What the NFL gets right
The NFL understands that despite what fans say on talk radio about a season’s purpose being to determine the “best” team, that what actually keeps fan watching is the large role that randomness plays in the NFL versus other professional sports. By having the entire playoffs be sudden death, it virtually guarantees there will be scenarios where the “better” team loses. Contrast this with MLB where seemingly every season the winner of the AL Central will get lucky and take game 1 of a series against the Yankees/Red Sox only to be eventually overwhelmed by the superior talent of the favorite. This scenario does not exist in the NFL and for good reason. Would anyone remember the Giant’s David Tyree’s amazing catch against the Patriots in the Super Bowl if they’d been playing best of 5 or 7? Does anyone think the Giants could have defeated that Patriot’s team in a best of 7? Whenever you watch an NBA or MLB game 7, the announcers always talk about the magic of a game 7 due to it’s finality and how every play’s impact is magnified, with the NFL, every playoff game is a game 7.
Greed is Good – Why Punitive Taxes don’t Work
New column of mine on HuffingtonPost – Greed is Good – Why Punitive Taxes don’t Work
Fallacies of “no cost is too high” model for fighting terrorism
Love this blurb by Nate Silver on how our over reaction to these botched terrorist attempts increase their value to those who commit them -
no cost is too high, they say, to prevent the next 9/11. But if history is any guide, the next attack will probably not be like 9/11—it will be like NWA 253, something which threatens the lives of dozens or hundreds of people, not thousands. To the extent we overreact to these incidents—allowing them to disrupt our economy and our way of life—we do little but increase the value to terrorists of committing them.
Book Review – The Ivy Portfolio
Read Mebane Faber’s The Ivy Portfolio yesterday and found it to be very well written. For a book dealing with asset allocation and some statistics, it is a very easy read and avoids ever droning on like a college textbook. The premise of the book is twofold . First is that the majority of the incredible outperformance of the “super-endowments” (Harvard and Yale are the two examples in the book) over the past 23 years (over 15% / year compounded) is due more to their asset allocation than outperformance in any specific asset (though they have achieved this as well). The second is that individual investors would be well served to follow a similar asset allocation model and can enhance their performance using a simple market timing method outlined in Faber’s 2007 paper.
I found the approach to be well thought out and refreshing. Faber makes a very strong case for the significant inclusion of foreign equities (already common on most allocation models but in smaller percentages) as well as REITs (less common) and commodities (rare). The most illustrative chart on including all 5 of the suggested asset classes (US equities, foreign equities, bonds, commodities and reits) is on page 137 which along with the accompanying table shows how surprisingly close the total returns for each of those classes have been over the previous 25 years.
The second premise and the one that has gotten more attention on the web via Faber’s blog is the timing portion where an investor moves to cash when the price of the asset class crosses below its 10 month moving average and buys back in when it crosses above. Based on the data provided in the book and updated on the accompanying website, this method provides a safeguard against scenarios like 2008 where the correlation of the major asset classes went to 1 as the entire global financial markets melted down. This meltdown resulted in losses to the Harvard and Yale endowments of 25-40% while Faber’s timing model had a positive return of ~1%. Impressive performance for model that was public as of 2007 and can be duplicated for a fraction of the cost of the average mutual fund.
This book should be read by anyone who still believes the common axiom that the key to asset allocation is adjusting the % of stocks versus bonds based on your age.
Airlines Banning Laptops?
In light of the recent incident on the Northwest international flight from Amsterdam to Detroit where the supsect tried to ignite some type of incendiary/explosive device, the TSA has reacted with even more restrictive security precautions. Similar to the initial reaction to the Shoe Bomber and the scare of mixing liquids to create an explosion, the primary concern continues to be a person, our group of people bringing on board a device capable of generating enough energy to create a fire/explosion capable of crashing or disabling an aircraft in flight.
My concern is that at some point in the near future someone will try a similar attack using some variation of a laptop battery. Under “normal” conditions, they can already be volatile (just search the web for exploding laptop batteries) and I can only imagine what someone with more advanced knowledge could do to create a modified one. In addition, with it being the status quo for almost everyone on board to have a laptop, it leaves open the possibility of a coordinated plot that combines multiple batteries into one conflagration.
If this does come to pass and the TSA bans laptops as carry on luggage for flights, it will be the end of business travel as we know it. Without the ability to work on the plane, in the airport, etc. the vast majority of business trips will no longer have enough value to offset the incredible time sink they are. I know from personal experience that for a 1 night trip I spend more time in transit than in business meetings and for a 2 night trip, it’s about equal. Those are numbers I can live with when I have my laptop on the plane and airport as I do some of my best work on the plane. However, in the non-laptop scenario those numbers become untenable not only for myself but for many business travelers. The idea of flying into a city for a meeting and them flying back no longer makes sense.
I really hope I’m wrong about this, because if I’m not, it’s only a matter of time before they ban anything with batteries (cell phones, nintendo’s, DVD players, etc.), thus making the average American passenger (and citizen) even more miserable when they travel by air.
Another 100 Galleons?
At the Federal Reserve Bank of Atlanta’s conference on short selling, there was a fascinating paper presented by professor Nadia Massoud of York University. In it she provided compelling evidence that hedge funds actively short the shares of companies they loan money to directly before the announcement of the loan becomes public and directly before the loan covenants are violated and the terms are made more negative. What I found interesting is that their ability to short on this obviously inside information likely allows them to lend money to companies at a lower rate than a traditional bank as the profit they make from the shorting helps offset the fact that the default likelihood is higher than the rate reflects.
This means that they’re able to win business away from banks by offering a lower rate and then subsidize that rate by basically stealing money from individual investors by trading on the insider information. Based on the research in this paper, which included a robust sampling of hedge fund loans I think it’s extremely likely that the Galleon case is merely the tip of the iceberg.
Presenting at Federal Reserve Conference next week
I’ll be presenting at the Atlanta’s Federal Reserve Board conference on the costs and benefits of short selling next week.
News release on recent growth/hires at S3
S3 continues to grow and hire.
The Big Problem
New web product rollouts across the industry are very similar. They generally include – last minute development and fixes, a mad scramble to get everything pushed and configured on the proper servers followed by an immediate influx of critical bugs shortly after go-live.
At S3, we just rolled out a completely new web portal that allows our multinational Fortune 100 client to automate a very complex process that used to be managed on excel spreadsheets. Over 20 different user roles, over 300 possible user/status combinations, hundreds of users worldwide, not a simple product by any means.
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