Predicting the Economy

October 2, 2009

One outcome of the financial crisis is we have to “live with messiness.” Instead of a neat and tidy explanation for everything that happens in the markets, humans are sometimes irrational and, as emotional creatures, we occasionally let fear and greed cloud our financial decisions. After witnessing the current financial crisis, the tech stock bubble [...]

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Ivy League Endowment Funds

September 18, 2009

Rarely do you see a headline in a mainstream newspaper containing the three words, “Yale,” “Harvard,” and “Losers,” but that’s exactly what happened last week in The Wall Street Journal. The Journal certainly wasn’t talking about the Universities’ academic prowess or even their athletic exploits; rather, it was the disappointing performance of their once invincible [...]

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Did Asset Allocation Fail in 2008?

August 13, 2009

A recent Wall Street Journal article epitomizes the new “conventional wisdom” that asset allocation failed in 2008. It is true that correlations among major asset classes have increased in recent years giving the impression that asset allocation no longer works. During the 2008 financial crisis all major equity asset classes experienced severe declines. Even commodities, [...]

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Is Modern Portfolio Theory (MPT) Dead?

August 13, 2009

This question has been coming up a lot lately in the media and some academic journals. Thinking Modern Portfolio Theory died last year is based on the misconception that Modern Portfolio Theory will guarantee against a loss. That is simply not the case. What MPT believes is diversification to a portfolio, which over the long [...]

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The Fear of Losing and Losing Out

August 11, 2009

Investors are driven by the fear of losing and losing out. Last winter, as the financial markets were seemingly in a free fall, panic and fear reigned. There was a sense that the worldwide financial system could collapse and that the problem was bigger than the government’s ability to solve it. This fear of losing [...]

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Assumed Permanence of Unusual Conditions

July 15, 2009

How will we know when the market hits rock bottom and starts a new secular bull market? This is one of those questions where if we knew the exact answer we could probably make a fortune. Unfortunately, no one cannot pinpoint the bottom of a bear market in real time, but according to money manager [...]

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Are Stock’s a Loser’s bet?

June 9, 2009

According to a recent article in CNN Money, only if you attempt to sort out the handful of winners from the rest of the market. As the article points out, the majority of indi­vidual securities tend to post negative returns over the long run. In fact, research by Dimensional Fund Advisors found that from 1980 [...]

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Financial Meltdown Anniversary

June 9, 2009

This week marks the two-year anniversary of the financial meltdown. What lessons have we learned? On June 12, 2007, news broke that a 10-month old Bear Stearns hedge fund that speculated in mortgage-backed securities was melting down. The fund used leverage and bet heavily on bonds tied to subprime mortgages. As the market for subprime [...]

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Mental Accounting

June 2, 2009

Sunk costs and mental accounting can be hazardous to your wealth. Imagine you just arrived at a theater and as you reach into your pocket to pull out the $10 ticket you purchased in advance, you discover that it’s missing. Would you fork over another $10 to see the movie? Compare that to a second [...]

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Jesse Livermore

May 26, 2009

“Wall Street never changes, the pockets change, the suckers change, the stocks change, but Wall Street never changes, because human nature never changes.” –Jesse Livermore Jesse Livermore is a famous early 20th century trader and speculator who was immortalized in the 1923 book, Reminiscences of a Stock Operator by Edwin Lefevre. Many consider Livermore one [...]

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