Posts tagged with finance

The entrepreneurial class, during its rule of scarce one hundred years, has created more massive and more colossal productive forces than have all preceding generations together. Subjection of Nature’s forces to man, machinery, application of chemistry to industry and agriculture, … — what earlier century had even a presentiment [of] such productive forces…?

The need of a constantly expanding market for its products chases businesspeople over the entire surface of the globe. They must nestle everywhere, settle everywhere, establish connexions everywhere.

Business has subjected the country to the rule of the towns. It has created enormous cities, has greatly increased the urban population as compared with the rural, and has thus rescued a considerable part of the population from the isolation of rural life.

Entrepreneurs, wherever they have got the upper hand, have put an end to all feudal, patriarchal, idyllic relations. They have pitilessly torn asunder the motley feudal ties that bound man to his “natural superiors”….

Entrepreneurs cannot exist without constantly revolutionising the instruments of production, and thereby … the whole relations of society.

Charles Marx, 1848

(I just changed all reference to “the bourgeoisie”, which has an archaic or leftist ring to it, to “entrepreneurs”, which sounds more contemporary. Eat your heart out, Thomas Friedman.)

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Unaudited, these methods have allowed me to beat the market since the strategy started in September of 2000.

  1. Industries are under-analyzed, relative to the market on the whole, and relative to individual companies. Spend time trying to find good companies with strong balance sheets in industries with lousy pricing power, and cheap companies in good industries, where the trends are not fully discounted.
  2. Purchase equities that are cheap relative to other names in the industry. Depending on the industry, this can mean low P/E, low P/B, low P/S, low P/CFO, low P/FCF, or low EV/EBITDA.
  3. Stick with higher quality companies for a given industry.
  4. Purchase companies appropriately sized to serve their market niches.
  5. Analyze financial statements to avoid companies that misuse generally accepted accounting principles and overstate earnings.
  6. Analyze the use of cash flow by management, to avoid companies that invest or buy back their stock when it dilutes value, and purchase those that enhance value through intelligent buybacks and investment.
  7. Rebalance the portfolio whenever a stock gets more than 20% away from its target weight. Run a largely equal-weighted portfolio because it is genuinely difficult to tell what idea is the best. Keep about 30-40 names for diversification purposes.
  8. Make changes to the portfolio 3-4 times per year. Evaluate the replacement candidates as a group against the current portfolio.
  9. New additions must be better than the median idea currently in the portfolio. Companies leaving the portfolio must be below the median idea currently in the portfolio.
David Merkel

Investment banking neither seeks out nor requires the allegedly “best and brightest”—whoever the f― they are supposed to be—for its employees. All we seek are aggressive, ambitious, smart enough young kids to process our ridiculous pitch books, update our standardized models, and generally take our sh_t while we senior bankers do whatever is necessary to bring in enough revenues to ensure our continued employment and the consequent support of our dependent wives, children, mistresses, and bartenders.

The core premise of my industry … is uncompromising customer service. The entire f―ing point of working 24 hours a day, for days on end, and canceling weeknight dates with Kate Upton, Las Vegas bachelor parties with George Clooney and Brad Pitt, and Christmas holidays with the Pope of all Christendom at the last possible minute is that the entire investment bank works at the pleasure and whim of clients who pay us a small fortune to do so. That is why successful senior bankers never tell the client no. That is why we agree to impossible deadlines for ridiculous requests at the last minute. Why we therefore ruin our junior bankers’ lives with all-night and all-weekend work on a regular basis. Because that is the f―ing job.

The Epicurean Dealmaker, The Invention of Leisure


He adds:

[I] mean the wet-behind-the-ears tyros who join investment banks straight out of college (known, grandiloquently, as “Financial Analysts”) or business school (“Associates”) to provide the blood, lymphatic fluid, and gristle which lubricate the grindstones of a large, multinational investment bank such as Goldman Sachs. Note that the moniker “professionals” is applied only to those naïfs who join an investment bank with some pretense or ambition of making widow and orphan cheating their long-term career, rather than the far more numerous, better-treated, and far less dispensable folks known as “support staff” who actually make the world go around.


Random portfolios have the power to revolutionize fund management.

There is no convincing evidence that more than a handful of funds have consistently outperformed. This should tell every active fund manager on the planet that the present form of performance measurement is inadequate.

Performance measurement via a benchmark is hopelessly noisy — it takes decades to get a real answer.

A fund manager that can outperform should do better when the tracking error constraint is removed. Much better to use random portfolios to measure the performance of active funds to see if they are adding value. Funds should be judged with minimum tracking error constraints. It is in the investor’s best interest for the active funds they invest in to be as uncorrelated as possible with the indices that they invest in passively. That means a large tracking error.

Patrick Burns

(edited and amalgamated by me, without adding anything substantial)


In smile modelling or pictures of the term structure of options or bonds, one speaks of a “volatility landscape” or “risk landscape”.

That is assigning numbers to price-points and time-points; contingencies form a “surface”.

I tend to forget that for farmers, the actual landscape—the actual (sur)face of the Earth is itself the risk landscape.

  • Hillocks get more sun (could be good or bad depending on the cooling-degree days
    New Hampshirel CDD 1895-2009
    , the chance of frost, and the abundance of rain)
  • Dells and ravines get more water—which could be good if it’s dry,
    or catastrophic in case of flood.
  • Of course that depends on the crop type. Rice wants to be flooded. Even I know that.

  • And just like derivatives, agriculture has its term contingencies. Water in autumn is too late to grow the baby saplings but, too, a flood might not be as bad for the granary as it was for spring's seedlings.
  • Symbiosis between “funded” (planted) neighbours could result in a “value-added merger” if, for example, the bugs which are attracted to one plant fend off another plant’s predators.
  • A monogenetic crop could all be wiped out by the same disease.
  • Diversification, then, would seem to mirror finance as one wants to invest fully in the “cash crop” (let’s say a junk bond), but risks increase as eggs are concentrated in one basket.
  • Or say you wish that lucrative bridge loan’s IRR were applied to your entire portfolio—perhaps this is like a plant with rare seeds, or a plant that only takes in exactly perfect parts of your land.
  • If a farmer could get “negative correlated assets” (half the plants do better in dry; half do better in wet), that would reduce the “portfolio variation”.
  • Is there anything in finance that, like alfalfa, regenerates the “soil” for the next year’s crop?
  • We speak of “exposure” in finance—well, furrows in la terre literally change the exposure to the sun over the course of its chariot ride across the sky!

So you convolve the crop type with the weather it receives localised to its exact spot in the ground. (its place in the "field" — oh! I mean its place in the field!)

Is it possible, then, to apply the lessons of modern portfolio theory to crop selection?

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Flash Boys is deliberately set up to suggest a “perfect world gone bad” scenario: As if, prior to the advent of HFT, … nobody ever got bad fills and liquidity was provided by a fairy godmother who never skimmed. It is … irresponsible, … dumb and deceptive, … to … talk about HFT without talking about what HFT replaced.

… Why … did floor traders and market makers play a key role in the function of markets for multiple centuries? Because floor traders provide liquidity. Liquidity provision is a service, and it has a cost. A discussion of what HFT replaced—with examination of new systems, old systems, and continuity between the two, with attendant pluses and minuses [would have been better]. Yet for Lewis it barely [merits] a paragraph.

Liquidity has always been an issue. The more size you want to move, the more of an issue it becomes. There has always been a need for middlemen to provide it, and friction / incentive issues in doing so, ever since the fabled meeting under the Buttonwood tree.

In the late 1980s, the Justice department busted 46 traders and brokers in the Chicago trading pits. The stealing had gotten so bad, the FBI came onto the trading floor.

Flash Boys reveals itself as a tempest in a teapot on pages 52 and 64. (I speak here of the hardcover edition from Amazon.) When Lewis … uses real numbers, the frivolity of his case is revealed.

On page 52 … an HFT “tax” that amounts to $160 million per day on $225 billion worth of volume. That is significantly less than one-tenth of one percent.

's review of { Flash Boys by Michael Lewis }

The auction for capital has happened in such diverse places as under banyan trees, in coffee shops, in whore houses, near the sandal market (Egypt, Jerusalem), in a cave, at farm crossroads, near lake edges and river deltas, at magic springs, over a levee, in private country club gardens, etc.

The folks who made it more comfortable thrived (Mr. Lloyd, for example). The folks who made this process more uncomfortable eventually killed the golden goose (not many trades in Florence anymore, and it is all Savanarola and the Bishop’s fault. Bonfire of Vanities indeed).
user “Bachelier”


risk, however measured, is not positively related to (rational) expected returns. It goes up a bit as you go from Treasuries, or overnight loans, to the slightly less safe BBB bonds, or 3 year maturities. But that’s it, that’s all you get for merely taking the psychic pain of risk.

Just as septic tank cleaners do not make more than average, or teachers of unruly students do not make more than average, merely investing in something highly volatile does not generate automatic compensation. Getting rich has never been merely an ability to withstand some obvious discomfort.

@condoroptions Interviews Tadas Viskanta of Abnormal Returns - Part 1

  • brokerage model is broken. mutual fund model is broken. ETF’s are the wave of the future.
  • Minute 10. Did the U.S. equity premium dissolve during the lost decade of the aughties?
  • falkenblog
  • Minute 13. Do proper accounting. Many investors do not receive the headline equity premium due to tax, cost of intermediary services, etc.
  • Minute 15. We have to make decisions at some point. Let’s not count angels on pinheads.
  • Minute 17. First, second, third waves of ETF’s. (the most opinionated segment)
  • Minute 19. “It’s an ETF; how bad can it be?” You’re not getting spot natgas or spot oil. Watch out for the fund’s inefficient rolling of futures contracts.
  • "slow burn" approach to currency investing
  • Minute 22. The time cost of becoming an informed investor (currencies, options, futures, ETF’s, ….) 
  • "It’s really easy to blow up an account trading spot forex"
  • using options to sculpt your portfolio—trading what you understand to limit risk—rather than using leverage to take strong positions
  • liquidity an issue for less famous options
  • "Somebody who’s just trading $AAPL long and short is likely to get shook out of a trade"
  • "There are no good books"
  • PART 2
  • complexity — leverage — liquidity issues
  • cognitive biases & financial advisors
  • financial advisors as a buffer between your decisions and the market
  • advisors who mirror what their clients say
  • Minute 3. Higher turnover by those who hold higher-volatility asset classes.
  • Minute 7. There are a lot of things [non-UHNW] people can do with their lives that generate a lot better financial return than fighting for an extra 100 basis points per year. (e.g., saving). We have infinitely more control over our personal choices than over the markets or whatever products we invest in.
  • Minute 8. People chasing higher yield without understanding what they’re doing.
  • Minute 9. Josh Brown does a post every year reviewing what was the “hot thing” that year. You don’t have to be in it.
  • You’re your own portfolio manager. You get to define success for yourself. That does not mean you need to match the S&P.
  • media consumption — a “liberal arts” or “consilience” or “cross-disciplinary” approach to financial news
  • Minute 12. Individual investors are actually more free than institutional investors, in that their time horizons are quarterly, daily, and annual.
  • Minute 16. Viskanta: In 20 years, brokerages will have automated tools for individual investors. (algorithmic)
  • "the long march of indexing" — Viskanta: people either are or will over-index
  • fracking totally broke the long-run correlation between oil and natgas — an unforeseeable technology

It’s true that the financial sector enjoyed disproportionate rents but it’s not true that the smartest and brightest work there. …[T]he place is littered with failed scientists. Worse, it’s littered with idiot savants. There are once in a while people working there who have trained for the job — Very good PhDs in finance and economics, for example, or good M&A lawyers, and they usually strike me as the ones who offer the best contributions to their organizations.


cf, Eric Falkenstein