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Recommended reading, economic debates, predictions and opinions.
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Bylo Selhi
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Post by Bylo Selhi »

ghariton wrote:I like Bylo's link just above, but I find this bit unfortunate.
People also want instant gratification. They want to meet their needs today. They go to Starbucks and spend $5 a day on a coffee and a muffin, which adds up to $150 a month. That’s an IRA contribution. They’re members of the Starbucks retire-now club. They are enjoying their retirement now.
To which I say: Good for them.

If someone thinks that $1800 a year in small luxuries is worth it, then go for it...
Yabbut you're enjoying your nominal retirement now. You have RRBs for your real retirement later ;)
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Post by FrostedGlass »

Is the United States Bankrupt? - from Federal Reserve Bank of St. Louis Review, July/August 2006, pp. 235 - 249
Is the United States bankrupt? Many would scoff at this notion. Others would argue that financial
implosion is just around the corner. This paper explores these views from both partial and general
equilibrium perspectives. It concludes that countries can go broke, that the United States is going
broke, that remaining open to foreign investment can help stave off bankruptcy, but that radical
reform of U.S. fiscal institutions is essential to secure the nation’s economic future. The paper
offers three policies to eliminate the nation’s enormous fiscal gap and avert bankruptcy: a retail
sales tax, personalized Social Security, and a globally budgeted universal healthcare system.
Beer is best served in a ... FrostedGlass
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Post by 83_gemini »

Of course is Kotlikoff-it's not that he's all wrong, it's just that he's a professional pessimist that way. He does accord with a fair number of people in the business. And Canada, by contrast is usually seen as in fiscal balance!
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Post by George$ »

Here is an out-of-print value financial book, currently featured in Business Week, that I have never heard of ...

Seth Klarman's 1991 work, Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor

Has anyone here read it?

Some text from the BW article
Why does anyone care what Klarman wrote 15 years ago? The author, now 49, is one good investor. Klarman earned his MBA at Harvard Business School in 1982, graduating near the top of his class. A group of wealthy families took notice and gave Klarman $27 million to manage, which was the start of his firm, the Boston-based Baupost Group. Between its February, 1983, inception and the end of June, 2006, Baupost's largest and oldest partnership posted a cumulative return of 6,133% after fees. During the same period, the Standard & Poor's 500-stock index was up 1,517%, with dividends reinvested.

...


In his latest shareholder letter, Klarman reiterates one of the book's tenets: Value investors must be overweighted in patience. In the past, Klarman has parked as much as half his portfolio in cash, earning a few percentage points until he finds investments with enough margin of safety to deploy it. Rather than chase stocks and bonds, he waits for them to come to him at prices he's comfortable paying.
(my emphasis)
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NormR
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Post by NormR »

George$ wrote:Here is an out-of-print value financial book, currently featured in Business Week, that I have never heard of ...

Seth Klarman's 1991 work, Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor

Has anyone here read it?
Not me, but I think that $700 is a decline from last time a similar story surfaced :wink:

I do know that a partial scanned version is making the rounds on the internet. But I don't have a copy. The best, and morally correct, thing to do is to get it from a library.
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Post by Richmond »

Their ae two used copies of the book at-

http://www.allbookstores.com/popular/:4

for about $22.
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Post by George$ »

"Multifactor Investing" by Eugene F Fama Jr - 25-page pdf file, dated July 2006
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Post by George$ »

Further info on the above interesting article "Multifactor Investing" by Eugene Fama Jr.

It comes from Jeff Troutner's TAM web site
Originally published over ten years ago by Eugene Fama, Jr., Multifactor Investing was intended as an easy overview of Dimensional Fund Advisors’ (DFA) philosophies on risk, return, and portfolio structure. Updated for 2006, the paper survives with notably few edits. The paper speaks to the enduring quality of the ideas that inspired it—ideas that follow no fad, but derive from financial science and a thriving investment philosophy.
And Eugene Fama Jr is the son of the "Eugene Fama" and a vice president at Dimensional Fund Advisors (DFA) Inc
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Post by parvus »

For Adrian2 and Optionable; I'm going to post the whole thing, because the NYT will "disappear" it in a week behind a password.
--------------------------------------------------------------------------------
August 13, 2006
Strategies
If You Know Options, You’re Likely to Know Stocks
By MARK HULBERT
DO options traders know more about buying and selling stocks than the rest of us?

It seems that much of the time, they do. A new study has found that a portfolio based on the preferences of options traders has consistently beaten the overall stock market. In reaching that conclusion, the study paves the way for what may be a very profitable stock-picking strategy.

The study, “The Information in Option Volume for Future Stock Prices,” appears in the fall 2006 issue of the Review of Financial Studies. Its authors are two associate professors of finance: Jun Pan of the Sloan School of Management at the Massachusetts Institute of Technology and Allen M. Poteshman of the University of Illinois at Urbana-Champaign.

Because of the way options are designed, traders have powerful incentives to go to the options market when they have information that is likely to affect a stock’s price, Professor Poteshman said. A call option, for example, which amounts to a bet that a stock’s price will rise, enables its owner to buy that stock at a predetermined level. If, by the time of the option’s expiration, the stock trades above that level, the option may be worth several times what was paid for it; if not, it will be worthless. In other words, the option has much leverage. As a result, a small percentage change in the price of the underlying stock can mean a difference of hundreds of percentage points in the option’s profitability.

Similar risks and rewards exist for put options, which are bets that a stock’s price will fall. Puts enable their owners to sell that stock at a preset level, and will be worth an increasingly large amount if the stock trades below that level by the time that put expires. If not, the put will be worthless.

Until now, there has been no comprehensive study of option traders’ track records as stock pickers. That hasn’t been for want of trying: the requisite data simply was not available to researchers. The volume figures that options exchanges report publicly, for example, reflect a combination of several kinds of transactions, muddying the overall picture. The volume number reported for a given option, for example, may reflect new purchases by options traders, but it may also include the sale of positions previously acquired. That makes it hard to tell whether traders actually favored a stock.

Using a private database provided by the Chicago Board Options Exchange, the two professors were able to deconstruct an option’s total trading volume into various categories. They excluded trades by market makers, for example — dealers at the options exchange who buy and sell securities for the general purpose of maintaining liquidity. They narrowed the database further to focus on just that portion of an option’s daily trading volume that reflected new positions by other traders, on the assumption that these transactions offered a clearer signal of what traders actually thought of the underlying stock. The database covered the dozen years from the beginning of 1990 through the end of 2001.

For each option in this database, the professors calculated a daily volume ratio of newly acquired put options to newly acquired call options. A high ratio meant a strong consensus among options traders that the price of the option’s underlying stock would fall, while a low ratio showed a widely shared expectation that the stock would rise. The professors found that the stocks whose options had the lowest ratios consistently outperformed the stocks whose options had the highest ratios.

Consider this hypothetical portfolio constructed by the professors: it held the stocks of the 20 percent of options with the lowest put-call ratios, while selling short the stocks whose options had the highest such ratios. (The portfolio was readjusted weekly, adding and deleting stocks because of changes in the ratios.)

The professors reported that before transaction costs, this portfolio produced an annual average return of 62 percent over the dozen years covered in the study. This contrasts with an annualized total return of 12.3 percent for the general stock market over this period, as measured by the Dow Jones Wilshire 5000 index. Still more impressive was the fact that the portfolio earned double-digit returns each year, even when the overall market declined. Based on their data, however, the professors had no way to determine how options traders were able to achieve these results.

The portfolio required frequent transactions because the price moves correctly anticipated by options traders lasted for only a couple of weeks, on average. So transaction costs would have eaten up a big chunk of the return. But Professor Poteshman estimated that in the hands of an institutional investor, for whom such costs would typically be quite low, the portfolio’s return would still have been as much as 50 percent annually.

Even for individual investors, who would pay higher costs, Professor Poteshman estimated that the annualized return would have been well into double digits.

DESPITE the strong results of the strategy, it would have no more than academic interest if investors had no access to the private C.B.O.E. database that the professors studied. In July, however, the exchange began selling subscriptions to this database to the public.

A subscription isn’t cheap: $600 a month. That helps make the professors’ strategy impractical for small investors. Still, the study shows that potentially valuable information can be found in options traders’ behavior. And institutional investors, including hedge funds and mutual funds, can easily exploit it.

Mark Hulbert is editor of The Hulbert Financial Digest, a service of MarketWatch. E-mail: strategy@nytimes.com.
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Post by WishingWealth »

Long article on The Mismeasure of Poverty / History of a calculation .... In Policy Review.

And the conclusion.
....In some quarters, criticism of the various shortcomings of America’s official poverty rate will be taken as evidence of indifference to the plight of America’s disadvantaged and poor. Such an inference is illogical at best. Proponents of more effective antipoverty policies should be in the very front ranks of those advocating more accurate information on America’s poverty problem. Without such information, effective policy action will be impeded; under the influence of misleading information, policies will be needlessly costly — and ineffective.

The official poverty rate is incapable of representing what it was devised to portray: namely, a constant level of absolute need in American society. The biases and flaws in the poverty rate are so severe that it has depicted a great period of general improvements in living standards — three decades from 1973 onward — as a time of increasing prevalence of absolute poverty. We would discard a statistical measure that claimed life expectancy was falling during a time of ever-increasing longevity, or one that asserted our national finances were balanced in a period of rising budget deficits.

Central as the “poverty rate” has become to antipoverty policy — or, more precisely, especially because of its central role in such policies — the official poverty rate should likewise be discarded in favor of a more accurate index, or set of indices, for describing material deprivation in modern America.

The task of devising a better statistical lodestar for our nation’s antipoverty efforts is by now far overdue. Properly pursued, it is an initiative that would rightly tax both our formidable government statistical apparatus and our finest specialists in the relevant disciplines. But such exertions would also stand to benefit the common weal in as yet incalculable ways.
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Post by George$ »

From World War to Class War: The Rebound of the Rich by Robert g. Evans - then click on the "download pdf" option to get the full article with figures
Abstract
Incomes in Canada, as in many other countries, are becoming increasingly unequal. In North America this process has several notable features. First, after 40 years of stability, income has since 1980 been increasingly concentrated in the hands of the top 0.01% of earners. Second, this concentration correlates with an explosion in the relative earnings of corporate CEOs, a sort of "corporate kleptocracy." Third, the top earners have appropriated most of the productivity gains over this period. The resources and political influence of the super-rich underlie the growing prominence of the "elite" agenda: lower taxes, smaller government and privatization or shrinkage of social programs. The marketing of this agenda may explain much of the nonsense that contaminates health policy debates.
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Gus
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Post by Gus »

I have noticed in recent weeks that much of the content in the Economist has been free to non-subscribers.

For, example, this week's edition has all the business, finance and science articles open to everyone.
Money ain't got no owners, just spenders. Omar Little
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Gus
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Post by Gus »

Alpha betting

Sep 14th 2006
From The Economist print edition
The industry is splitting in two—and investors are gambling on the expensive bit
And even where you can spot talent, much of the extra performance may be siphoned off into higher fees. “A disproportionate amount of the benefits of alpha go to the manager, not the client,” says Alan Brown at Schroders, an asset manager.

And yet investors may be willing to gamble, despite the higher fees, because they desperately need high returns. The bear market between 2000 and 2002 brought a sober reassessment of the future returns likely from equities and bonds. With bonds yielding 4-5% and equities returning perhaps 3% on top, composite future returns of 6% or so looked inadequate. Peter Harrison, chief executive of MPC, a fund manager, says that American pension funds have analysed their liabilities. “They need more than 6% to make up the shortfalls in their funds. Whether they earn alpha or not, they have to roll the dice and try to get it.”

The same rationale led to the enthusiasm for other forms of alternative assets, such as property and commodities. These appeared to offer a different source of returns that was not closely correlated to shares or bonds. The problem is that, as more money has piled in, the character of such assets have changed (see article). Prices have risen (reducing prospective returns) and exotic assets are more correlated with run-of-the-mill ones.

Diversification is supposed to be the one “free lunch” in the financial markets. However, these new market niches may be too small to absorb the amount of capital investors would like to place in them. Furthermore, top-performing managers, especially in hedge funds, may well close their doors to new investors to prevent returns being diluted. Even when you can identify the most skilful manager, it may be impossible to invest with him.

Nevertheless investors will probably keep pursuing alpha, even though the cheaper alternatives of ETFs and tracker funds are available. Craig Baker of Watson Wyatt, says that, although above-market returns may not be available to all, clients who can identify them have a “first mover” advantage. As long as that belief exists, managers can charge high fees.
In other words, if you want Alpha, do it yourself. And TANSTAAFL or EMT ((take your pick) is removing some of the historic benefits of diversification.
Money ain't got no owners, just spenders. Omar Little
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Post by George$ »

Speculation on Future Trends & Reversals by Jack Gray at the Rotman ICPM Colloquim in 2005

interersting read ...in part ...
Speculating is fundamentally different to forecasting. The latter’s tools are formal models and
analysis; its output predictions ripe for decision-making. It is justified by the long-term having
modest levels of predictability as with capital markets and climate change. Occasionally
predictability is high and ignored at our peril. The long-term baby-boom trend was well
documented and understood by demographers by the mid 50s, yet its economic, investment and
political consequences were largely ignored. But there are traps in being too analytic and precise
in forecasting. First, our human need for comfort and acceptance encourages trend-following
when the essence of capital markets is mean reversion, the breaking of trends. When mixed with
our healthy bias towards optimism absurdities such as Fukayama’s End of History and LTCM’s
imputed End of Risk result. Second, low signal/noise ratios in capital markets make it far from
clear what can be learnt, what can be understood.
Added later -- An interesting webcast on a related theme by Jack Gray can be found at the CFA website. See
http://www.cfawebcasts.org/cpe/what_pac.cfm?test_id=174
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Post by George$ »

I appreciate Tom Bradley's articles in the Globe and Mail. One can access most of them (the latest is not there) at his web site via
Tom Bradley Globe and Mail Articles
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Post by WishingWealth »

Sort of the same recommendations on investing à la Dilbert.

(Stingy Investor site. Look for Dilbert

(Original on Market Watch but I'm having some problems with the link and no patience to make it work.
Quietly hidden in Adams' groundbreaking work is a financial formula so simple it rivals Einstein's E=mc2. In its original form Adams' formula was apparently so heretical and so explosive that no major house would touch it when he proposed publishing it as a one-page book. After initial rejections, he announced sadly that "if God materialized on earth and wrote the secret of the universe on one page, he wouldn't be able to find a publisher" either.
Fortunately for America's 95 million investors, Adams' secret nine-point formula was finally revealed in "Dilbert and the Way of the Weasels." Notice its simple brilliance in the exact reproduction of his formula:

Make a will
Pay off your credit cards
Get term life insurance if you have a family to support
Fund your 401k to the maximum
Fund your IRA to the maximum
Buy a house if you want to live in a house and can afford it
Put six months worth of expenses in a money-market account
Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker and never touch it until retirement
If any of this confuses you, or you have something special going on (retirement, college planning, tax issues), hire a fee-based financial planner, not one who charges a percentage of your portfolio
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Post by Bylo Selhi »

WishingWealth wrote:Sort of the same recommendations on investing à la Dilbert.

(Stingy Investor site. Look for Dilbert

(Original on Market Watch but I'm having some problems with the link and no patience to make it work.
Vanguard beat Farrell and Norm to the punch by three months ;)

See also Bylo's Archive for July 2006.
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Post by NormR »

Bylo Selhi wrote:Vanguard beat Farrell and Norm to the punch by three months ;)

See also Bylo's Archive for July 2006.
Now now, the article in question is from Oct 9, 2006. The Dilbert book referenced is from Oct 2002
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Post by parvus »

From today's NYT
Off the Charts
Viewed From Abroad, the Dow at 12,000 Isn’t So Impressive
By FLOYD NORRIS
The Dow Jones industrial average is setting records in the United States, trading over the 12,000 level for the first time this week. But when adjusted for inflation, the American stock market lags behind those of many other countries, and appears to be going nowhere fast.

The chart accompanying this article shows the last 10 years of the Dow, with the level adjusted for changes in the Consumer Price Index. After adjusting for inflation, it remains around 15 percent below the highs it reached in 2000, and has made little progress in recent years.

The charts also show the inflation-adjusted performance of major stock indexes in seven other countries over 10 years through the end of September.

They show that the world changed. For some major industrial countries, the last five years have been dull at best. But for emerging markets, and for countries more dependent on commodity production and exports, the period has been stronger than earlier periods.

The three best countries among the eight over the last five years were the Asian ones — Japan, Singapore and India. They were also the only three markets that fell during the prior five years.

Among the non-Asian countries, only Canada, with an economy much more dependent on natural resources than the others, turned in a better performance over the most recent period than it had in the earlier years.

The most recent five-year period began at the end of September 2001, after markets around the world plunged following the Sept. 11 attacks but well before most markets hit bottom.

During that period, the Dow rose 3 percent a year on average after adjusting for inflation, outperforming only Britain, where the gain was just 1.2 percent.

But in India, where inflation-adjusted share prices in 2001 were lower than they had been 10 years earlier, the five-year period saw share prices rise at an amazing rate of almost 30 percent a year.

In Japan, which endured a long period of poor economic and stock market performance after the stock market bubble burst in 1991, the annual inflation-adjusted gain for the market the last five years came to 10.6 percent a year. That figure is greater than the combined growth rates over the period for the United States, British and German stock markets.

All the figures reflect adjustment based on local consumer price indexes. Because currency movements do not move in lockstep with inflation rates, and because the charts do not include dividend payments, they do not reflect actual returns in each market for international investors.

But they do reflect the purchasing power of a basket of local stocks over time in each market, and thus provide an insight into the way market movements can look to local investors.

To them, neither the United States nor the major European markets appear very strong.
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WishingWealth
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Post by WishingWealth »

Anybody has a good idea re taxes?
Quick, apply for a patent.

Patent law is getting tax crazy

In Intl. Herald Tribune.
As the American tax law gets more and more complicated, lawyers have come up with one more way to make life difficult for taxpayers: Now you may face a patent infringement suit if you use a tax strategy that someone else thought of first.

"I can't even imagine what it will be like in 5 or 10 years," said Dennis Drabkin, a tax lawyer with Jones Day in Dallas, "if anytime a lawyer or accountant gives tax advice, they have to find out if there is a patent on this." He notes that researching patents, and then licensing them, would just make tax compliance more costly.

Drabkin is chairman of an American Bar Association task force on the issue. He said that at one conference where tax strategies were discussed, participants later got a letter warning that using one idea mentioned would be in violation of a patent...
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Post by WishingWealth »

SAN FRANCISCO (MarketWatch) -- Nobel Prize-winning economist Milton Friedman has died at the age of 94, according to media reports Thursday. Friedman, one of the most influential economists of the past century, died last night, the Wall Street Journal reported on its Web site, citing an official at the Cato Institute in Washington. Friedman was a professor at the University of Chicago from 1946 until 1976. He was awarded the Nobel in 1976
..
Nobel-winning economist Milton Friedman has died...

WW
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Post by TrueMrP »

It looks like his Monetarism had quite a influence on western economies. How could the followers of JM Keynes miss that money supply is contributing to economic fluctuations? It sounds so obvious.

I like his Permanent income hypothesis: http://en.wikipedia.org/wiki/Permanent_ ... hypothesis
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Post by Bylo Selhi »

Nine Ways to Manage Money Effectively
Jonathan Clements wrote:There are some key financial insights that, I believe, should guide everyone's investing, and I pound away at them week after week. I have been talking about some of these ideas for years, while others have only recently captured my imagination. Want to manage your money better? Here, I would argue, are nine of the most important financial ideas...
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Post by Norbert Schlenker »

Nothing can protect people who want to buy the Brooklyn Bridge.
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Post by Norbert Schlenker »

Nothing can protect people who want to buy the Brooklyn Bridge.
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