds. There can be little doubt that tail risk protection is certainly an investment topic du jour."

The Paulson Sino Forest loss
06/27/11   Funds
"The shortcuts we use as portfolio managers (and these are often sophisticated shortcuts born from some deep understanding of the industry) can make even the best portfolio manager susceptible to fraud."

A dirty business
06/25/11   Crime
"In the language of hedge funds, Galleon's strategy was to "arbitrage reality" with the consensus on the Street - to find information about a given company that diverged from Wall Street's view, allowing Galleon to cash in when the company's stock price rose or fell."

Dividend growth stars
06/25/11   Dividends
"Using data going back to 1992, CPMS created annual portfolios of all TSX-listed stocks that increased their dividend over the previous year. The annualized return through 2010 was 13.9 per cent, compared to 9.7 per cent for the S&P/TSX composite total return index."

Private-public wage disparities
06/25/11   Government
"When I negotiate collective agreements, I find a distinct difference between the instructions I receive from entrepreneurs -large or small -who are spending their own money compared to professional managers. The former are almost invariably more parsimonious and do not succumb to collective agreement 'creep' wherein, in each round of bargaining, more and more is given, until the collective agreement can be weighed in pounds, each clause providing another impediment or cost."

The importance of being audited
06/23/11   Accounting
"When a company's auditors resign and disclose that prior financial statements "should no longer be relied upon," investors should head for the hills because there is a very good chance fraud has been discovered. Unfortunately if that company is a Chinese operation that obtained an American listing through a so-called reverse merger, then it is probably too late to salvage much if anything from the investment."

Swinging for the fence not a sustainable strategy
06/22/11   Stocks
"There are many investors who roll the dice on just a one or two stocks. Some people choose well and hit the jackpot - again through varying proportions of luck and skill. These are the investors that often visit firms like ours for advice. We just don't see the other investors that saw their concentrated bets work against them. In other words, while hearing many of the strike-it-rich stories can give the impression that this is the path to prosperity, believe me when I tell you that far greater numbers of investors have permanently destroyed wealth using this approach. This is not a high probability way of building wealth."

Burned by Chinese shares
06/20/11   Markets
"The epidemic fraud affecting dozens of U.S.-listed China stocks is one of this year's big newspaper stories - after being one of last year's big stories in your favorite stock-market weekly. But the scams that have disgraced many Chinese listings on Nasdaq and the NYSE weren't unmasked by the exchanges, auditors, investment bankers or market regulators. The detective work was done by research-oriented hedge funds, who found the lies behind these multibillion dollar stock promotions, shorted the shares, and then blew the whistle. And for that public service, the shorts have been punished in an unexpected way."

A license to lie, backdated
06/20/11   Law
"if you are considering an investment in a mutual fund or ETF, you should understand that you will have little recourse if information provided in the prospectus turns out to be misleading or incomplete, even outright fraudulent"

Partner casts doubt on Sino-Forest
06/19/11   Stocks
"Embattled Sino-Forest Corp. , once Canada's biggest publicly-traded timber company, appears to have substantially overstated the size and value of its forestry holdings in China's Yunnan province, according to figures provided by senior forestry officials and a key business partner there."

A new way to slice the pie
06/19/11   Brokers
"In theory, fee-based accounts give advisers a transparent, above-board way to answer the question of how much they charge for their services. Instead of paying commissions buried in the cost of investment products, clients pay annual fees equal to a percentage of the value of their account plus any costs associated with the investments they hold."

Momentum and credit rating
06/19/11   Academia
"This paper establishes a robust link between momentum and credit rating. Momentum profitability is large and significant among low-grade firms, but it is nonexistent among high-grade firms. The momentum payoffs documented in the literature are generated by low-grade firms that account for less than 4% of the overall market capitalization of rated firms. The momentum payoff differential across credit rating groups is unexplained by firm size, firm age, analyst forecast dispersion, leverage, return volatility, and cash flow volatility."

Beware China's political bubble
06/19/11   World
"Although China has been churning out its share of unpleasant news, many onlookers don't consider its problems as serious as those of other big economies. They should think again. China's biggest economic challenges are political in nature and daunting, and will almost certainly get worse. That is because its autocratic system, for all the stability it has provided, will struggle to handle the sustained economic slowdown the country is likely to confront during this decade."

The war on drugs turns 40
06/17/11   Government
"Almost every year the DEA budget and staff are expanded, never mind if the organization is succeeding or failing at its mission. This isn't the DEA's fault. The illicit trade in narcotics is a black market that cannot be eliminated in a free society. But why do legislators continue to increase its size?"

When two-thirds isn't enough
06/15/11   Management
"It's one of the great anomalies of our ownership society: shareholders own companies, but executives can easily slap them down. The hired help, in other words, holds the cards. The owners of Cedar Fair L.P., a leisure and entertainment company in Sandusky, Ohio, have learned this the hard way."

Reason as a weapon
06/15/11   Behaviour
"For centuries thinkers have assumed that the uniquely human capacity for reasoning has existed to let people reach beyond mere perception and reflex in the search for truth. Rationality allowed a solitary thinker to blaze a path to philosophical, moral and scientific enlightenment. Now some researchers are suggesting that reason evolved for a completely different purpose: to win arguments."

Have Canadians reached their limits?
06/14/11   Debt
"If household debt was to be evenly spread across all Canadians, each individual would hold some $44,115 in outstanding debt in March 2011 while a family with two children would, relying on similar logic, be burdened with $176,461 in total outstanding household debt."

U.S. taxman reaches north
06/14/11   Taxes
"Janet Selby never imagined she was anything other than a Canadian. After all, she has lived in Canada for all of her 47 years. She went to school here, voted in elections, travelled on a Canadian passport and built a successful career as an accountant and corporate recruiter. But a recent call from her online broker forced her to confront a long-forgotten past. Ms. Selby spent the first four days of her life in the United States, born in 1963 to two Canadians pursuing graduate work at the University of Illinois in Champaign, Ill. That makes Ms. Selby an accidental American - a reality that comes with sweeping tax and reporting obligations that could now cost her thousands of dollars and a monster headache."

Who killed the internet auction?
06/13/11   Markets
"Then there was A. T. Stewart's most important innovation: His products came with price tags. At that time, in most stores, prices were set by haggling. The result was a frustrating dance between customer and salesperson, who parried back and forth until they managed to arrive at (in the words of one retail historian) "a price which neither party to the transaction considered robbery." Stewart saw that this experience left buyers feeling taken advantage of, and it encouraged salespeople to squeeze the most from every transaction rather than build long-term relationships with customers. So he marked each product with a fixed price. Customers embraced the new "no haggling" policy, and the Marble Palace became an enormous success."

Is Sino-Forest a Sino-Fraud?
06/13/11   World
"It is exceedingly difficult to build a private business in the state-dominated Chinese economy without committing high crimes and misdemeanors. Entrepreneurs, as a practical matter, have to lie, cheat, and steal every day just to keep their businesses going. In these circumstances, do you really think they tell the truth to auditors, underwriters, and regulators?"

Why Groupon not as rosy as it appears
06/13/11   Stocks
"It would seem Mr. Lefkofsky has an extensive history of taking investors' money for himself, then bankrupting the businesses invested in."

You want fries with that degree?
06/13/11   Debt
"What's more, governments might be doing some students a big favour by not encouraging them to get into debt to secure degrees and diplomas that qualify students to be little more than baristas and wait staff. You want fries with that English BA?"

State finances are worse than estimated
06/07/11   Government
"Fixed interest expenses are absorbing a bigger and bigger share of state budgets, leaving a shrinking portion for everything else. Today, debt service absorbs half of Nevada's budget, and 40% of Michigan's. In Arizona, California, Connecticut, Ohio and Illinois, the share now exceeds 20%."

Groupon has no competitive advantage
06/06/11   Growth Investing
"Groupon, a service that keeps half the proceeds from discounts that connect consumers to local merchants - has no competitive advantage and can't get one."

Bob Rodriguez's perspective
06/06/11   Value Investing
"Since coming back to work on Jan. 1, he has found himself galled once again by what he sees. Fund managers, emboldened by their mammoth gains, clamor for risk. Junk bonds remain wildly popular. Even more stunning, says Rodriguez, is the government's failure to address its debt. 'I know one thing from business,' he says, his voice quavering as he tries, mostly successfully, not to yell. 'Unless you correct the problems that are already occurring, you don't add on new leverage and new, other responsibilities until you correct the old! All you're going to do is capsize the ship!'"

Lessons from Ronaldinho and Beckham
06/04/11   Taxes
"How high can you tax the rich before they decide to pack up and move somewhere cheaper? For states teetering on the edge of bankruptcy, this is no theoretical question. Set taxes too low, and you miss out on valuable revenue - set them too high, and your powerhouse workers might move away.Now, by looking at the mobility of soccer stars in Europe, three economists say they are closer to understanding an ideal tax rate for the super-wealthy."

Credit lines worst trend
06/04/11   Debt
""People cannot resist lines of credit. And the worst combination in the country is a line of credit and a home renovation - once they renovate one room, the other rooms pale by comparison, so they go on to the next room and it's a never-ending cycle of renovation as they get deeper and deeper and deeper in debt. The four most expensive words in the English language are 'while we're at it.' And the four most expensive letters are 'HGTV.' "We go through a credit crisis brought on by too much private debt in the developed world, particularly in the States, and our response - the Home Renovation Tax Credit. That's like starting an alcoholic's rehab by taking him on a pub crawl. The problem with governments is they want to get re-elected.""

Income funds' payout sustainability 2
06/03/11   Funds
"Earlier this year, I wrote about how to gauge the sustainability of monthly income funds' fat distributions so that investors and advisors could make better decisions and set realistic expectations. Since then, I've received a steady stream of phone calls and emails, mostly expressing concern over many funds. However, one fund in particular keeps popping up in such inquiries, so I thought it was deserving of its own blog post. Perhaps I shouldn't be surprised by the continued interest in such funds but I am. Individual investors, financial advisors and industry regulators have contacted me to solicit my views on T-series or monthly income funds - both in general and for specific funds. Over the past five months, the one fund that has been most frequently mentioned is the RBC Managed Payout Solution - Enhanced Plus. So, let's take this through our test for distribution sustainability."

The Euro's PIG-headed masters
06/03/11   Debt
"Europe is in constitutional crisis. No one seems to have the power to impose a sensible resolution of its peripheral countries' debt crisis. Instead of restructuring the manifestly unsustainable debt burdens of Portugal, Ireland, and Greece (the PIGs), politicians and policymakers are pushing for ever-larger bailout packages with ever-less realistic austerity conditions. Unfortunately, they are not just "kicking the can down the road," but pushing a snowball down a mountain."

Can progressives fix the U.S. postal service?
06/01/11   Management
"But a desire to maximize profits and an aversion to losing money leads to certain efficiencies that ought to be exploited in less fraught enterprises. At UPS and FedEx, management has a powerful incentive to hold down overall labor costs, and to preserve the flexibility and adaptability of the respective companies. When USPS negotiates with the any of the four unions that represent its employees, the dynamic is completely different: management has fewer incentives to hold down costs, even as labor exercises substantially more clout due to is political influence.The results are ludicrous"

The U.S. postal service nears collapse
06/01/11   Government
"The USPS has stayed afloat by borrowing $12 billion from the U.S. Treasury. This year it will reach its statutory debt limit. After that, insolvency looms. On Mar. 2, Postmaster General Patrick R. Donahoe warned Congress that his agency would default on $5.5 billion of health-care costs set aside for its future retirees scheduled for payment on Sept. 30 unless the government comes to the rescue. 'At the end of the year, we are out of cash,' Donahoe said. He noted that the unusual requirement was enacted five years ago by Congress before mail started to disappear."

The golden age of drive-thru
06/01/11   Management
"Operational innovations at restaurants like Taco Bell rival those at any factory in the world. A view from the drive-thru window at how they do it"

How David beats Goliath
05/31/11   Behaviour
"Why, then, did weak teams play in a way that made it easy for good teams to do the very things that made them so good?"

Unlocking cash hoards
05/28/11   Dividends
"There is a cash crisis in corporate America - although it comes not from a shortage of the stuff, but from a surplus."

Lessons for the irrational investor
05/28/11   Behaviour
"In recent years interest in behavioral finance has steadily grown: It's equally valuable to retirees deciding whether to stick with their dividends or risk their savings in the currency markets, to a fund manager putting a good spin on a bad year, and to a brokerage redesigning its retirement accounts. And recently, of course, the stock market has given behavioral economists all the more to think about, as Main Street and Wall Street investors have pushed stock prices up and down in reaction to crises in Japan and the Middle East."

All revenue is not created equal
05/28/11   Stocks
"With the IPO market now blown wide-open, and the media completely infatuated with frothy trades in the bubbly late stage private market, it is common to see articles that reference both "valuation" and "revenue" and suggest that there is a correlation between the two. Calculating or qualifying potential valuation using the simplistic and crude tool of a revenue multiple (also known as the price/revenue or price/sales ratio) was quite trendy back during the Internet bubble of the late 1990s. Perhaps it is not peculiar that our good friend the price/revenue ratio is back in vogue. But investors and analysts beware this is a remarkably dangerous technique, because all revenues are not created equal."

Your so-called education
05/28/11   Academia
"While some colleges are starved for resources, for many others it's not for lack of money. Even at those colleges where for the past several decades tuition has far outpaced the rate of inflation, students are taught by fewer full-time tenured faculty members while being looked after by a greatly expanded number of counselors who serve an array of social and personal needs. At the same time, many schools are investing in deluxe dormitory rooms, elaborate student centers and expensive gyms. Simply put: academic investments are a lower priority. The situation reflects a larger cultural change in the relationship between students and colleges. The authority of educators has diminished, and students are increasingly thought of, by themselves and their colleges, as "clients" or "consumers." When 18-year-olds are emboldened to see themselves in this manner, many look for ways to attain an educational credential effortlessly and comfortably. And they are catered to accordingly. The customer is always right."

Shale boom in oil
05/28/11   World
"The technique, also called fracking, has been widely used in the last decade to unlock vast new fields of natural gas, but drillers only recently figured out how to release large quantities of oil, which flows less easily through rock than gas."

Economic stagnation explained, at 30,000 feet
05/28/11   Government
"The man in the aisle seat is trying to tell me why he refuses to hire anybody. His business is successful, he says, as the 737 cruises smoothly eastward. Demand for his product is up. But he still won't hire. "Why not?" "Because I don't know how much it will cost," he explains. "How can I hire new workers today, when I don't know how much they will cost me tomorrow?" He's referring not to wages, but to regulation: He has no way of telling what new rules will go into effect when. His business, although it covers several states, operates on low margins. He can't afford to take the chance of losing what little profit there is to the next round of regulatory changes. And so he's hiring nobody until he has some certainty about cost."

The audacity of Chinese frauds
05/27/11   Crime
"Frauds and audit failures can, and do, happen in many countries, including in the United States. But the audacity of these frauds, as well as the efforts to intimidate auditors, stand out. If investors such as Goldman Sachs and Hank Greenberg cannot fend for themselves, something more needs to be done if Chinese companies are to continue to trade in American markets."

Scraping by on $250k a year?
05/23/11   Taxes
"As educated professionals, they buy books, newspapers and magazines they own computers and pay for Internet access. But the Joneses don't take lavish vacations, don't belong to a country club, don't play golf, don't drive luxury cars, don't have a swimming pool, don't buy designer clothes, don't own or rent a second home, and don't send their kids to private school. They don't even shop for groceries at high-end markets. (They spend what the United States Department of Agriculture defines as a "moderate" amount on food for the average family of four.) In short, they're not "wealthy," even if they're in the top 5 percent of earners. ..."

Seven takeover targets
05/23/11   Value Investing
"Picking takeover candidates for fun and profit is a perennial investment sport. How can it not be? When one company takes over another, it typically pays a 20 percent to 70 percent premium over the target's prevailing stock price. Takeovers can enrich investors instantly."

Rebalance to control risk not boost returns
05/23/11   Markets
"The question of portfolio rebalancing presents a significant challenge. A momentum effect has persisted in many financial markets for decades. In other words, when a financial asset rises in price in the short-term, that asset has tended to continue rising for a period of time. (The same effect has persisted on the downside.) This is called the momentum effect and it has persisted for generations. Since stock and bond markets tend to spend more time going up than falling, this momentum effect can be a significant benefit over time. Rebalance too frequently and you risk cutting off the benefits of this momentum effect. Failing to rebalance enough could result in overexposure to certain asset classes or sub-classes. The challenge, then, when faced with developing a rebalancing method is to capture as much of this momentum effect while keeping risk within a range that is suitable and reasonable."

Beware of the yogurt
05/23/11   Government
"Ms Dashtaki is pondering whether to move to another state, one whose rules allow for artisanal products. She would not be the first entrepreneur to flee the Golden State. Or she might just give up. After all, one has to make a living. It looks like California's regulators have triumphantly saved their population from the threat of mass poisoning once again."

In defence of the Shiller p/e
05/20/11   Markets
"It wasn't actually a new idea on Shiller's part. Ben Graham, the value investor who was Warren Buffett's guru, had suggested a similar measure, involving the averaging of profits over an extended period to smooth out the effects of the economic cycle. Investors were paying little attention in the late 1990s. As the chart shows, the US market in the late 1990s was even more overvalued than it was before the crash of 1929. This was not a welcome message at the time when analysts talked of a 'new era' and even speculated that the cycle had been abolished. But even though the Shiller p/e accurately predicted that the market was overdue for a fall, there are still many critics who today refuse to accept its message."

Capitalists who fear free markets
05/20/11   Debt
"Japanese executives were outraged at the prospect of banks taking losses on loans to the company that produced a nuclear catastrophe. This used to be how free markets worked."

Is value compensation for distress risk?
05/20/11   Value Investing
"This study provides a comprehensive investigation of the relation between the value anomaly and distress risk. Using risk measures based on accounting models, structural models, credit spreads and credit ratings, we find no relation between the value premium and distress risk. Our findings are inconsistent with the notion that the value effect is a compensation for distress risk."

Fair-trade coffee fix
05/15/11   World
"Today, on World Fair Trade Day, we have something else to feel guilty about. That fair-trade cup of coffee we savour may not only fail to ease the lot of poor farmers, it may actually help to impoverish them, according to a study out recently from Germany's University of Hohenheim."

Rules for Fools
05/15/11   Government
"Some occupations clearly need to be licensed. Nobody wants to unleash amateur doctors and dentists on the public, or untrained tattoo artists for that matter. But, as the Wall Street Journal has doggedly pointed out, America's Licence Raj has extended its tentacles into occupations that pose no plausible threat to health or safety - occupations, moreover, that are governed by considerations of taste rather than anything that can be objectively measured by licensing authorities. The list of jobs that require licences in some states already sounds like something from Monty Python - florists, handymen, wrestlers, tour guides, frozen-dessert sellers, firework operatives, second-hand booksellers and, of course, interior designers - but it will become sillier still if ambitious cat-groomers and dog-walkers get their way."

Fantastic pieces of journalism
05/14/11   World
"Awards season in journalism is almost over: David Brooks has long since handed out the Sidneys, the Pulitzer Prizes have been issued, and the National Magazine Award finalists find out who won next week. Throughout 2010, I kept my own running list of exceptional nonfiction for the Best of Journalism newsletter I publish. The result is my third annual Best Of Journalism Awards - America's only nonfiction writing prize judged entirely by me. I couldn't read every worthy piece published last year. But everything that follows is worthy of wider attention."

GM's profits a huge net loss for taxpayers
05/14/11   Government
"No, the question was not whether GM could make a profit after a bankruptcy that stiffed most of its creditors and shed the most grotesque burdens of its legacy costs, nor whether giving companies money will make them more profitable. The question is whether it was worth it to the taxpayer to burn $10-20 billion in order to give the company another shot at life. To put that in perspective, GM had about 75,000 hourly workers before the bankruptcy. We could have given each of them a cool $250,000 and still come out well ahead compared to the ultimate cost of the bailout including the tax breaks--and over $100,000 a piece if we just wanted to break even against our losses on the common stock."

More denial
05/11/11   World
"Muddling through and hoping for the best is the strategy but it ain't going to work. The Greeks won't wear it (there's another national strike today) the markets won't wear it (three year Greek bond yields are nearly 25%) and German voters won't wear it either."

Closet indexing, fees, and performance
05/11/11   Funds
"Mutual fund investors face a basic choice between actively-managed funds and index funds with lower expenses. However, the prevalence of indexing is rare in most countries. Rather, actively managed funds in many countries engage in "closet indexing," choosing portfolios that closely match their declared benchmark. The degree of explicit indexing in a country is negatively related to fees, while "closet indexing" is positively associated with fees and negatively with performance. The most actively managed funds charge higher fees but outperform their benchmarks after expenses. The degree of indexing and the ability of active managers to outperform are both associated with competition and fees."

Demographic changes and financial markets
05/11/11   Academia
"We find surprisingly powerful results when we apply the same technique for exploring the links between demography and capital markets returns, net of the strong and well-documented effects of valuation and yield levels. Stocks perform best when the roster of people age 35-59 is particularly large, and when the roster of people age 45-64 is fast-growing. Bonds follow a similar pattern, with an age-shift: they're best when the roster of people age 50-69 is growing quickly. We carry out three different forms of robustness checks, each of which provides statistical significance in different ways: applying different country weights, testing alternative demographic variables, and confirming GDP results on out-of-sample countries."

Botox and beancounting
05/10/11   Government
"Take public-sector debt. The definition used in Washington, DC, is "federal government debt held by the public", which stood at 62% of GDP at the end of 2010. But if you instead use Europe's preferred measure - general government gross debt, which also includes the borrowing of state and local governments and Treasury securities held by other government bodies, such as the Social Security Trust Fund - it jumps to 92% of GDP (see left-hand chart). That is on a par with Portugal's level of public debt."

Get back to work Warren
05/10/11   Buffett
"Steve Carell's Office character, Michael Scott, left the show this season, and it looks like producers are pulling out all the stops to keep up the show's ratings. Guest appearances by Jim Carey, Ray Romano, James Spader, Catherine Tate, Ricky Gervais and Will Arnett have already been announced, but the addition of legendary capitalist Warren Buffett may blow them all out of the water."

Three cheers for the cheapeners
05/09/11   World
"A feature of innovation is that the greatest impact of a new idea comes not when the light bulb goes on over the geek's head, but when the resulting technology eventually becomes cheap enough for many people to use - perhaps decades later. The first plane at Kitty Hawk had zero impact on the world economy, but budget airlines have a huge impact the first computer was a curiosity, but cheap laptops changed the world."

What bourbon street taught me
05/09/11   Fun
"I can't believe it - the goldbugs/silverbugs were right - The Dollar is dead. "Kid Dynamite," you ask, "WTF are you talking about? You've been saying that the Metal Heads are being a bit irrational in their declaration of the New Monetary Regime - what changed?" Indeed, I HAD been saying that, but then I did some empirical research - some feet-to-the-ground old fashioned channel checks in the most primal of places, one of the hardest hit cities in the country: Bourbon Street on New Orleans. What I found was shocking - The Dollar is NOT the currency of choice. Alas, the silverbugs weren't entirely correct, as silver was not the money of the future in New Orleans. Rather: beads were. I kid you not. Plastic beads."

Think big and go broke
05/06/11   Value Investing
"Alcoa, with its two AA's, is the first symbol alphabetically in the Standard and Poors 500 Index. It is also traditionally the first S&P company to report quarterly earnings. Why? With results like these over the last 17 years one would think that the SEC would have to drag the results out of them. Or maybe Alcoa executives would hide 'til midnight Friday and put out a press release when no one would be likely to report it. But no, this capitalistic catastrophe is Johnny on the spot every quarter, and neatly illustrates an investing nugget my partner Edwin Levy and I stumbled upon nearly twenty years ago. After faithfully perusing the Value Line Survey every weekend for many years, we noticed that over half of the companies portrayed didn't actually make any money. Value Line follows almost 2000 stocks in its main survey, so this is quite a mouthful, but so many of them look like Alcoa here. They report earnings, to be sure, and we all understand the denotation of "earnings". We mean GAAP, or in some technology companies we mean near GAAP, but only after we fudge some of the expenses. We generally get the hang of Generally Accepted Accounting Practices. But when we say "profits", it has a connotation very different. We know intuitively what a profit is at a local bakery. Profit, in every day speech, means money that we can take out of a business and spend on completely different things--- schools fees, new cars, diamond rings---and when we come back on the Monday morning, we still have an asset to come back to. You can see for yourself that that in no way describes Alcoa."

Double Dip
05/06/11   Real Estate
"National home prices are officially on the hunt for a new bottom. After beginning to decline again this summer, once the home buyer credit expired, home prices hit a new post-bubble low in April, according to housing industry consulting firm Clear Capital. It reports that national home prices now sit 0.7% below their March 2009 low. Over the past nine months, they're down 11.5%."

Inevitability of a Default in Greece
05/06/11   Bonds
"Sooner or later there will be a Greek default, even if it is officially described as a "voluntary restructuring" approved by most bondholders. Europe wants to delay that at least until 2013, when new rules are supposed to kick in that would let official creditors - such as Europe's bailout fund - do better in a deal than private creditors. But it seems less and less likely that the inevitable can be delayed that long."

T.O.'s unquenchable thirst for condos
05/04/11   Real Estate
"The still-buoyant real estate market hasn't just kept house and condo prices high it's held rents aloft as well. Developers in Toronto and other major Canadian cities stopped building large new rental high-rises in the 1970s. That was partly due to rent controls in Ontario and other provinces, but also because condominiums offered a faster, more certain payoff to a developer - once the building is completed and you've sold the units, you're out. You don't have to manage and maintain it for years, even decades. As for owners, they could either occupy the units or make a pretty penny renting them out. "Condos have become the de facto new rental supply," says consultant Barry Lyon. That supply is much more expensive than old rental high-rises. Lyon and other analysts say that renters typically pay 50% more for a new condo unit than they would on rent for a comparable apartment in an aged building."

Berkshire Annual Meeting
04/30/11   Buffett
"It's time once again for Berkshire Hathaway's annual shareholder meeting, the two-day frenzy of Warren Buffett aficionados who have descended here to listen to his latest musings. This year's meeting promises to be even more interesting than ever, given the controversy over David Sokol, whose resignation has cast a pall over the normally jovial proceedings."

Supersize our pension plan
04/29/11   Government
"The overconcentration of financial power isn't even the biggest flaw with the proposed Mega CPP. Even worse, it will take money away from many of those who need it, and give it to those who don't. Advocates of a fat CPP insist that it is needed to keep the elderly out of food banks. In fact, poverty among seniors is remarkably low. Fewer than 5% of those over 65 are below Statistics Canada's low-income cutoff. Thanks to Ottawa's Old Age Security and Guaranteed Income Supplement programs, many seniors actually see their disposable income go up when they retire, says Vettese. Poverty is a far bigger problem among working-age adults - nearly 10% of them fall below the Statscan line. Yet most of them would have to pay extra taxes to fund the Mega CPP. That's Layton's anti-Robin Hood scheme in a nutshell: removing money from the pockets of younger workers, business owners and the working poor to give better pensions to everybody, including those who already have a sweet deal at retirement. I can understand why union leaders like this approach. I just can't understand why anyone else thinks it's fair."

Keynes vs. Hayek Round Two
04/28/11   Economics
"In 'Fight of the Century', Keynes and Hayek weigh in on these central questions. Do we need more government spending or less? What's the evidence that government spending promotes prosperity in troubled times? Can war or natural disasters paradoxically be good for an economy in a slump? Should more spending come from the top down or from the bottom up? What are the ultimate sources of prosperity?"

Bad Education
04/26/11   Academia
"If tuition has increased astronomically and the portion of money spent on instruction and student services has fallen, if the (at very least comparative) market value of a degree has dipped and most students can no longer afford to enjoy college as a period of intellectual adventure, then at least one more thing is clear: higher education, for-profit or not, has increasingly become a scam."

Irish Setter Dad
04/26/11   Fun
"Whose children are going to succeed in life, Amy Chua's or mine? Her Lulu has that violin going for her - there's hardly a Silicon Valley billionaire, Wall Street plutocrat, senator, four-star general, or pope who isn't a violin virtuoso. And Sophia, who tickles the ivories, can always say, "Don't tell Mom I work for Goldman Sachs, she thinks I play piano in a house of ill repute." But my kids practice too, hour after hour every day. They practice being jerks. And since almost every boss I've ever had was a jerk, this gives them a leg up. Plus there's the cat in the microwave. That shows an inquisitive, experimental turn of mind. You can see how electronic cat-zapping could lead directly to the invention of something like Facebook."

On being wrong
04/23/11   Behaviour
"Most of us will do anything to avoid being wrong. But what if we're wrong about that? 'Wrongologist' Kathryn Schulz makes a compelling case for not just admitting but embracing our fallibility."

Dead Suit Walking
04/23/11   Economy
"In New York City, men in the 35-to-54 kill zone have lost jobs faster than any other group, including teenage girls, according to new data from the Fiscal Policy Institute."

Buffett's Profit on GE
04/22/11   Buffett
"In the financial crisis, Warren Buffett loaned out his halo of respectability to prop up sentiment about Goldman Sachs Group, Dow Chemical, General Electric and other blue-chip companies. Those bets came with some heavy costs for the companies, and produced handsome profits for the Oracle of Omaha."

Systemic risks of ETFs
04/22/11   Indexing
"Crisis experience has shown that as the financial intermediation chain lengthens, it becomes complicated to assess the risks of financial products due to a lack of transparency as to how risks are managed at different levels of the intermediation chain. Exchange-traded funds, which have become popular among investors seeking exposure to a diversified portfolio of assets, share this characteristic, especially when their returns are replicated using derivative products. As the volume of such products grows, such replication strategies can lead to a build-up of systemic risks in the financial system. This article examines the operational frameworks of exchange-traded funds and identifies potential channels through which risks to financial stability can materialise."

Owning Loses Appeal
04/21/11   Real Estate
"The median U.S. home price tumbled 32 percent from a 2006 peak to a nine-year low in February, data from the Realtors show. The retreat surpassed the 27 percent drop seen in the first five years of the Great Depression, according to Stan Humphries, chief economist of Zillow Inc., a Seattle-based real estate information company."

Losing 84 Cents on Dollar
04/21/11   Government
"Stephen Street, the state inspector general who led the investigation with U.S. authorities, says that criminal law fell short of addressing all of the police pension system's shortcomings. "Randy Zinna is a symptom of a larger problem over there, which is a lack of oversight, a lack of accountability," Street says. "You can't conclude anything other than that.""

Negative Outlook on U.S. AAA Rating
04/18/11   Bonds
"Standard and Poor's put a "negative" outlook on the U.S. AAA credit rating, citing rising budget deficits and debt."

Will Canada be going Dutch?
04/18/11   World
"Once the current commodity boom ends the loonie will plunge, the economy will stumble badly, wages will fall and complacent policy makers will find out what happens when there isn't enough growth to compensate for a lack of fiscal prudence."

Does DALBAR really calculate investor returns?
04/18/11   Behaviour
"To give credit where it's due, DALBAR deserves kudos for having begun its annual QAIB studies as far back as the mid-1980s. But for nearly a decade, I have suspected that DALBAR's methodology was flawed. I contacted DALBAR recently in an effort to confirm my understanding of the finer points of their calculations. Their lack of response left me with my original interpretation of DALBAR's 2001 QAIB report, the only full version I've reviewed. And it reveals what may be a questionable methodology. I suspect that DALBAR calculates what it calls investor returns by applying dollar-weighted fund redemption rates to benchmark returns - rather than applying a DWRR calculation directly to the funds. And if they're doing that, they're not calculating investor returns."

Top Marginal Tax Rates 1916-2010
04/15/11   Taxes
"Over the years, changing the amount of taxes people pay was accomplished not just by changing rates but by changing the income limits of the tax brackets. Just looking at the top rates does not give the whole picture about who is paying taxes. Before the 1986 tax reform, the income tax had 15 brackets. In the 1930s, there were more than 50. The Wealth Tax Act of 1935, applied the top rate to income over $5 million and had only a single taxpayer: John D. Rockefeller, Jr. As the number of tax brackets decrease, the the top rate was applied to more people over the decades. Since 1987 the income tax brackets were combined so now more than a million people "qualify" for the top marginal rate."

State of war
04/12/11   Government
"The funding crisis in public-sector pensions is, in large part, the result of post-dated cheques written by politicians in the past. As Roger Lowenstein, a journalist, recounts in his book "While America Aged", there has been a "devil's pact" in which politicians granted benefits to unions without funding those promises properly. A classic illustration comes from San Diego, California. In 2002 the funding ratio (the proportion of pension liabilities covered by assets) of the city's pension scheme dropped close to 82.3%, a level that should have triggered a rise in the contribution to make up the shortfall. That would have required a tax increase. To avoid this, the city did a deal with the unions whereby it would raise future benefits in return for not having to lift contributions. In other words, faced with a hole in the fund, the authorities dug deeper."

Pick a number, any number
04/12/11   Government
"Unfunded schemes cannot use the assumed rate of return on their assets because they do not have any. One possible measure would be the growth rate of the economy, since tax revenues (which will fund the pensions) should rise in line with GDP. The problem lies in estimating the future growth rate. In 1990 the Japanese government would have forecast a much higher growth rate than it actually achieved. The financial economists say that the discount rate should be based on the inflation-linked government bond yield, because British public-sector pensions are inflation-protected. As index-linked yields are currently very low (below 1% in real terms), that makes the British shortfall on public-sector pension funding look very large, at around 1 trillion, or 81% of GDP."

End of Month Anomaly
04/12/11   Markets
"Calendar effects in stock returns have been prominent in the finance literature since the 1970s. It's easy to pull in a time series and look at things like January, Monday, or beginning of month. Josef Lakonishok and Robert Haugen wrote a book, The Incredible January Effect, in 1988. Alas, most of this effect was in smaller stocks that were hard to trade, and while it may have existed, it no longer does."

How to Get a Real Education
04/09/11   Academia
"I understand why the top students in America study physics, chemistry, calculus and classic literature. The kids in this brainy group are the future professors, scientists, thinkers and engineers who will propel civilization forward. But why do we make B students sit through these same classes? That's like trying to train your cat to do your taxes - a waste of time and money. Wouldn't it make more sense to teach B students something useful, like entrepreneurship?"

Property bubble hits the grave
04/09/11   World
"In Beijing and Guangzhou, where the average per sq m price of a burial plot now exceeds that of houses, some Chinese call themselves fen nu (grave slaves). This label is derived from fang nu (housing slaves) - those burdened with huge housing mortgages."

Death by a thousand credits
04/09/11   Taxes
"...a tax-credit announcement allows a party to look pro-family, or pro-green, or whatever the cause du jour may be. They're mainly symbolic gestures parties use to make sure they have something for every interest group - symbolic gestures that add up to a big price we all pay."

The Ryan Journey
04/08/11   Government
"The Democrats are on defense because they are unwilling to ask voters to confront the implications of their choices. Democrats seem to believe that most Americans want to preserve the 20th-century welfare state programs. But they are unwilling to ask voters to pay for them, and they are unwilling to describe the tax increases that would be required to cover their exploding future costs."

A Tax Code for the Digital Age
04/08/11   Taxes
"Anyone who wants a Nintendo Wii console or the latest John Grisham novel can pick it up at the nearest Target (TGT) store or log on to (AMZN) and have it delivered. The similarities between the two retailers aren't as apparent when it comes to taxes. Amazon's effective rate - the total it pays in federal, state, local, and international income taxes after deductions, along with its sales and property levies - has been more than 10 percentage points lower than Target's for the past four years. Target's effective tax rate in 2010 was 35.1 percent, compared with Amazon's 23.5 percent. Amazon in 2010 owed $352 million in income taxes worldwide on income of $1.5 billion, according to its SEC filings, while Target owed $1.58 billion on income of $4.5 billion."

Stepping on the Gas
04/02/11   World
"In the early 1980s, George P. Mitchell, a Houston-based independent energy producer, could see that his company was going to run out of natural gas. Almost three decades later, the results of his effort to do something about the problem are transforming America's energy prospects and the calculations of analysts around the world."

Measurements that mislead
04/02/11   Behaviour
"Mr. Sackett had assumed that these separate measurements would generate similar rankings. Those cashiers who were fastest in the short test should also be the fastest over the long term. But instead he found a surprisingly weak correlation between the rankings, leading him to distinguish between two types of personal assessment. One measures 'maximum performance': People who know they're being tested are highly motivated and focused, just like those cashiers scanning a few items while being timed. The other type measures 'typical performance' - measured over long periods of time, as when Mr. Sackett recorded the speed of cashiers who didn't know they were being watched. In this sort of test, character traits that have nothing to do with maximum performance begin to influence the outcome."

The biggest urban legend in finance
04/02/11   Markets
"Stocks ought to produce higher returns than bonds in order for the capital markets to "work." Otherwise, stockholders would not be paid for the additional risk they take for being lower down the capital structure. It comes as no surprise, therefore, that stockholders have enjoyed outsized returns for their efforts for most - but not all - long time periods."

The Price of Taxing the Rich
04/02/11   Taxes
"Nearly half of California's income taxes before the recession came from the top 1% of earners: households that took in more than $490,000 a year. High earners, it turns out, have especially volatile incomes - their earnings fell by more than twice as much as the rest of the population's during the recession. When they crashed, they took California's finances down with them."

Is ethanol to blame for global unrest
03/29/11   World
"The U.S. produces more corn than any other country. The total value of its crop in 2009 was about $50 billion, and that was before the recent price surge. It was also more than double the combined value of all the crops produced in Canada. Until a few years ago, corn was used almost entirely for animal feed, booze, processed foods for humans - such as corn flakes and high-fructose corn syrup - and backyard corn roasts. Today, 40% of the U.S. crop is devoted to ethanol, up from 33% in 2008. A decade ago, the figure was just 7%."

Ontario's search for a solar system
03/29/11   Government
"In Germany, where the solar revolution began, critics are now questioning the huge size of the subsidies, estimated at $200,000 to $300,000 per job created."

The expansion of regulators
03/29/11   Government
"From an evolutionary perspective, a research regulator is a life form with three very interesting characteristics. First, its numbers explode in response to catastrophic events regardless of how rare that event is. Second, it has few natural predators, so its expansion goes unchecked. Third, regulators multiply like bacteria: they spawn more regulations which require more regulators, so there is a rapid increase in population over time. And these three characteristics derive, I submit, from a basic human tendency to focus on emotionally-engaging events while ignoring their probability."

Curb your enthusiasm
03/26/11   Dividends
"If you want to drive today's investors mad with desire, try this magic word: dividends. There's something about the promise of a high yield that makes grey-haired stock buyers turn giddy as 17-year-olds. It's not entirely clear what gives rise to this intoxicating effect. Stock market historians say dividend-paying stocks have generally done better than their non-dividend-paying peers, perhaps because being forced to disgorge cash on a regular basis pushes executives to focus on their core business rather than lavishing money on the CEO's pet projects. But paying a dividend, by itself, doesn't guarantee a company success."

Home Prices Since 1890
03/26/11   Real Estate
"Are you one of those people who still thinks buying a home is a good investment? Perhaps some historical perspective will help. VisualizingEconomics provides a fascinating chart showing how nominal and real home prices have changed since 1890"

In Prison for Taking a Liar Loan
03/26/11   Law
"It's not just that Mr. Engle is the smallest of small fry that is bothersome about his prosecution. It is also the way the government went about building its case. Although Mr. Engle took out the two stated-income loans, as liar loans are more formally called, in late 2005 and early 2006, it wasn't until three years later that his troubles began."

Public Pension-Fund Squeeze
03/23/11   Government
"Some public pension funds are finding themselves caught in a squeeze between actuaries worried about future benefit costs and local governments worried about immediate budgets strains. The tension was on display last week, when California pension fund Calpers decided to hold its expected annual return rate steady. The fund's actuary had recommended that the California Public Employees' Retirement System adopt a more-conservative long-term investment expectation nearly a dozen local officials attended a meeting last week to urge Calpers not to change the rate."

Creative Destruction?
03/23/11   Disaster
"Modern economies, it turns out, are adept at rebuilding and are often startlingly resilient. The quintessential example comes from Japan itself: in 1995, an earthquake levelled the port city of Kobe, which at the time was a manufacturing hub and the world's sixth-largest trading port. The quake killed sixty-four hundred people, left more than three hundred thousand homeless, and did more than a hundred billion dollars in damage (almost all of it uninsured). There were predictions that it would take years, if not decades, for Japan to recover. Yet twelve months after the disaster trade at the port had already returned almost to normal, and within fifteen months manufacturing was at ninety-eight per cent of where it would have been had the quake never happened."

Groupon no bargain at even half the price
03/23/11   Stocks
"Let's look at a couple of pro-Groupon arguments designed to counter this whole barrier-to-entry argument. One is that Groupon has "first-mover advantage," which is said to be exceptionally important in the tech space. I was going to use my Netscape browser to access the Excite search engine to research this concept more, then share what I found on Friendster, but decided to move on to the next point instead."

How Carrots Became the New Junk Food
03/23/11   Behaviour
"The company has been around for nearly a century now, but it boomed in the 1990s, with a breakthrough product. A local grower named Mike Yurosek had become frustrated with all the waste in the carrot business. Supermarkets expected carrots to be a particular size, shape, and color. Anything else had to be sold for juice or processing or animal feed, or just thrown away. Yurosek wondered what would happen if he peeled the skin off the gnarly carrots, cut them into pieces, and sold them in bags. He made up a few test batches to show his buyers. One batch, cut into 1-inch bites and peeled round, he called 'bunny balls.' Another batch, peeled and cut 2 inches long, looked like little baby carrots. Bunny balls never made it. But baby carrots were a hit. They transformed the whole industry. Soon, the big growers in Bakersfield were planting fields with baby carrots in mind, sowing three times more seeds per acre, so the carrots, packed densely together, would grow long and skinny, for the maximum number of 2-inch cuts. Yields and profits climbed. The really big deal, the thing nobody expected, was that baby carrots seemed to make Americans eat more carrots. In the decade after they were introduced, carrot consumption in the United States doubled."

Trouble Lurks in Junk Bonds
03/21/11   Bonds
"Risky bonds have been on a tear since 2009. But as the events in Japan and elsewhere fuel demand for safer assets, investors would be wise to exercise caution."

The Canada bubble
03/18/11   World
"Eleven years into the bull market in commodities, it's easy to forget just how much Canada has riding on strong resource prices. For one thing, the boom has boosted our paycheques. The rise in commodity prices was responsible for two-thirds of the 15 per cent gain in disposable income experienced in the last decade, Bank of Canada governor Mark Carney said in a 2008 speech. While Canada's soaring loonie has hurt manufacturers, it's also improved living standards by keeping inflation low. And rising commodity prices have also helped keep unemployment muted. As bad as Canadians think the recent recession was, in terms of the job market it was the mildest downturn of the last 30 years. In January, the Canadian economy added nearly double the number of jobs created in the entire U.S. economy, which is 10 times larger."

Why this value investor holds cash
03/17/11   Value Investing
"The Canadian stock market is more vulnerable to a major pullback than its U.S. counterpart, warns one of Canada's more successful money managers of the past decade. "We think that valuations in Canada, in particular, are at a very dangerous level," said Vito Maida, founder of Toronto-based investment firm Patient Capital Management Inc. "Equities in Canada have, I think, gone to levels that are not attractive today, and could be in for a serious correction.""

The Crowded Restaurant Conundrum
03/17/11   Behaviour
"These restaurants have perfected the art of creating Veblen goods - items where demand increases as the price goes up. In this rarefied world, high prices are a feature, not a bug they're status symbols that alert others to the fact that the patrons can pay $26 for something as basic as a spinach salad. They also serve to keep out the riff-raff."

The Top 200 Canadian Stocks for 2011
03/15/11   Stingy Investing
"As it happens, this was about an average year for our top stocks. If you had bought equal amounts of the All-Stars and rolled your gains into the new players each year, you'd now be sitting on a 19.1% average annual return over the last six years, not including dividends. By way of comparison, that's more than 12 percentage points higher than the annual return of the S&P/TSX Composite (XIC), which climbed just 6.5% a year over the same period."

The Top 500 U.S. Stocks for 2011
03/15/11   Stingy Investing
"Just like the Canadian team, the U.S. All-Stars combine the best value and growth attributes. It's a one-two punch that helped them advance 19.4% since last year, not including dividends. Meanwhile the S&P 500 (SPY) trailed the All-Stars by 6.5 percentage points but managed a gain of 12.9% over the same period."

Retirement 100
03/15/11   Stingy Investing
"Do you dream of breaking free from cubicleville and visiting far off lands, exploring castles of yore, or sipping your way through wine country? Wouldn't it be grand if your stocks paid for the experience? To help launch your retirement world tour, we've ranked the largest dividend stocks in Canada based on their ability to put cash in your pocketbook. Before we reveal this year's top picks for income investors, let's check out how last year's crop fared. Our stocks have paid big dividends since the spring of 2009, with our A-grade Retirement All-Stars shooting skyward with average gains of 58.3%. That includes non-reinvested dividends which we assumed were spent on pleasurable pursuits."

Reinvent education
03/13/11   Academia
"Salman Khan talks about how and why he created the remarkable Khan Academy, a carefully structured series of educational videos offering complete curricula in math and, now, other subjects. He shows the power of interactive exercises, and calls for teachers to consider flipping the traditional classroom script -- give students video lectures to watch at home, and do 'homework' in the classroom with the teacher available to help."

How state budgets are breaking
03/13/11   Government
"In this fiery talk, Bill Gates says that state budgets are riddled with accounting tricks that disguise the true cost of health care and pensions and weighted with worsening deficits -- with the financing of education at the losing end."

A Red Flag On Reverse Mortgages
03/13/11   Real Estate
"It is the saddest of paradoxes: a government-backed financial maneuver intended to free up extra money for struggling older people turns out to have left some widows and widowers on the brink of foreclosure."

The Lobster Underground
03/10/11   Government
"Whether as a treat for the common man or an excuse to slum it for the well-to-do, the lobster roll was never terribly hip, edgy, or controversial. Until last year, when a Brooklyn artist and chef reinvented the lobster roll as delicious underground performance art. Using the moniker Dr. Claw, the thirtysomething chef began boiling batches of lobsters in his home kitchen and using the meat in rolls he sold - without the requisite licenses and permit - in Greenpoint, a Brooklyn neighborhood populated by Polish Americans and an ever-increasing numbers of hipsters. In order to skirt the law, Claw - whose real name is widely published but whom I chose not to identify here so that he could speak freely to me - devised a system that would be the envy of even the most enterprising drug dealers on The Wire. Claw's customers first had to friend him on Facebook. Then, if they checked out, Claw would provide the potential customer with a phone number, exchange texts when the roll was ready, and hand off the goods in a plain brown bag."

The elephant in the room
03/09/11   Government
"As can be seen, entitlements and interest will absorb all government spending by 2025. But when the CBO did the same sums a decade ago, says Ms Meeker, the critical point was reached in 2060. In short, the fiscal position is deteriorating rapidly. Where then is the appetite for cutting entitlements or increasing taxes sharply?"

Made in America
03/08/11   World
"For US firms, the decision to manufacture overseas has long seemed a no-brainer. Labor costs in China and other developing nations have been so cheap that as recently as two or three years ago, anyone who refused to offshore was viewed as a dinosaur, certain to go extinct as bolder companies built the future in Asia. But stamping out products in Guangdong Province is no longer the bargain it once was, and US manufacturing is no longer as expensive. As the labor equation has balanced out, companies - particularly the small to medium-size businesses that make up the innovative guts of America's technology industry - are taking a long, hard look at the downsides of extending their supply chains to the other side of the planet."

Tour De Gall
03/08/11   Fun
"Twenty minutes later, possibly under their own steam, the snails arrive. Vesuvian, they bubble and smoke in a magma of astringent garlic butter and parsley. We grasp them with the spring-loaded specula and gingerly unwind the dark gastropods, curling like dinosaur boogers. They go on and on, expanding onto the plate as if they were alien. We have to cut them in half, which is just wrong. The rule with snails is: Don't eat one you couldn't get up your nose."

A madcap quest for 'free'
03/04/11   Thrift
"As soon as Kathy Spencer walked into the Rite Aid in Haverhill, early one recent Sunday morning, she knew something was up: All the carts were gone. At that hour, she was accustomed to having the store to herself, quietly piling hundreds of dollars worth of goods in her cart, quietly working the system, quietly walking out the door without having to pay for any of it. Instead, the store was "a madhouse full of crazy women fighting over toilet paper,'' she said. She knew exactly who was to blame: she was."

Broke Town, U.S.A.
03/03/11   Government
"In May 2008, Vallejo filed for bankruptcy. The filing drew little national attention most people were too busy watching banks fail to worry about cities. But while the banks have largely recovered, Vallejo is still in bankruptcy. The police force has shrunk from 153 officers to 92. Calls for any but the most serious crimes go unanswered. Residents who complain about prostitutes or vandals are told to fill out a form. Three of the city's firehouses were closed. Last summer, a fire ravaged a house in one of the city's better neighborhoods one of the firetrucks came from another town, 15 miles away. Is this America's future?"

Flee the land of quota
03/03/11   Government
"So, rightly or wrongly, unlike so many others, we didn't base our family's future on an industry spinning its wheels, plus having an investment-to-earnings ratio similar to where Nortel was when things went into the manure pit."

Five Tips From Warren Buffett
03/02/11   Buffett
"While the stock market overall has boomed, and it's a battle to find cheap stocks, one thing does stand out: Many of Warren Buffett's favorite stocks remain at, or around, the prices he paid for them. As Mr. Buffett only likes to buy stocks for a lot less than he thinks they are really worth, this suggests you can get a bargain or two"

Global Investment Returns 2011
03/02/11   Markets
"High dividend yield strategies are a focus of this year's report."

Why Koch Industries Is Speaking Out
03/01/11   Government
"Federal data indicate how urgently we need reform: The unfunded liabilities of Social Security, Medicare and Medicaid already exceed $106 trillion. That's well over $300,000 for every man, woman and child in America (and exceeds the combined value of every U.S. bank account, stock certificate, building and piece of personal or public property)."

The Myth of Japan's 'Lost Decades'
02/28/11   World
"There is clearly a contradiction here, and after studying the facts on the ground in Tokyo for decades I find it hard to avoid the conclusion that the story of Japan's stagnation is a media myth. Certainly anyone who visits Japan these days is struck by the obvious affluence even among average citizens. The cars on the roads, for instance, are generally much larger and better equipped than in the 1980s (indeed state of the art navigation devices, for instance, are more or less standard on many models). Overseas vacation travel has more than doubled since the 1980s. The Japanese boast the world's most advanced cell phones, and the biggest and best high-definition television screens. Japan's already long life expectancy has increased by nearly two years. Its Internet connections are some of the world's fastest -- something like ten times faster on average than American speeds. True, not all of Japan's indicators are equally impressive. The Tokyo stock market, for instance, has never recovered from its 1990s slump. Neither has the real estate market. (In the latter case, however, there is a silver lining in a major boost to living standards, in that young home buyers now get far more space for their money. In any case the implosion since 1991 has merely restored some sanity to valuations that had previously become -- very temporarily -- outlandish)."

Sometimes a Great Notion
02/27/11   Stocks
"One common thought in the equity world has been that a rotation of investor dollars toward shares of 'high-quality' companies should be imminent. This is a sane and sober idea, and one that generally hasn't worked in the past couple of years, when markets have been lifted by improving credit conditions, a snap-back in corporate profits and surging risk appetites. These drivers of market action almost always favor smaller, more volatile, more cyclical and less well-capitalized stocks, which have led this bull market."

Negative fee fund
02/27/11   Funds
"Those performance fees have led to another distinguishing characteristic for two of Bridgeway's funds: Bridgeway Micro-Cap Limited has an expense ratio of zero, while the recently reopened Bridgeway Aggressive Investors 1 has a negative 0.51 percent expense ratio - it pays investors $5.10 for every $1,000 they have invested in it."

Berkshire Hathaway 2010
02/26/11   Buffett
"Don't let that reality spook you. Throughout my lifetime, politicians and pundits have constantly moaned about terrifying problems facing America. Yet our citizens now live an astonishing six times better than when I was born. The prophets of doom have overlooked the all-important factor that is certain: Human potential is far from exhausted, and the American system for unleashing that potential - a system that has worked wonders for over two centuries despite frequent interruptions for recessions and even a Civil War - remains alive and effective. We are not natively smarter than we were when our country was founded nor do we work harder. But look around you and see a world beyond the dreams of any colonial citizen. Now, as in 1776, 1861, 1932 and 1941, America's best days lie ahead."

A small hedge fund manager's lament
02/24/11   Markets
"Running a small hedge fund, I would usually want to buy small caps on which I had done superior analysis. Alas, when I look at small caps - even medium caps I keep finding expensive, dodgy and well promoted stocks. Small caps are a land of shorts. The good stuff - and then the less good stuff left behind - has been picked over by numerous PE shops."

Why Investors Can't Get More Cash
02/20/11   Taxes
"Earlier this month, Microsoft borrowed $2.25 billion in unsecured debt. What in the world possesses a company with $40 billion in cash and short-term securities to go out and borrow money? Rock-bottom interest rates are one reason. But the bizarre, byzantine U.S. tax code seems to be another."

Why Ten Million Dollar IPOs Matter
02/20/11   Markets
"Today only the largest of companies can go public, generally only those with over $500 million dollars of market capitalizations. In the 80s there were IPOs where the net proceeds were less than $900K."

Berkshire's $1.2 billion selling spree
02/20/11   Buffett
"In the you can't-have-too-much department, Berkshire Hathaway raised cash last year as it prepared for a rare change of the investing guard."

Economic Meltdown Looming
02/20/11   Funds
"Bob Rodriguez says the U.S. has seven months to implement significant budgetary reductions or face tipping point"

Tim McElvaine talk
02/16/11   Value Investing
"A rare talk from one of the nicest value investors in Canada."

Lewis on the financial crisis
02/15/11   Fun
"Wall Street leaders now understand that they made a mistake, one born of their innocent and trusting nature. They trusted ordinary Americans to behave more responsibly than they themselves ever would, and these ordinary Americans betrayed their trust. Amazingly, these ordinary Americans don't even appear to feel guilty for their actions. Like wild animals that have lost their fear of humans, they continue to wander down from the hills to rummage through our garbage cans for sustenance."

Love the downgrade
02/12/11   Brokers
"It would appear that as long as they spell your company's name right,upgrades and downgrades are both good news for your stock."

Rethinking Stocks for the Long Haul
02/11/11   Markets
"Put yourself in the shoes of an intrepid investor in 1900. Both the U.S. and Argentine equity markets looked extremely attractive. Yet the buy-and-hold investor would have pocketed a small fortune in U.S. equities and would have been essentially wiped out in Argentina over the course of the century. 'We don't know what the equity premium will be over the next 30 years,' says Pastor. 'And that uncertainty compounds with time.'"

Expectation Errors in Value/Glamour Strategies
02/11/11   Academia
"This paper uses financial statement analysis to identify expectation errors regarding future firm performance embedded in the prices of value and glamour firms. We contrast performance expectations implied by firms' value/glamour classification against a simple, financial statement analysis-based metric that differentiates improving versus deteriorating financial performance. We find that the value/glamour effect is concentrated among firms whose financial performance conflicts with implied expectations. Corroborating evidence of predictable expectation errors exists for future analyst forecast errors, forecast revisions, earnings announcement-window returns, and momentum reversals. Together, the results suggest that the value/glamour effect is an artifact of erroneous performance expectations that are predictable from financial statement analysis."

Canada is 'a purely random success story': Shiller
02/09/11   Economy
"Robert Shiller, the Yale professor who correctly predicted the 1987 stock market collapse and the recent U.S. housing market meltdown, said Canada's robust financial health compared to other nations is largely due to a random run-up in oil prices in the midst of the global financial crisis. "It's a major export for Canada and it went to US$140 a barrel in 2008, right when Canada needed it," Prof. Shiller said in an interview Tuesday. Canada's economic output fell roughly 4.2% from its peak in 2007 to its trough in 2009 - even with the oil price surge, while the U.S. saw a near-identical decline. "It seems that if the country didn't have that boost from oil, it would have done worse than the United States," Prof. Shiller said."

How Great Entrepreneurs Think
02/09/11   Behaviour
"Sarasvathy likes to compare expert entrepreneurs to Iron Chefs: at their best when presented with an assortment of motley ingredients and challenged to whip up whatever dish expediency and imagination suggest. Corporate leaders, by contrast, decide they are going to make Swedish meatballs. They then proceed to shop, measure, mix, and cook Swedish meatballs in the most efficient, cost-effective manner possible. That is not to say entrepreneurs don't have goals, only that those goals are broad and - like luggage - may shift during flight. Rather than meticulously segment customers according to potential return, they itch to get to market as quickly and cheaply as possible, a principle Sarasvathy calls affordable loss. Repeatedly, the entrepreneurs in her study expressed impatience with anything that smacked of extensive planning, particularly traditional market research."

People play events into biases
02/09/11   Behaviour
"I'm a big believer in Jonathan Haidt's characterization of our brains as articulate confabulators, primarily engaged in rationalizing our prejudices. I have rarely witnessed someone change their mind on something important to them based on any one fact sure, disinterested people do, but not anyone who's invested several years on a subject. Last week's John Tierney's NYT article on academics highlights they are just as biased as the uneducated, even though they consider them paragons of rational, unbiased thought"

Celebrating 75 Years Of Sloth
02/08/11   Indexing
"Wharton professor Jeremy Siegel pointed out in his 2005 book, The Future for Investors, that the original S&P 500 stocks in 1950 outperformed the annually reconstituted index from 1950 through 2003. Interestingly, many of the largest stocks from the original S&P 500 Index are also in this fund's portfolio, including ATandT, ExxonMobil, and DuPont (DD). The fund's winning streak has continued since 2003, too, as it has beaten the S&P 500 Index by 2.5 and 1.5 percentage points annualized over the trailing five- and 10-year periods, respectively. The fund has benefited from the same dynamics that have powered the returns of the original S&P 500 constituents. In fact, the fund has returned an annualized 11.1% since 1970 (which is as far back as our database goes) versus 9% for the S&P 500. It has also beaten the 17 actively managed equity funds introduced in 1935 or earlier."

Land of the free lunch
02/08/11   Markets
"In short, America is the ultimate example of survivorship bias. Go back to 1900 and you might have picked Argentina or Russia as emerging nations with the ability to rival the US but each proved to be a huge disappointment."

A License to Shampoo
02/07/11   Government
"Amid calls for shrinking government, lawmakers across the country are vowing to cut regulations that crimp economic growth. President Barack Obama recently said it's time to root out laws that 'are just plain dumb.' Tell that to the cat groomers, tattoo artists, tree trimmers and about a dozen other specialists across the country who are clamoring for more rules governing small businesses."

Super Rich
02/07/11   Books
"In both authors' works, it's difficult to find concrete business lessons. And perhaps that's the point. For example, writes Chopra: 'Your body is a constant projection of you in the world. Every cell eavesdrops on your thoughts.' The author views our metabolisms as chat rooms, with epidermal cells listening in to what's going on in the cranium. If you don't understand what he means, your foot can explain it to you."

State Budget Bunk
02/07/11   Government
"When Arizona claimed to be selling its government buildings, it was engaging in a far more deceptive kind of borrowing - a gimmick known as "tax-exempt certificates of participation" and even more preposterous than the Daily Show correspondent realized. There was no new owner in this so-called sale. Rather, the state floated more than $1 billion of notes, promising to repay bondholders with the "rent" that it would pay to lease the buildings. Since rent, not tax revenues, technically would repay the certificates, Arizona could borrow the money, even though it exceeded the state's constitutional debt limit. Yet Arizona will pay the rent on the buildings with tax revenues, so the impact on taxpayers is exactly the same as more borrowing would have been: in this case, $1.5 billion in future taxes."

Hedging Bankers Skirt Efforts to Overhaul Pay
02/07/11   Management
"Intent on fixing a banking system that contributed heavily to the recent financial crisis, lawmakers and regulators pushed Wall Street to overhaul its pay practices. Big banks responded by shifting more compensation into stock, a move intended to align employees' interests more closely with those of investors and discourage excessive risk-taking. But it turns out that executives have a way to get around those best-laid plans. Using complex investment transactions, they can limit the downside on their holdings, or even profit, as other shareholders are suffering."

Your Roadmap to Investment Success
02/07/11   Stingy Investing
"I was pleased to talk at The Investment Show where I made the case that novice investors should opt for low-fee balanced funds. I then moved on to more advanced topics including dividend investing and value investing. Here are the slides that were used..."

Think twice
02/02/11   Academia
"Business schools have long sold the promise that, like an F1 driver zipping into the pits for fresh tyres, it just takes a short hiatus on an MBA programme and you will come roaring back into the career race primed to win. After all, it signals to companies that you were good enough to be accepted by a decent business school (so must be good enough for them) it plugs you into a network of fellow MBAs and, to a much lesser extent, there's the actual classroom education. Why not just pay the bill, sign here and reap the rewards? The problem is that these days it doesn't work like that. Rather, more and more students are finding the promise of business schools to be hollow. The return on investment on an MBA has gone the way of Greek public debt. If you have a decent job in your mid- to late- 20s, unless you have the backing of a corporate sponsor, leaving it to get an MBA is a higher risk than ever. If you are getting good business experience already, the best strategy is to keep on getting it, thereby making yourself ever more useful rather than groping for the evanescent brass rings of business school."

When Irish Eyes Are Crying
02/02/11   World
"First Iceland. Then Greece. Now Ireland, which headed for bankruptcy with its own mysterious logic. In 2000, suddenly among the richest people in Europe, the Irish decided to buy their country - from one another. After which their banks and government really screwed them. So where's the rage?"

Cowen's Great Stagnation
01/31/11   Economics
"Cowen's way of thinking is rather common, that growth emanates from some limited resource, and like 'peak oil' goes through a natural cycle of growth and decline. The Physiocrats in the eighteenth century believed that the wealth of nations was derived solely from the value of things from soil like minerals and agriculture, all the rest - advertising, management, finance - just parasitic. Such thinking influenced Malthus's idea that we are all doomed by a finite amount of land, which will ultimately constrain our population via starvation. Later the labor theory of value tried to make labor the source of all wealth, where capital was disembodied labor. This too is mistaken, and while no one promotes these theories anymore, their intuition lives on."

The Hot Spotters
01/31/11   Health
"Brenner wasn't all that interested in costs he was more interested in helping people who received bad health care. But in his experience the people with the highest medical costs - the people cycling in and out of the hospital - were usually the people receiving the worst care. "Emergency-room visits and hospital admissions should be considered failures of the health-care system until proven otherwise," he told me - failures of prevention and of timely, effective care. If he could find the people whose use of medical care was highest, he figured, he could do something to help them. If he helped them, he would also be lowering their health-care costs. And, if the stats approach to crime was right, targeting those with the highest health-care costs would help lower the entire city's health-care costs. His calculations revealed that just one per cent of the hundred thousand people who made use of Camden's medical facilities accounted for thirty per cent of its costs. That's only a thousand people - about half the size of a typical family physician's panel of patients."

Follow the Cash
01/30/11   Value Investing
"'A company can transfer that free cash flow to shareholders even without sales growth. That's our theology!' jokes the former seminarian. Double-digit cash-flow yields look very attractive compared with 10-year Treasuries yielding roughly 3.5%."

In debt to Grandpa
01/30/11   Government
"Sometimes the financial system can appear like one of those Escher drawings in which water flows simultaneously uphill and downhill. Governments rescued banks from the threat of failure in 2008, but banks are also big buyers of government bonds - so much so that a sovereign default in Europe might cause a banking crisis. Who is supporting whom? The same question can be asked of pension funds."

How to Tax the Rich
01/30/11   Fun
"The president was too polite to mention it during his State of the Union speech on Tuesday, but here's a quick summary of the problem: The U.S. is broke. The hole is too big to plug with cost cutting or economic growth alone. Rich people have money. No one else does. Rich people have enough clout to block higher taxes on themselves, and they will. Likely outcome: Your next home will be the box that your laser printer came in. I hope that you kept it."

5 Stingy Stocks for 2011
01/29/11   Stingy Investing
"Our Stingy Stocks climbed a phenomenal 69.4% this year and that marks the second year in a row that they've gained more than 60%."

Illinois Plan for Pensions Questioned
01/28/11   Government
"The Securities and Exchange Commission has said it has a special team devoted to investigating public pensions, and last year it brought its first case ever against a state, accusing New Jersey of securities fraud for claiming to have pension assets that did not really exist."

Lies, flame-grilled lies and statistics
01/28/11   World
"Burgernomics does support claims that Argentina's government is cooking the books. The gap between its average annual rate of burger inflation (19%) and its official rate (10%) is far bigger than in any other country. Its government deserves a good grilling."

Peter Cundill's last interview
01/27/11   Value Investing
"Reporter David Berman spoke with the legendary investor, who passed away this week, for the February issue of Report on Business magazine. Here is Mr. Cundill's last interview."

The Cost of Clout
01/27/11   Government
"People in Chicago tend to write off clout and political corruption in Chicago with a shrug, as a unique or even amusing local affectation, or just part of the character of purely political life of the city, but one that doesn't fundamentally change its status as the "City That Works." But nothing could be further from the truth. Chicago's culture of clout is a key, perhaps the key, factor holding the city back economically."

Asset Mixer Update
01/26/11   Stingy Investing
We've updated the Stingy Investor asset mixer to include data for 2010.

Periodic Table Update
01/26/11   Stingy Investing
We've updated our periodic table of annual returns for Canadians to include data for 2010.

The president as micromanager
01/26/11   Management
"While watching the speech, I tweeted that 'Obama sounds remarkably similar to the CEOs I used to listen to on earnings calls: the ones with mediocre EPS and a failing business model.' This wasn't a crack at Obama, or Democrats it was a reaction to the content. And after watching the responses, the impression lingers--indeed, maybe it's strengthened. The nation is facing some really difficult problems, particularly on the fiscal front. There's no longer any way to put it off pretty soon, the government is going to have to start making some very hard choices about taxes and spending. No matter what it chooses, that probably means lower economic growth, angry voters, and some real loss on the part of whoever's ox is gored."

Don't enter the dragon
01/24/11   Stocks
"Yet, because the railways offered - and sometimes delivered - the prospect of enormous wealth, the money kept flowing. Today, the same is true. China's boom is real enough, and so it's possible for investors in small Chinese stocks to believe that they're heeding Deng Xiaoping's famous admonition "To get rich is glorious." Unfortunately, many of them are just proving the truth of another famous adage: "There's a sucker born every minute." "

7 Graham Stocks for 2011
01/23/11   Stingy Investing
"Graham's time-tested strategy for defensive investors gained ground this year but, in a rare turn of events, it failed to beat the market. As a result, it has only bested the market in eight out of the last ten years which, as they say, ain't bad."

Mr. Moneybags
01/23/11   Buffett
"A flush Berkshire Hathaway is in its best shape ever and piling up cash so quickly that it could be sitting on close to $50 billion at its core insurance operation alone by year end, and might even begin paying a dividend. Berkshire's profit recovery, aided by some smart acquisitions and investments by CEO Warren Buffett -- notably its purchase of the Burlington Northern railroad -- has gone largely unrecognized on Wall Street, where Berkshire's Class A shares, now trading around $121,000, haven't budged in nearly a year."

Hedge Fund Analyst Checklist
01/23/11   Value Investing
"Anyways, I was cleaning out some old files and came across these notes from the class and thought I would repost them as they are a wonderful guide for a young analyst on how to think about investing in stocks."

A path to escape debt
01/23/11   Government
"Policymakers are working behind the scenes to come up with a way to let states declare bankruptcy and get out from under crushing debts, including the pensions they have promised to retired public workers."

A continuing disgrace
01/23/11   Thrift
"However, what is disgraceful is that savers cannot hedge this inflation risk. The government stopped the sale of index-linked national savings certificates last year. This was not because the government didn't need the money the budget deficit is still 150 billion. It can only be viewed as a deliberate attempt to punish savers by denying them the chance of a positive real return. And slamming savers is not in the country's long-term interest."

China is a bubble close to bursting
01/23/11   World
"The Mayfair hedge fund manager said he started work when he saw some news reports on China's "ghost towns". Last year Al Jazeera, the Middle Eastern television channel, aired a short report from Ordos Shi, a city in inner Mongolia built for one million people that is almost entirely empty. The report reveals empty streets, housing estates, shops and restaurants. The locals prefer the old town of Ordos and tell the cameras there's no need to move to the new city. According to Corriente, China has consumed just 65pc of the cement it has produced in five years, after exports. The country is outputting more steel than the world's next seven largest producers combined. It has 200m tons of excess capacity. In property, Corriente said it had found an excess of 3.3bn square meters of floor space in China - yet 200m square meters of new space is being constructed each year. Despite the vast population, the property is generally out of the price range for most. House prices are around 22 times disposable income in Beijing."

Forensic Finance, Benford's Way
01/19/11   Accounting
"One of the more curious statistical anomalies of the universe has turned out to have a range of practical applications in the world of finance. It also turns out to be one of the stranger laws underpinning the stock market, although figuring out why is a painful process. Above all, Benford's Law can be used to spot financial fraudsters because of a psychological quirk that means we humans are dead useless at pretending to be random. All of this comes from a law that was discovered by one man, explained by another and named after a third. Now that's random."

The Groupon Bubble
01/18/11   Stocks
"The paper reports that Groupon, which turned down $6 billion from Google last month, is in talks with Wall Street for an IPO that Wall Street is pitching to investors valuing the company at between $15 billion and $20 billion. The NYT says the two-year-old Groupon "is pushing ahead with plans for its initial public offering," and I'm sure it is. I'd be pushing to cash in too before this bubble pops."

Blaming the Rat
01/17/11   Behaviour
"Here's the problem in a nutshell: our mix of jobs has changed profoundly while our approach to incentives has not. As a consequence, we have employees who have lost motivation and faulty incentive programs that have introduced a raft of unintended consequences."

Worthless Stocks from China
01/16/11   Stocks
"Bird's involvement would evolve from irritation that a company could get away with making a claim that so obviously defies basic business logic to the conviction that many pieces of the Chinese miracle that trade in the U.S. are, in his words, 'flat-ass' frauds. And what started as a retiree looking into a company has turned into a dispute that has drawn in other shorts, the Securities and Exchange Commission, auditors, and, according to recent reports, the U.S. House Committee on Financial Services. It has also revealed significant flaws in U.S. markets and how they are regulated. Although the stocks trade on U.S. exchanges, and thus project a sense of having to play by American rules, the assets and the principals of many of the companies reside in China. The companies operate on their terms, leaving injured parties and the SEC powerless. Bird says the carnage is just beginning. 'The whole thing has no place to go but to blow up,' he says. 'That's a rational position for an investor to start with, that every one of these Chinese reverse mergers is a fraud.'"

Is Law School a Losing Game?
01/14/11   Law
"Based on the seething and regret you hear from some law school grads, more than a few wish that someone had been patronizing enough to say, "Oh no you don't." But it's often hard to convince students about the potential downside of law school, says Kimber A. Russell, a 37-year-old graduate of DePaul, who writes the Shilling Me Softly blog. "This idea of exceptionalism - I don't know if it's a thing with millennials, or what," she says, referring to the generation now in its 20s. "Even if you tell them the bottom has fallen out of the legal market, they're all convinced that none of the bad stuff will happen to them. It's a serious, life-altering decision, going to law school, and you're dealing with a lot of na ve students who have never had jobs, never paid real bills.""

A Brief Visual History of U.S. Taxes
01/14/11   Taxes
"Tax reform might be The Issue of 2011. Or, like most years, it might linger on the sidelines of the national debate, but never press its way into the limelight. Either way, the Senate Finance Committee is hearing the case for tax reform today -- and who better to hear from first than the head of the Joint Committee on Taxation, Congress' official oracle and arbiter of tax policy. You can download the full testimony here, but I wanted to pass along four easy charts from the presentation that explain some major developments in the tax code over the last 40 years. I don't want to say too much, as these charts speak for themselves."

Putting monthly distributions to the test
01/14/11   Funds
"I don't make many bold predictions. But nearly a decade ago I did just that. I challenged the most popular monthly income mutual fund of the day, now known as IA Clarington Canadian Income. I stated that this balanced fund's 10% distribution rate at the time could not be sustained and would have to be cut. No recommendation has ever caused me such grief. I received angry phone calls and e-mails. But I turned out to be right. Fast forward to 2011. In today's Global and Mail I take readers through a process for testing whether an investment's monthly cash payout can continue longer-term. It's the same process I used to make my Clarington prediction in 2001. While Clarington and some other firms have adopted more flexible distribution policies, several funds continue to sport unsustainable cash payouts. And I use a popular big bank fund to illustrate our distribution sustainability test in today's article."

Dire States
01/09/11   Government
"'If something cannot go on forever, it will stop.' States with a permanent mismatch between taxes and spending will not be able to squeak by on budget gimmicks and backdoor borrowing forever either they'll find a way to bring their budgets into balance, or they'll run out of money and default on their obligations. The path they choose will make a big difference in the future of the states, and of their citizens - and in the life of the nation as a whole."

Government workers of the world unite!
01/09/11   Government
"It would be a mistake to write off the public-sector unions. They are masters of diverting attention from strategic to tactical questions. Undoubtedly the unions will lose some of their privileges over the coming years the scale of the debt crisis makes this inevitable. But will governments have the courage to tackle the root causes of the problem (such as pensions) rather than dealing with secondary problems (such as wages)? And will they dare to tackle questions of power rather than just pay and perks? If they are to claim victory in the coming fight, they need not just to restore the public finances to health. They also need to breathe the spirit of innovation into Leviathan."

Disassembling, Reassembling Hoover Dam
01/09/11   Fun
"Systematically tearing down such a massive edifice will create at least 25,000 jobs over the next five years. And then reassembling it, using all the same pieces in the exact same configuration, will employ another 25,000 workers. America is back"

Buffett on Berkshire, Succession and America
01/09/11   Buffett
"Finally, he talked a little about why he was optimistic about the future of the United States: "We had four million people here in 1790," he tells Vanity Fair. "We're not more intelligent than people in China, which then had 290 million people, or Europe, which had 50 million. We didn't work harder, we didn't have a better climate, and we didn't have better resources. But we definitely had a system that unleashes potential. This system works. Since then, we've been through at least 15 recessions, a civil war, a Great Depression. ... All of these things happen. But this country has optimized human potential, and it's not over yet."

Financial Crisis Q and A
01/09/11   Debt
"The panic in 2007 was not observed by anyone other than those trading or otherwise involved in the capital markets because the repo market does not involve regular people, but firms and institutional investors. So, the panic in 2007 was not like the previous panics in American history (like the Panic of 1907, shown below, or that of 1837, 1857, 1873 and so on) in that it was not a mass run on banks by individual depositors, but instead was a run by firms and institutional investors on financial firms. The fact that the run was not observed by regulators, politicians, the media, or ordinary Americans has made the events particularly hard to understand. It has opened the door to spurious, superficial, and politically expedient "explanations" and demagoguery."

Goldman Pitch vs Nigerian Scam
01/07/11   Fun
"Of course, unlike Nigerian email scams, the solicitation came from a Goldman money manager rather than a random stranger. And Goldman isn't offering a scam but an investment opportunity so hot that the investment bank had to stop taking orders, as our colleagues reported this afternoon. But we couldn't help note some similar language used by Goldman and purported Nigerian princes. Read and compare"

Penny Stock Risk Premium Has Wrong Sign
01/07/11   Markets
"In case you didn't know, penny stocks are lousy investments high risk, negative return."

When States Default
01/04/11   Government
"Land values soared. States splurged on new programs. Then it all went bust, bringing down banks and state governments with them. This wasn't America in 2011, it was America in 1841, when a now-forgotten depression pushed eight states and a desolate territory called Florida into the unthinkable: They defaulted on debts."

Value Averaging and Automated Bias
01/04/11   Academia
"Value averaging is a formula investment strategy which can be shown to achieve a lower average cost and higher IRR than alternative strategies. However, in contrast to previous studies, this paper shows that this does not lead to higher expected profits. Instead an "averaging down" effect systematically biases the IRR up and the average purchase cost down. The same bias applies to a wide class of investment strategies (including dollar cost averaging) where the amount invested in each period is negatively correlated with the return made to date."

Hindsight Bias in Dollar-Weighted Returns
01/04/11   Academia
"Dollar-weighted returns have been used as evidence that consistently bad timing drags investor returns significantly below the buy-and-hold market return, and that consequently the equity risk premium is overstated. In this paper we show that this approach is affected by hindsight bias in the dollar-weighted return. We present an alternative method which quantifies and removes this effect. The results show that bad timing has actually had little impact on investor returns from mainstream US equities. We conclude that previous estimates of the equity risk premium remain valid."

The jobs crisis
01/02/11   Economy
"Why have new jobs been so hard to come by? One view blames cyclical economic factors: at times when everyone is cautious about spending, companies are slow to expand capacity and take on more workers. But another, more skeptical account has emerged, which argues that a big part of the problem is a mismatch between the jobs that are available and the skills that people have. According to this view, many of the jobs that existed before the recession (in home building, for example) are gone for good, and the people who held those jobs don't have the skills needed to work in other fields. A big chunk of current unemployment, the argument goes, is therefore structural, not cyclical: resurgent demand won't make it go away. Though this may sound like an academic argument, its consequences are all too real. If the problem is a lack of demand, policies that boost demand - fiscal stimulus, aggressive monetary policy - will help. But if unemployment is mainly structural there's little we can do about it: we just need to wait for the market to sort things out, which is going to take a while."

Have You Ever Tried to Sell a Diamond?
01/02/11   Economics
"The diamond invention is far more than a monopoly for fixing diamond prices it is a mechanism for converting tiny crystals of carbon into universally recognized tokens of wealth, power, and romance. To achieve this goal, De Beers had to control demand as well as supply. Both women and men had to be made to perceive diamonds not as marketable precious stones but as an inseparable part of courtship and married life. To stabilize the market, De Beers had to endow these stones with a sentiment that would inhibit the public from ever reselling them. The illusion had to be created that diamonds were forever -- 'forever' in the sense that they should never be resold."

Why a Budget Is Like a Diet
01/02/11   Thrift
"As a species, humans are notoriously poor at following through with their plans. Sticking to a budget - a dirty word even among many financial planners, who prefer the more euphemistic 'spending plan' - feels too much like dieting. And we often fail at both for the same reasons: too much focus on the restrictions, not enough on fun. So it's not surprising when people end up bingeing later, more than making up for dollars not spent or calories not consumed."

It's When You Start And Finish
01/02/11   Markets
"But historical averages can vary widely depending on their starting and ending points. For example, averages that start before the 1929 crash are substantially different from those that start after it, and Mr. Easterling felt that choosing a single date was arbitrary. In response, he created the chart above, which shows annualized returns based on thousands of possible combinations of market entry and exit."

The downfall
01/02/11   Management
"Next time you go to an AGM, if you think there is cause for concern, ask the CEO during the QandA if management could leave the room for 15 minutes because you have a few questions to ask the independent directors concerning executive compensation, and point out that it would not be appropriate for management to be present for such a discussion. Don't be afraid. The meeting is for you, the shareholder. If the CEO gets defensive, that might be taken as a bad sign. If the independent directors get defensive, that could be taken as a really bad sign, because it would suggest that, in their hearts, they don't represent shareholders at all."

The virtue of simplicity
01/01/11   Stingy Investing
"'Complexity isn't necessarily a good thing when it comes to picking stocks,' he says. 'The real challenge is sticking to the stocks you like and not getting scared out of them if they don't work out immediately.'"

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