Showing posts from August, 2009

The Difficulty of Measuring the Gains To Fundamental Research

Here's a paper by Bradford Cornell that I've had in my in box for a while. It's titled "Investment Research: How Much Is Enough?" Here's the abstract
Aside from the decision to enter the equity market, the most fundamental question an investor faces is whether to passively hold the market portfolio or to do investment research. This thesis of this paper is that there is no scientifically reliable procedure available which can be applied to estimate the marginal product of investment research. In light of this imprecision, investors become forced to rely on some combination of judgment, gut instinct, and marketing imperatives to determine both the research approaches they employ and the capital they allocate to each approach. However, decisions based on such nebulous criteria are fragile and subject to dramatic revision in the face of market movements. These revisions, in turn, can exacerbate movements in asset prices. I raises some interesting issues about th…

My First Century (Bike Ride, That Is)

I recently signed up to ride in my first "Metric Century" - a 100 kilometer (that's about 62 miles for those of you who don't speak metric) bike ride. Fittingly, it's a fund-raiser for the Hole In The Wall Gang Camp.

The Hole In The Wall Gang Camp was started by Paul Newman (yes, that Paul Newman) in the late 1980s to provide seriously ill children with a Wild West-themed camp experience (the original HITWG camp was formed in Ashford CT and was based on the movie "Butch Cassidy and the Sundance Kid"). The original camp has been built up over the years - it now has an "OK Corral" for its infirmary (with a 24 hour medical staff), horse stables, totem poles, tee pees, swimming pools, boating, horseback riding, sports, theater, and camping, along with much, much more. Over the years, the HITWG camps (there are now 11 separate camps in several countries) have hosted over 130,000 seriously ill children.

My nephew (who also died of cancer a little …

Data Analysis With Stata

The Unknown Family went to the Unknown Sister-in-Law's family's house in an adjacent state (their youngest daughter is going off to college, and Unknown Wife wanted to see her before she leaves for the Big Adventure). So, I got a couple of days to myself. Nothing very exciting - I've been grinding data during the day, and went on a couple of longish bike rides (I'm up to 25-30 miles at a time at what for me is a pretty good clip).

On the data analysis front, I finally took the plunge and started using Stata. It's a pretty amazing package of tools. I work with a lot of large and complicated data sets, and there's always a lot of data manipulation before I get to the point where I'm running statistical analyses. When it comes to moving data around (merging data, sub-setting, mean adjusting, etc...) SAS wins hands down. And I've put a lot of time getting my SAS chops, so I'd put off learning Stata for a long time.

But I now understand what so many…

Capital Structure, Buybacks, and Free Cash Flow

I'm in the process of putting together material for my Advanced Corporate Finance class. Of course, it has a module on capital structure and payout policy. One of concepts we'll get across is that holding extra cash often gives managers incentives to invest in negative NPV projects (the old "free cash flow" problem). So, according to agency theory, managers should lever up and pay out the excess cash to shareholders in the form of buybacks and/or dividends. Unfortunately, higher leverage and lower cash holdings exposes the firm to increased risk of financial distress.

Along those lines, I was going through my "clippings file" and came across this piece in the Economist. It discusses some of the costs of excess debt during recessions. Of course, it's always easy to look back after the fact and say that firms shouldn't have levered up so much, since it means they'll face distress costs during a recession (hindsight's always 20/20, after …

Dilbert On Mutual Funds

Nuff said.

Tutorials For The BA2+ Calculator

In any class, there are some sections that take up a disproportionate amount of class time but are only needed by some of the class. For example, in my case course, some of the students have a very good grasp of how to use their business calculators, while others somehow made it out of the introductory class without learning something as basis as how to calculate simple present and future values using the built in financial functions of their calculator.

So, how do I make sure that all my students have the basic background knowledge needed to survive the class? My solution this semester is to use screen recording software to create a few tutorials for the Texas Instruments BA2+ calculator (the model we encourage our students to use in the intro class).

I made a short 5-6 minute video that goes over how to change the settings on the calculator (i.e. the number of decimals displayed, number of periods per year, etc), and another to demonstrate how to solve problems involving present …

Beloit College Publishes Its Latest Mindset List

Every year, Beloit college publishes its "Mindset List." This list is updated annually to reflect what the latest crop of incoming freshman has experienced. Here are some of my favorites:
12. The KGB has never officially existed.
13. Text has always been hyper.
18. They have never understood the meaning of R.S.V.P.
30. There has always been a Cartoon Network.
51. Britney Spears has always been heard on classic rock stations.
61. “Womyn” and “waitperson” have always been in the dictionary.Read the whole thing here.

It's CFA Level 2 and Level 3 Results Day

Today is the day they give out results for the Level 2 and Level 3 CFA exams. Looks like pass rates for the Levels 2 and 3 exams were lower than their historical levels.

To all who passed, congratulations - you're now one step closer to finishing the process. If not, here's some perspective from the "Godfather of the Analyst Forum" (he goes by the pseudonym of "Joey DeVivre"). It was geared towards the Level 1 Exam, but it fits for L2 and L3 as well:
If You Failed
1) You are in distinguished company
I know a college finance professor who took 7 tries to pass three exams. This guy even wrote a college textbook on corporate finance. (That sounds like an apocryphal story, but I swear it's true but there is no way I'm posting his name).

2) Nobody will care
Everybody seems to have this dread that something terrible will happen when they tell their colleagues, boss, significant other, and parents. What will happen is they will say "Wow, hard test. Whe…

Finding the Lowest-Cost Textbooks

I've blogged on this previously, but this piece on sources for finding low-cost textbooks bears repeating (particularly with school starting back up shortly).

Of the sources mentioned, I tried out CampusBooks to search for a few reference materials I needed (used, of course). It's outstanding, and well worth checking out.

HT: Newmark's Door

How To Remember Material For the CFA Exam

I just read a study that is highly applicable to anyone who's studying for the CFA exams, since there's a ridiculous amount of information that must be retained. When people ask me how much they have to study for the L1 exam, I answer "about 16 pounds", since that's the weight of the curriculum.

But the study is applicable to students in many other disciplines.

The study is titled "The Critical Importance of Retrieval For Learning" by Jeffrey Karpicke and Henry Roediger, and it's in the February 2008 issue of the journal Science. They examine the question of how best to improve long-term recall. Specifically, they tested whether, once a student can recall a piece of knowledge once, they most improve their long term recall by repeated studying of the material, by repeated testing of the material, or both. Here's the abstract:
Learning is often considered complete when a student can produce the correct answer to a question. In our research, studen…

Penn and Teller on Progressive Taxation

I try to get across to my students that the government has no money of its own - everything either comes from taxes or from borrowing(which is paid off with future taxes). So in the end, most government programs involve taking money from one group and giving it to another. That's not necessarily bad (there might be a compelling reason to do so in some circumstances), but it's useful to frame things this way.

Here's a videos by Penn and Teller from their Bullsh*t (this is mostly a family friendly blog) series that hits the nail pretty much on the head:

HT: Ace of Spades, which, FWIW, is NOT a family-friendly blog. Funny, but not family friendly)

A Good Ride

I just went on my longest ride of the year (26 miles). I know it's not long by serious cyclists' standards, but it's as long as anything I did last summer (but slower than last year's rides). Unfortunately, it was also the hottest day of the year in UnknownVille - 90 degrees and very humid.

Still, not too bad considering I only started riding the week after Jonathan's passing (eight weeks ago). So, I have hopes of getting up to a 40 miler before Unknown University starts classes 4 weeks from now.

It takes longer to get it back as I get older. But still, an almost 2 hour ride (and at a fairly good clip- just under 16 mph) isn't too bad considering I just turned 51.

Ah well, pain is just nature's way of telling you you're fat, lazy, and out of shape.

The 50 Greatest Film Monologues

Here's something for your weekend viewing pleasure - the 50 Greatest Movie Monologues of All Time (from

I think Pacino's in there about 4 times, and there are a lot of other big names - James Earl Jones, Mel Gibson, Morgan Freeman, etc...


Markets in Receivables

Here's an interesting article in the WSJ from a while back (7/16) titled "CIT's Woes Prompt Surge In Activity At Receivables Exchange".
CHICAGO (Dow Jones)--The turmoil surrounding finance giant CIT Group Inc. (CIT) is driving a surge in new business for a New Orleans-based company that runs a market in receivables.

The Receivables Exchange, which lets small- and mid-sized companies auction their accounts receivable to buyers that include hedge funds and commercial banks, on Wednesday recorded its busiest day ever and is fielding a flood of calls from businesses searching for financing alternatives.

"These people want to do their own underwriting and do their own credit determination," said Justin Brownhill, co-founder and chief executive of The Receivables Exchange, or TRE.

Events this week have shown that "they can't rely on others like CIT to do it," Brownhill said.

New York-based CIT, among the biggest U.S. lenders to small and mid-sized busin…

Research Love/Hate

I love doing research. Actually, I like finding out new stuff. But sometimes the research process makes me rue the fact that I work on a dry campus.

Like this week.

I've been working on a paper where I needed to update the data on. Since the latest version was a rush job put together for a conference (yes - this happens a lot), I decided to go back and check every line of my program (always a good thing to do). I also wanted to do the anal-retentive (I know, that's redundant. - except in research, where it's expected) thing where I can relate what happens to my sample at each filtering step. While doing this, I found out that I'd used the wrong data code for one of my variables - one of my MAIN variables. So, the whole data set was, in a word, crap.

After taking a deep breath, I made the corrections and redid most of the analysis. Luckily, the results still held, with minor modifications.

Then I discovered a minor discrepancy in the number of o…

The Ideas Report

I just came across an interesting new blog: the Ideas Report for Serious Investors. It's put out by the Manual of Ideas (a for-fee service) and obviously) geared towards investing. However, it ranges pretty far afield. Check it out.

Advice From A Journal Editor

Here's a very interesting and informative piece titled "Edifying Editing"by R. Preston McAfee (former co-editor of AER and editor of Economic Inquiry). It's not entirely applicable to finance because he's an econ guy. But there is a great deal of similarity between the fields. Here are a few things that stuck with me:
He cites a paper by Dan Hamermesh (1994), who discovered that, conditional on not receiving a report in 3 months, the expected waiting time was a year. So, if you want to endear yourself to editors and you're a reviewer, get stuff done quickly. I know that the longer I wait on a referee report, the less I feel like punching it out.Around 25% of the to AER during his tenure were rejected due to poor execution. That is, the paper represented a good start on an article worthy topic, but provided too little for the audience. I recently was discussing a former student (and current coauthor) with a friend of mine who edits a pretty good journa…

Things You Wish You Could Write On Students' Papers

Here's a pretty good list of things I wish I could write on some students' papers, from Sapience Speaks. #6, while harsh even for this list, is my favorite. Feel free to add your own in the comments.
"You certainly have a way with words. A long, long way.""You seem to be attempting a very delicate approach to the assignment--so delicate, in fact, that you fail to touch on it at all.""Every one of the words in this sentence is utterly devoid of meaning.""I can't help feeling that you treat the ideas in your paper much as a black hole treats its neighboring star systems: forcefully and vigorously synthesizing them, you condense them beyond recognition, leading to utter destruction and chaos.""like the broad swift stream / a thesaurus will go far / but yields no great depth.""This paper isn't even bulls*&t. Bulls*&t has substance. This is diarrhea.""I find your rhetorical strategy in this expository …

Robert Shiller on Charlie Rose

Here's an interesting interview of Yale finance professor Robert Shiller on the Charlie Rose show. The early part of the clip is an interview of Winston Churchill's grandson - it's also interesting (I'm a Churchill fan), but if you want to skip it, Shiller starts around 14:15.