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Showing posts from November, 2010

Turducken? Meh! I want a TurBacon Epic

We survived Thanksgiving with the Unknown In-Laws. The Unknown Wife, her mom, and her sisters are all good cooks, so we easily put on a couple of pounds.

Many of you have heard of the Turducken (a dish consisting of a de-boned chicken stuffed into a de-boned duck, which itself is stuffed into a de-boned turkey).

But these folks have gone several steps better - the TurBacon Epic: a 20lb pig stuffed with a 8lb turkey, a 6lb duck, a 4lb chicken, a cornish hen, a quail, bacon croissant stuffing, and 10 lbs of bacon wrapped around all the layers. It's "only 79,046 calories and roughly 6,900 grams of food coma inducing fat.

To quote Yakov Smirnoff, "What a Country!"

New Video on Risk and Return

I've posted a new video on Risk and Return - it covers the typical material presented in and introductory class from the math of risk and return (Expected returns, standard deviations, covariance and correlation) through Markowitz Portfolio Theory and the Capital Market Line through the CAPM and the Security Market Line. it has a table of contents, so you can skip around. Click on the video below to see it - it's a pretty big file, so it might take a while to load.


In case you don't want to view the whole thing at one sitting (it's a bout 90 minutes), the video is organized as follows (I reference the numbers in the Table of Contents):
Sections 1-13 (roughly from the beginning to 38 minutes in - the "math" risk and return (Expected Returns, Standard Deviation, Covariance, and Correlation)Sections 14-25 (from minutes 38 to 75): Markowitz Portfolio Theory and the Capital Market LineSections 26-32 (Minutes 75 to the end): Systematic and Unsystematic Risk, The CAP…

Happy Thanksgiving

It looks like Unknown University is all but deserted the day before Thanksgiving. I finally decided to quit swimming against the tide, and canceled classes for today (I usually only get about 30% attendance on the day before Thanksgiving in the best of times, so it's no big loss).

Instead, I told the students that I'd put up a video with the lectures for the week on Risk and Return. Once it's done, I'll post a link here. I'm pretty happy with it - it runs the gamut of topics from the calculations for standard deviation, covariance, expected returns, etc... to Markowitz Portfolio Theory and the Capital Market Line to the CAPM and the Security Market Line.

Although I don't use all this material in my intro class, I expect to use it in my investments class this spring. So, this should allow me to go a bit faster and cover more material there.

Unfortunately, I have to wait another hour before the video software is done rendering the final version and I can …

Kissing Up is Good Practice

It's important to be good at the technical aspects of your job. But the "soft" stuff may be even more cirtical - the ability to get along with coworkers (and more important, with bosses) has a lot to do with eventual career success.

Tow researchers (Ithai Stern at Northwestern University and James Westphal at the University of Michigan) recently published a study in Administrative Science Quarterly titled "Stealthy Footsteps to the Boardroom: Executives’ Backgrounds, Sophisticated Interpersonal Infl uence
Behavior, and Board Appointments (here's an ungated copy). They lay out several effective ways of "kissing up" to the boss:
Go with discomfort: Preface compliments to the boss with something like "I don't want to embarrass you, but..."Frame it in question form: Ask for advice - it's just as flattering as a compliment. goes down a lot easierBait and switch: Start out by disagreeing with the boss and then gradually warm to their opi…

Happy Thanksgiving From the TSA

Luckily, we're not flying this Thanksgiving - we live a mere 2 hours from our families. But in case you are, here's a pretty funny clip from SNL.


Now take off you D**n shoes!

Take Me Down to the Paradox City

Assume, for a minute, that Paul Krugman is 100% correct in his analysis of the economy: assume that we are indeed in a liquidity trap, and the only way to escape the trap is through higher inflation. What's the best way to create this higher inflation? Why, through inflation expectations, of course. And what's the best way to foster inflation expectations? Well, here are some ideas:

- complain endlessly about government deficits;
- claim that QE2 will debase the dollar;
- whine about higher food and gas prices;
- tout gold as the ultimate investment.

Conversely, what's the absolute worst way to create an inflationary mindset in the populace? Hmm, I don't know, but writing a New York Times column that constantly warns of the dangers of deflation while pooh-poohing claims of inflation current or future, real or imagined -- that's gotta be pretty high on the list.

So within the framework of Prof. Krugman's own model, it's the right-wing fringe that is d…

Annoying or Amusing?

I had the genuine pleasure this past Thursday of speaking to 150 new faculty members in the Virginia Community College System. It is always a treat to work with people at the very beginning of their teaching careers. They have such a wonderful opportunity to help change the world.

One of the themes that I explored with the group was the idea of improvement. If you continue to improve as a teacher, year after year, you will get very good and eventually become great. And, the amount of annual improvement doesn’t have to be huge. In connection with their teaching, I suggested that every person work toward making a mere 5 percent improvement per year. That is doable and at that rate, in not too many years, you can become the best teacher in your building.

However, a great majority of teachers get better for awhile but eventually plateau. Many people who were B- teachers two decades ago are still B- teachers. I find that troubling. Why doesn't a B- teacher eventually bec…

Yo Momma is a Data Miner

Having a lot of data makes research easier - we now have more data in easily readable formats than ever before, and an amazing amount of computing power on our desktops (I have far more horsepower on my desk than NASA had in total in the 1980s)..

Unfortunately, there's a flip side to that coin - we can easily find variables (or specifications) that seem to "predict" returns (or just about anything). In reality, we're often just overfitting the data.

Here's a pretty good piece on the topic titled "Yo Momma is a Data Miner", by David Leinwebber in which he fits a polynomial time-series regression to the S&P 500 with surprising (if you don;t follow what he's doing) good results - particularly since he's using things like the sheep population and Bangladesh Butter production as regressors.

Positive Feedback, for a change

Nattering nabobs of negativity? Nyet! Instead of finding further fault with economists who I disagree with, let me share some interesting articles from economists who I agree with.

First, Jim Hamilton reports on a beautifully simple test for inflation: the rolling correlations between various commodity prices. It turns out that these correlations have increased quite significantly in recent months and years. This is strong suggestive evidence that there is a common factor driving all prices higher. What could that factor be? Hmm, I wonder.

Second, Steve Waldman has a great post on the role of morality in economics. Is there such a role? He says yes: “The thing is, human affairs are a morality play, and economics, if it is to be useful at all, must be an account of human affairs”. I couldn’t agree more. There’s a follow-up post here.

Third, Raghu Rajan has two policy suggestions that are exactly the same as my own: “The US should dial back its aggressive monetary policy, focusin…

I Did Not Know Damodaran Had a Blog

Aswath Damodaran has written a couple of excellent textbooks (on valuation and corporate finance), both of which are among my core reference materials. He also wecasts his valuation class at NYU (available here)

But I didn't know that he also has a blog - Musings on Markets. Just a quick glance over the last couple of months gave me several good articles to read:
High Dividend Stocks: Do They Beat the Market?

Capital Structure: Optimal or Opportunistic?

What if Nothing is Risk Free?
He doesn't update regularly (but who am I to talk). In any event, check it out.

HT: Finance Clippings

Making The Grade

I was cleaning out some to the 1500+ emails I've let accumulate in my gmail account (unlimited space leads to sloppy housekeeping), and I came across this old (but still excellent) piece titled "Making the Grade", by Georgia Tech physics professor Kurt Weisenfeld:
IT WAS A ROOKIE ERROR. AFTER 10 YEARS I SHOULD HAVE known better, but I went to my office the day after final grades were posted. There was a tentative knock on the door.
""Professor Wiesenfeld? I took your Physics 2121 class? I flunked it? I wonder if there's anything I can do to improve my grade?'' I thought: ""Why are you asking me? Isn't it too late to worry about it? Do you dislike making declarative statements?''

...Time was, when you received a grade, that was it. You might groan and moan, but you accepted it as the outcome of your efforts or lack thereof (and, yes, sometimes a tough grader). In the last few years, however, some students have developed a…

We Shouldn’t Take It For Granted

Topic One: On this coming Thursday, I will be having one of the great pleasures of my life. I will be leading a 3 1/2 hour teaching workshop for 150 new teachers in the Virginia Community College System. When you are given the opportunity of working with 150 new teachers, you realize that you are looking at a group that can truly make a difference in the lives of an almost countless number of students for decades and decades to come. This truly is an honor for me.
**

Topic Two: This past Friday I sat in my office for about 30 minutes and talked with an official in the Afghanistan government. That certainly is not a traditional part of my job. However, his daughter is a student at the University of Richmond and he was on campus visiting her. Because I knew the daughter, she brought her father by so we could meet.

We talked about the progress being made in Afghanistan and he immediately started talking about the problems caused by illiteracy in his country. His point wa…

Contra Krugman, Continued

A few follow-ups to my previous post.

First, of course, the obvious question: why does any of this matter? So what if Government Gus has to pay a slightly higher interest rate on his debts? Won’t the benefits of his spending (higher employment, income and consumption, which combine to help the private sector clean up its balance sheet) outweigh the costs?

I don’t think they will. And the reason, as usual, is positive feedback. If the tipping point is reached, Gus won’t have to pay a ‘slightly higher’ rate on his debts; he will have to pay a rate that is significantly higher. High enough to burst the bond bubble and send foreign investors running for cover; high enough to send the dollar plummeting; high enough to put into serious doubt the government’s ability to roll over its debt. The US could end up in a situation like Greece. Worse, in fact, given the size and importance of the US economy, the US bond market and the US dollar.

The bursting of a bond bubble is far more dangero…

Entrepreneurship and Satan's Learning-Challenged Little Brother

Although most people know him as the creator of Dilbert, Scott Adams may also be one of the funniest writers around. Here's a recent piece that appeared in the Wall Street Journal Online where he talks about dissatisfaction as a major driver of entrepreneurship:
I wasn't suffering alone. Many of my co-workers already had active side businesses and ambitious expansion plans. The guy in the cubicle behind me was running a concert equipment rental business. Across from me was a guy running a computer tech support business. We had Amway dealers, Mary Kay sales people, inventors, authors and just about any other business you can imagine. That's not counting all of the business plans in the incubation phase. I think we all understood that working in a cubicle and being managed by Satan's learning-challenged little brother was not a recipe for happiness.
Actually, it was a hamster-brained sociopath of a boss that made me think about going into academia.

Read the whole …

The Fun of The Exam Continues

It seems like every semester, I get at least one student who bombs an exam (or two) and reacts in a way-over-the-top manner. Last semester, it was a senior finance major (with a pretty high GPA) who suffered from anxiety attacks. She drew a complete blank during my Advanced Corporate Finance midterm. She subsequently appeared in several professors' offices wondering tearfully if she should change her major in her senior year. We eventually talked her down off the ledge, and she even subsequently took my Student-Managed Investment Fund class, where she did just fine.

But this semester took the grand prize. The 80/20 rule says that 20% of your students cause 80% of your problems. That would be true this semester if you counted ONE student alone as my 80%. She (we'll call her Brittany henceforth) is to put it succinctly, a bit of a Princess - high maintenance, dressed entirely in designer clothes, vocal, bossy to her friends, and simply not doing well in the class. …

The Unknown Students Nail an Exam

I've been teaching the undergraduate core finance class this semester, . If you've been teaching for a while, you know that it's easy in that class to get discouraged by students who are (pick any or all that apply) unmotivated, unable to do simple math, whiny, unwilling to be stretched, never darken your office doorway, etc...

This semester, I made a conscious decision to really push my students - since the first week of September, they've two exams, three very involved problem sets (with a lot of curves thrown in - the typical one takes about 3-5 hours to complete), eight online quizzes, and short pop quizzes (they typically last 5 minutes or less and contain 1 or 2 basic questions on the material to be covered for the day's class) on average every other day, and almost constant cold-calling in class (in a 50 minute class, I typically call on 15-20 students). I like to think that I've set the bar at a far higher level than the other sections of the intro cl…

Liquidity, Solvency, Switching Equilibria -- and Paul Krugman

Paul Krugman believes that we are in a liquidity trap (interest rates can’t go any lower), and that the only way to break out of it is via increased government spending. Here’s a column expressing his views (apologies for the long excerpt but I want to make sure I don’t quote him out of context):
One of the common arguments against fiscal policy in the current situation – one that sounds sensible – is that debt is the problem, so how can debt be the solution? Households borrowed too much; now you want the government to borrow even more?

What’s wrong with that argument? It assumes, implicitly, that debt is debt – that it doesn’t matter who owes the money. Yet that can’t be right; if it were, we wouldn’t have a problem in the first place. After all ... one person’s liability is another person’s asset.

It follows that the level of debt matters only if the distribution of net worth matters, if highly indebted players face different constraints from players with low debt. And this means tha…

Teaching Is Serious Business

I was asked, about four years ago, to write an essay on teaching. The following was my response. I believed this then. I believe it now. Joe


Teaching is serious business. We have wonderfully bright and talented students at every school. They have almost unlimited potential. For most, this is their one shot at college; they deserve nothing less than an excellent education,
an academic experience that challenges them to excel from their first day to their last.

Faculty members have a responsibility to the world to coax the very best from their students because they will certainly become the next generation of leaders. Where they go from here, what they accomplish, how they impact the world, depends in large part on how much we are able to push and nurture their development. I want every student to leave my class at the end of the semester saying, “I had to work very hard but I am so amazed by how much I learned.” Anything less is unacceptable.

If a teacher challenges student…

Terry Pratchett Quotes

Before J.K. Rowland, Terry Pratchett was the best-selling British fantasy author of the 1990s. He's written more than 60 books (either by himself or in collaboration with a coauthor). In fact, while I was at the recent FMA conference I made a comment "There can only be... one thousand" at a reception,a and found that an Irish friend of mine was a fellow Pratchett-phile.

So imagine my enjoyment at finding out there's a repository of Pratchett quotes titled the Pratchett Quote File (you can also get it in a test file here). Here's one that struck home (note that the Unknown Wife and I just celebrated our 20th anniversary):Sam Vimes could parallel process. Most husbands can. They learn to follow
their own line of thought while at the same time listening to what their
wives say. And the listening is important, because at any time they could
be challenged and must be ready to quote the last sentence in full. A vital
additional skill is being able to scan the dialogue…

Month-End Recap, Oct 2010

This is a new feature: a very quick summary of my investment positions, to be published monthly. This is not investment advice and should not be construed as such.

I am currently 93% invested, as follows:

59% Agricultural commodities
11% Other commodities
17% Emerging market equities
6% Miscellaneous equities

My largest position is in soybeans, followed by sugar.

I usually try to be between 85% and 105% invested, so I am a touch below my average exposure here. Indeed I plan to drop down to around 90% in the next few weeks or months, mainly through selling EM stocks especially India.