In case they don't publish my comment (I'll be crushed), here it is:
Comment on "A Crisis of Ethic Proportions " by John C. Bogle
Essentially, Mr. Bogle is proposing that we try harder to be more moral and in that misses the point of Adam Smith. Adam Smith's statement, "[M]anagers of other people's money [rarely] watch over it with the same anxious vigilance with which . . . [they] watch over their own" is an indictment of human nature. Smith's position is that man's essential nature is a given, not something which can be altered. It is from this base that the invisible hand is derived. Setting up structures which rely on what man ought to be compared to what he is, is like building a house upon sand.
Yea, they published it!
http://online.wsj.com/article/SB124087477951861329.html
Sunday, April 26, 2009
Saturday, April 25, 2009
Unemployment Insurance
As a New Liberal Democrat I want to propose an improvement to Unemployment Insurance and explain the rationale behind it.
Insurance is a mechanism for transferring risk from those who don't want it to those that do. This means that as individuals we don't want to bear the risk of losing our jobs and consequently our income streams. We transfer that risk to a third party who can profit by aggregating or pooling many individual risks and making a small profit. This is a win-win situation and the reason all types of insurance exist.
Unfortunately unemployment insurance has a few flaws. First, because you get benefits for a specific period of time (say six months), there is little incentive to find new work quickly. In fact, it has been shown empirically that the length of unemployment after a job loss is positively correlated with the duration of unemployment benefits. The second problem is that unemployment insurance isn't paid directly by those who benefit from it. Instead the government forces employers to pay for it. This is a fallacy of course because the reality is that employees are paid that much less than they would be paid because of the hidden cost of their employment. Once again this creates a perverse incentive.
What I propose is this: Have employees directly pay for their unemployment insurance so that it is visible how much they are paying every month. Secondly, Let's have a sliding scale for benefits received for an unemployed person. This means that if you find work sooner than your benefits expire you don't lose the income stream you would have received had you stayed unemployed.
Unemployment is a bad thing for everyone. Our goal is to create a safety net which catches you when you fall but doesn't accidentally keep you down. This means altering incentives to motivate everyone to get off the ground as quickly as possible.
Insurance is a mechanism for transferring risk from those who don't want it to those that do. This means that as individuals we don't want to bear the risk of losing our jobs and consequently our income streams. We transfer that risk to a third party who can profit by aggregating or pooling many individual risks and making a small profit. This is a win-win situation and the reason all types of insurance exist.
Unfortunately unemployment insurance has a few flaws. First, because you get benefits for a specific period of time (say six months), there is little incentive to find new work quickly. In fact, it has been shown empirically that the length of unemployment after a job loss is positively correlated with the duration of unemployment benefits. The second problem is that unemployment insurance isn't paid directly by those who benefit from it. Instead the government forces employers to pay for it. This is a fallacy of course because the reality is that employees are paid that much less than they would be paid because of the hidden cost of their employment. Once again this creates a perverse incentive.
What I propose is this: Have employees directly pay for their unemployment insurance so that it is visible how much they are paying every month. Secondly, Let's have a sliding scale for benefits received for an unemployed person. This means that if you find work sooner than your benefits expire you don't lose the income stream you would have received had you stayed unemployed.
Unemployment is a bad thing for everyone. Our goal is to create a safety net which catches you when you fall but doesn't accidentally keep you down. This means altering incentives to motivate everyone to get off the ground as quickly as possible.
Tuesday, April 14, 2009
Prediction
This is a test. Only a test. Let's try to link macroeconomic reality with specific investment recommendations and see the results. Very simply, I believe that due to the increased spending we will have inflation. Based on this the value of the dollar should decline relative non-inflatable commodities. Demand for oil should remain fairly constant or increase. Therefore a good investment opportunity would be to invest in oil. This is not really an investment in the sense that no true growth is occurring but for an individual investor you should be able to exploit this reality.
Monday, April 13, 2009
And Your Little Dog Too
Telling are the actions we take. Mr. Obama has fulfilled his promise to his daughters and given them a dog, but not a mutt like him. Given the opportunity, Mr. Obama displayed his true character, an elitist and a hypocrite. He "wanted" to rescue a dog from a shelter but alas, he didn't. He had good intentions but intentions won't cut it for Scruffie. Scruffie's days are numbered and there is no hope left. Soon, Scruffie will be euthanized, a euphemism for an ever long sleep.
How hard would it have been to have kept that promise, to fulfill the noble ideal of helping a downtrodden canine? Not hard, but harder than the minuscule sacrifice required. Obama, the embodiment of symbolism, sent a strong signal with his choice. Mr. Obama's symbolic failure unmasks the veil of shared sacrifice. He preaches shared sacrifice, but neglects to tell us to whom we are sacrificing. God does not give himself sacraments and he doesn't get a mutt.
How hard would it have been to have kept that promise, to fulfill the noble ideal of helping a downtrodden canine? Not hard, but harder than the minuscule sacrifice required. Obama, the embodiment of symbolism, sent a strong signal with his choice. Mr. Obama's symbolic failure unmasks the veil of shared sacrifice. He preaches shared sacrifice, but neglects to tell us to whom we are sacrificing. God does not give himself sacraments and he doesn't get a mutt.
Friday, April 10, 2009
Racial Profiling to its logical conclusion
I am watching C-span and I hear condemnation of racial profiling. They are talking about illegal immigrants and I couldn't help thinking about the inevitable conclusion. Check everyone's status because it wouldn't make any sense whatsoever to check hispanics even though they make up the majority of illegal aliens. That's brilliant.
Monday, March 30, 2009
Why do wages rise?
I was reading the Wall Street Journal and I read an extremely interesting explanation about wages from Henry Hazlit's book, "Economics in one lesson". Greed, i.e. competition, is what makes wages rise. Generally speaking compensation is based on productivity, the more some one produces the more they get paid. The counter intuitive aspect of this is: why would you pay someone who is more productive not because they are any smarter or work any harder but press a button on some piece of machinery? It almost seems unfair that a guy who works for someone else should take advantage of the capital investment of their employer. That person didn't invest in any capital, they just sit there and utilize the machinery and tools given to them. Yet, these people make more money then those that don't have the capital to improve their productivity.
What is the most you are willing to pay someone? The right answer is that you are willing to pay them anything less than the revenue they generate. You won't pay them anymore money than they generate because you will go out of business, but anything less is acceptable. So the question is, in a competitive market what will that salary be? Well, it will tend to be just underneath the value added by that employee. Let's say you pay someone 1 dollar an hour and that person is generating 10 dollars an hour what will happen? A greedy entrepreneur will see the 9 dollars an hour in profit and say, hey I'll take 5 dollars a hour in profit. This will continue until the wages can't go any higher. The important thing to note is that the amount someone would be willing to pay is independent of how that revenue is generated. Some greedy guy is always out there willing to pay a button pusher if it makes him an acceptable profit.
What is the most you are willing to pay someone? The right answer is that you are willing to pay them anything less than the revenue they generate. You won't pay them anymore money than they generate because you will go out of business, but anything less is acceptable. So the question is, in a competitive market what will that salary be? Well, it will tend to be just underneath the value added by that employee. Let's say you pay someone 1 dollar an hour and that person is generating 10 dollars an hour what will happen? A greedy entrepreneur will see the 9 dollars an hour in profit and say, hey I'll take 5 dollars a hour in profit. This will continue until the wages can't go any higher. The important thing to note is that the amount someone would be willing to pay is independent of how that revenue is generated. Some greedy guy is always out there willing to pay a button pusher if it makes him an acceptable profit.
Sunday, March 22, 2009
How far have we come?
In 1964, the civil rights act was enacted equalizing the rights of blacks in the eyes of the law. I believe that government, and consequently the law, is only a reflection of society and it's values. At the time of the civil rights act, the mores of society were changing and those changing norms preceded, did not follow, the eventual change in the law.
We have witnessed a very sad event in our country. The punitive tax on AIG employees is a travesty. It is blatantly unconstitutional and reflects new dangerous mores developing in our country.
First let's look at government. Every single one of them swears an oath to DEFEND the Constitution. What does that oath mean? Nothing, and neither does the constitution. Before this we pretended like the constitution mattered, now we know it does not. Maybe this will be vetoed by Obama or ruled unconstitutional by the supreme court. Regardless, we have definitive proof that your representatives don't give two cents about the constitution. Remember that. Also remember who did care and give them your money because they are your true advocates and leaders.
We forget so soon the evils of which we are capable. In my life I can't conceive of a world where blacks are openly discriminated against. This is beyond my comprehension because where I grew up this was unthinkable. Just as we are probably not evolved enough for our technology, we haven't evolved that much in 200, no 30 years. This episode demonstrates just how little it takes to bring society down to a base level.
What we need to learn from this is that the danger from us to us is very great. In this case we may feel justified in our anger and retribution (I don't), but should that be the basis for our action? The basis for our society? One of the reasons this country is great is because of equality under the law. Now, as we and our "leaders" foam at the mouth, the law is used for punitive inequality. Shame on us.
We have witnessed a very sad event in our country. The punitive tax on AIG employees is a travesty. It is blatantly unconstitutional and reflects new dangerous mores developing in our country.
First let's look at government. Every single one of them swears an oath to DEFEND the Constitution. What does that oath mean? Nothing, and neither does the constitution. Before this we pretended like the constitution mattered, now we know it does not. Maybe this will be vetoed by Obama or ruled unconstitutional by the supreme court. Regardless, we have definitive proof that your representatives don't give two cents about the constitution. Remember that. Also remember who did care and give them your money because they are your true advocates and leaders.
We forget so soon the evils of which we are capable. In my life I can't conceive of a world where blacks are openly discriminated against. This is beyond my comprehension because where I grew up this was unthinkable. Just as we are probably not evolved enough for our technology, we haven't evolved that much in 200, no 30 years. This episode demonstrates just how little it takes to bring society down to a base level.
What we need to learn from this is that the danger from us to us is very great. In this case we may feel justified in our anger and retribution (I don't), but should that be the basis for our action? The basis for our society? One of the reasons this country is great is because of equality under the law. Now, as we and our "leaders" foam at the mouth, the law is used for punitive inequality. Shame on us.
Thursday, March 19, 2009
The outrage over bonuses
I think the outrage over bonuses is ridiculous. I was watching the senate hearings and it came to light that there are multiple types of bonuses: retention and performance. Apparently, no performance bonuses were paid which makes sense. The bonuses everyone is upset over are the retention bonuses. The purpose of these "bonuses" was to keep people familiar with entangled financial products around so that they could unwind them and close them out. It seems that there are few people knowledgeable enough to deal with these things. So the company did something that made sense. They kept valuable assets.
The problem that everyone is having is one with semantics. These are really not bonuses. Bonus implies something extra and undeserved but who determines that? In the case of performance we naturally assume that as the driving factor in the bonus. The purpose of a retention bonus is to keep people that the company needs. This is analogous to paying a signing bonus for a new employee. The signing bonus is used to incentivize someone to join the company or a sports team. The subsequent performance is ancillary. The company has an obligation to get the people they need at the lowest cost. If they could have gotten those people from outside and fired everyone who worked there, then they should have done that. They chose to do what they felt was the lowest cost alternative. This is rational and good for the owners of the company, i.e. investors and government.
The outrage over this would be laughable if it were not true. Another lesson to learn is that "rights" are always dependent on the public mood. Notice how the idea of taxing the people who received the compensation (I refuse to continue to call it a "bonus") has support and no one is hollering how this violates anyone's rights.
The problem that everyone is having is one with semantics. These are really not bonuses. Bonus implies something extra and undeserved but who determines that? In the case of performance we naturally assume that as the driving factor in the bonus. The purpose of a retention bonus is to keep people that the company needs. This is analogous to paying a signing bonus for a new employee. The signing bonus is used to incentivize someone to join the company or a sports team. The subsequent performance is ancillary. The company has an obligation to get the people they need at the lowest cost. If they could have gotten those people from outside and fired everyone who worked there, then they should have done that. They chose to do what they felt was the lowest cost alternative. This is rational and good for the owners of the company, i.e. investors and government.
The outrage over this would be laughable if it were not true. Another lesson to learn is that "rights" are always dependent on the public mood. Notice how the idea of taxing the people who received the compensation (I refuse to continue to call it a "bonus") has support and no one is hollering how this violates anyone's rights.
Friday, March 13, 2009
How Evil is Bernie Madoff?
I feel for my pal Bernie. He stole some money, OK, a lot of money, but basically he stole money from people who didn't do their homework and relied on faith and the "watchful" eye of the government. Well, once again our fearless feckless leaders blew it. Remember that. What isn't being said and what I find fascinating is the total irony of the situation.
Over and over again I see rich people talking about how Mr. Madoff stole their life savings and I can't help but notice that if Mr. Madoff were an agent of the government, we would be applauding him. His only real crime, because taking from the rich is not a crime, is not giving to the poor. Wait, he did give to the poor. Oh well, I guess no good deed goes unpunished. Our moral lesson in immorality is that all animals are equal but some are more equal than others.
Over and over again I see rich people talking about how Mr. Madoff stole their life savings and I can't help but notice that if Mr. Madoff were an agent of the government, we would be applauding him. His only real crime, because taking from the rich is not a crime, is not giving to the poor. Wait, he did give to the poor. Oh well, I guess no good deed goes unpunished. Our moral lesson in immorality is that all animals are equal but some are more equal than others.
Sunday, March 8, 2009
Now is the time to buy
I have made many bad decisions when it comes to investing, but my logic has always been very sound. I want to put it on record that if you have access to any money that isn't invested you should be buying like crazy right now. Now don't do what I did and not hedge (i.e. buy some downside protection) but this is the time when fast millionaires are made. Buy foreclosed properties and get in the market!
Greed and Fear predominate in the marketplace. You can't beat people based on the information you have (although what my friend Geoff and legendary mutual fund manager Peter Lynch do is a very good idea - visiting the stores and seeing what their traffic is like, etc) but you can beat them based on resolve. You have to be greedy when others fear and fear when others are greedy. That's it. Put the odds in your favor and become the house at the casino!
Greed and Fear predominate in the marketplace. You can't beat people based on the information you have (although what my friend Geoff and legendary mutual fund manager Peter Lynch do is a very good idea - visiting the stores and seeing what their traffic is like, etc) but you can beat them based on resolve. You have to be greedy when others fear and fear when others are greedy. That's it. Put the odds in your favor and become the house at the casino!
Interesting Lesson Learned At School
In my finance class we are learning about efficient market theory. There are three versions of this theory:
Weak - All historical data is priced into the market
Semi-Strong - All historical and publicly available information is priced into the market
Strong - All information both public and private is priced into the market
The Weak theory implies that it is not possibly to beat the market by looking at past historical data (apparently there is some academic dispute regarding momentum but I digress)
The Semi-Strong implies that it is not possible to beat the market utilizing all past and present public information
The Strong means that you can't beat the market. Period.
Then we talked about Perfect markets. A perfect market is one that is efficient AND has no transaction costs. An efficient market is not necessarily perfect.
Anyway this is the less interesting part of my diatribe, the interesting part is the question the professor asked: If we are telling students that they should pursue positive NPV projects for their future companies but you can't beat the market then isn't this a contradiction? I admit to not knowing the answer (I hate when that happens) but the answer is that you are talking about two different markets. The financial market is what is generally referred to as the market. The real market is when you actually take resources, lumber and land, and turn them into more productive assets, a house. THAT market is not efficient (or not nearly as efficient as the financial market) and there are arbitrage opportunities.
To show the inefficiency of the real market he gave an example. Let's say the price of oil goes up, do the plastic spoons sold in the grocery rise immediately in price. No they don't. Eventually they will, but the lag between the rise in the factor of production, which should raise the price of the product immediately, is inefficiency in the real market.
Cool stuff!
Weak - All historical data is priced into the market
Semi-Strong - All historical and publicly available information is priced into the market
Strong - All information both public and private is priced into the market
The Weak theory implies that it is not possibly to beat the market by looking at past historical data (apparently there is some academic dispute regarding momentum but I digress)
The Semi-Strong implies that it is not possible to beat the market utilizing all past and present public information
The Strong means that you can't beat the market. Period.
Then we talked about Perfect markets. A perfect market is one that is efficient AND has no transaction costs. An efficient market is not necessarily perfect.
Anyway this is the less interesting part of my diatribe, the interesting part is the question the professor asked: If we are telling students that they should pursue positive NPV projects for their future companies but you can't beat the market then isn't this a contradiction? I admit to not knowing the answer (I hate when that happens) but the answer is that you are talking about two different markets. The financial market is what is generally referred to as the market. The real market is when you actually take resources, lumber and land, and turn them into more productive assets, a house. THAT market is not efficient (or not nearly as efficient as the financial market) and there are arbitrage opportunities.
To show the inefficiency of the real market he gave an example. Let's say the price of oil goes up, do the plastic spoons sold in the grocery rise immediately in price. No they don't. Eventually they will, but the lag between the rise in the factor of production, which should raise the price of the product immediately, is inefficiency in the real market.
Cool stuff!
Natural Selection Never Fails
Recently I commented on Deal or No Deal. Well, there is yet another example of natural selection in action: Charles Barkley. Now don't get me wrong, I really enjoy him as a commentator on TNT but, how do I say this tactfully...hmmm...oh yeah, what an idiot! I don't encourage drinking and driving (and nor does anyone else other than some hardcore libertarians) but possibly the only reason someone would contemplate breaking the law would be of utter necessity. Mr. Barkley, on the other hand, is a very wealthy man. Why, WHY, didn't he call a cab? It's not like he can't afford it. I predict that 20 years from now Mr. Barkley will be yet another formerly rich athlete. Our country likes to redistribute wealth from those that have it to those that don't under the pretense that the "have nots" were unlucky. I hope we can all agree that Mr. Barkley has been more than lucky and let's make a pact now that no matter what happens we will keep our money and let him live with the consequences. Maybe, if he has another hot date, I'll give him money for a cab ride!
Friday, February 27, 2009
I'll take a dive for 20 million
Everyone of us watches a boxer get knocked out in 32 seconds and thinks, hey I could do that. Yes, you could, but would they let you? The sad sack boxer and the bench warming NBA nobody get paid lots and lots of money for doing what anyone of the street could do: Nothing.
Then we see these CEO's get paid millions for exceptionally poor performance and we think, hey I could do that. Yes you could, but would they let you? My personal grievance was watching people at my job who were eminently less able than I get paid much more and do a poor job. Hell, I could have done that but they wouldn't let me.
Wages are based on two different things. The position and the performance within that position. I am getting an MBA in hopes of gaining the position. That position is in itself a higher salary regardless of my performance. Granted that if I am really terrible I would eventually lose my position but it doesn't change the fact that I am in a higher pay grade. While my performance in that position is secondary in terms of my salary, it does two things: It sets my pay within the position and ultimately puts me in line for the next position. Rinse and repeat.
Before we lament at the pay of the bench warmer or the poor performing CEO, remember they are not only being paid for performance. They are being paid as much money as is necessary for someone in that position. Think about it this way. First you get paid for being an NBA player, then you get paid for being Michael Jordan.
Then we see these CEO's get paid millions for exceptionally poor performance and we think, hey I could do that. Yes you could, but would they let you? My personal grievance was watching people at my job who were eminently less able than I get paid much more and do a poor job. Hell, I could have done that but they wouldn't let me.
Wages are based on two different things. The position and the performance within that position. I am getting an MBA in hopes of gaining the position. That position is in itself a higher salary regardless of my performance. Granted that if I am really terrible I would eventually lose my position but it doesn't change the fact that I am in a higher pay grade. While my performance in that position is secondary in terms of my salary, it does two things: It sets my pay within the position and ultimately puts me in line for the next position. Rinse and repeat.
Before we lament at the pay of the bench warmer or the poor performing CEO, remember they are not only being paid for performance. They are being paid as much money as is necessary for someone in that position. Think about it this way. First you get paid for being an NBA player, then you get paid for being Michael Jordan.
Tuesday, February 24, 2009
It's the West Wing, for real
I just heard Barack Obama, our Savior, declare that cancer will be cured in our lifetime. For all the other TV watchers out there, you may recall an episode of the West Wing where Rob Lowe (the speechwriter for president Bartlett, the fake president we wish we had, oh my) was going to put in the speech that we could cure cancer in ten years. They, unlike Obama, had the common sense to take that part out of the speech. I am tickled pink that Obama will cure cancer, at least we can Hope that He does. I, for one, need to change the channel, the West Wing, like Obama, was fake but at least it was better written.
Monday, February 23, 2009
Flash versus Substance
Recently I participated in a competition to determine the commercial viability of some particular invention. The competition involved researching the invention and determining it's advantages over the current technology. It then involved conducting an analysis of the current and potential markets and whether given their size and the product's relative advantage, an investor should invest money. It was fun and I think my team did a good job understanding the market place. I am happy to report that our analysis was very sound, our presentation was lacking.
The winners did an amazing job with their presentation. I don't remember their analysis and that's the point. The competition had virtually nothing to do with the analysis, it was about awing the audience with your presentation.
My personal demeanor is one that values substance over flash but I fear that is a minority opinion. Most people value flash over substance. The phrase, "perception is reality" reflects upon this belief and it is a bit of a tragedy. Like the falling tree, reality does not need our perception. Perception distorts reality.
At the end of the day perception always loses out to reality. I am ok with that. I can wait!
The winners did an amazing job with their presentation. I don't remember their analysis and that's the point. The competition had virtually nothing to do with the analysis, it was about awing the audience with your presentation.
My personal demeanor is one that values substance over flash but I fear that is a minority opinion. Most people value flash over substance. The phrase, "perception is reality" reflects upon this belief and it is a bit of a tragedy. Like the falling tree, reality does not need our perception. Perception distorts reality.
At the end of the day perception always loses out to reality. I am ok with that. I can wait!
Subscribe to:
Posts (Atom)
