Monday, December 28, 2009
Sunday, December 27, 2009
Thursday, December 24, 2009
Sunday, December 13, 2009
Tuesday, November 24, 2009
Saturday, November 14, 2009
Tuesday, November 10, 2009
Tuesday, November 3, 2009
Tuesday, October 20, 2009
Sunday, October 18, 2009
Saturday, October 17, 2009
Thursday, October 15, 2009
Monday, October 12, 2009
Sunday, October 4, 2009
Thursday, September 17, 2009
Tuesday, September 15, 2009
Sunday, September 13, 2009
Friday, September 11, 2009
Wednesday, September 9, 2009
Tuesday, September 8, 2009
Thursday, September 3, 2009
Thursday, August 27, 2009
Tuesday, August 25, 2009
No. 1 Goldman Sachs is faster than you.
There is an old story about two hikers who encounter a tiger. One says: There is no point in running because the tiger is faster than either of us. The other says: It is not about whether the tiger is faster than either of us. It is about whether I'm faster than you. And with that he runs away. The speed of the Goldman Sachses of the world has been boosted most recently by computerized high-frequency trading. Can you really outrun them?
It is normal for us, the individual investors, to frame the market race as a race against the market. We hope to win by buying and selling investments at the right time. That doesn't seem so hard. But we are much too slow in our race with the Goldman Sachses.
So what does this mean in practical terms? The most obvious lesson is that individual investors should never enter a race against faster runners by trading frequently on every little bit of news (or rumors).
Instead, simply buy and hold a diversified portfolio. Banal? Yes. Obvious? Yes. Typically followed? Sadly, no. Too often cognitive errors and emotions get in our way.
No. 2 The future is not the past, and hindsight is not foresight.
Wasn't it obvious in 2007 that financial institutions and financial markets were about to collapse? Well, it was not obvious to me, and it was probably not obvious to you, either. Hindsight error leads us to think that we could have seen in foresight what we see only in hindsight. And it makes us overconfident in our certainty about what's going to happen.
Want to check the quality of your foresight? Write down in permanent ink your forecast of tomorrow's stock prices. Do that each day for a year and check the accuracy of your predictions. You are likely to find that your foresight is not nearly as good as your hindsight..........
No. 3 Take the pain of regret today and feel the joy of pride tomorrow.
Emotions are useful, even when they sting. The pain of regret over stupid comments teaches presidents and the rest of us to calibrate our words more carefully. But sometimes emotions mislead us into stupid behavior. We feel the pain of regret when we find, in hindsight, that our portfolios would have been overflowing if only we had sold all the stocks in 2007. The pain of regret is especially searing when we bear responsibility for the decision not to sell our stocks in 2007. We are tempted to alleviate our pain by shifting responsibility to our financial advisers. "I am not stupid," we say. "My financial adviser is stupid." Financial advisers are sorely tempted to reciprocate, as the adviser in the cartoon who says: "If we're being honest, it was your decision to follow my recommendation that cost you money."
In truth, responsibility belongs to bad luck. Follow your mother's good advice, "Don't cry over spilled milk."
Where am I leading you? Stop focusing on blame and regret and yesterday and start thinking about today and tomorrow. Don't let regret lead you to hold on to stocks you should be selling. Instead, consider getting rid of your 2007 losing stocks and using the money immediately to buy similar stocks. You'll feel the pain of regret today. But you'll feel the joy of pride next April when the realized losses turn into tax deductions.
No. 4 Investment success stories are as misleading as lottery success stories.
Have you ever seen a lottery commercial showing a man muttering "lost again" as he tears his ticket in disgust? Of course not. What you see instead are smiling winners holding giant checks.
Lottery promoters tilt the scales by making the handful of winners available to our memory while obscuring the many millions of losers. Then, once we have settled on a belief, such as "I'm going to win the lottery," we tend to look for evidence that confirms our belief rather than evidence that might refute it. So we figure our favorite lottery number is due for a win because it has not won in years. Or we try to divine—through dreams, horoscopes, fortune cookies—the next winning numbers. But we neglect to note evidence that hardly anybody ever wins the lottery, and that lottery numbers can go for decades without winning. This is the work of the "confirmation" error.
What is true for lottery tickets is true for investments as well. Investment companies tilt the scales by touting how well they have done over a pre-selected period. Then, confirmation error misleads us into focusing on investments that have done well in 2008.
Lottery players who overcome the confirmation error conclude that winning lottery numbers are random. Investors who overcome the confirmation error conclude that winning investments are almost as random. Don't chase last year's investment winners. Your ability to predict next year's investment winner is no better than your ability to predict next week's lottery winner. A diversified portfolio of many investments might make you a loser during a year or even a decade, but a concentrated portfolio of few investments might ruin you forever.
No. 5 Neither fear nor exuberance are good investment guides.
A Gallup Poll asked: "Do you think that now is a good time to invest in the financial markets?" February 2000 was a time of exuberance, and 78% of investors agreed that "now is a good time to invest." It turned out to be a bad time to invest. March 2003 was a time of fear, and only 41% agreed that "now is a good time to invest." It turned out to be a good time to invest. I would guess that few investors thought that March 2009, another time of great fear, was a good time to invest. So far, so wrong. It is good to learn the lesson of fear and exuberance, and use reason to resist their pull.
No. 6 Wealth makes us happy, but wealth increases make us even happier.
John found out today that his wealth fell from $5 million to $3 million. Jane found out that her wealth increased from $1 million to $2 million. John has more wealth than Jane, but Jane is likely to be happier. This simple insight underlies Prospect Theory, developed by Daniel Kahneman and Amos Tversky. Happiness from wealth comes from gains of wealth more than it comes from levels of wealth. While gains of wealth bring happiness, losses of wealth bring misery. This is misery we feel today, whether our wealth declined from $5 million to $3 million or from $50,000 to $30,000.
We'll have to wait a while before we recoup our recent investment losses, but we can recoup our loss of happiness much faster, simply by framing things differently. John thinks he's a loser now that he has only $3 million of his original $5 million. But John is likely a winner if he compares his $3 million to the mountain of debt he had when he left college. And he is a winner if he compares himself to his poor neighbor, the one with only $2 million.
In other words, it's all relative, and it doesn't hurt to keep that in mind, for the sake of your mental well-being. Standing next to people who have lost more than you and counting your blessings would not add a penny to your portfolio, but it would remind you that you are not a loser.
No. 7 I’ve only lost my children’s inheritance.
Another lesson here in happiness. Mental accounting—the adding and subtracting you do in your head about your gains and losses—is a cognitive operation that regularly misleads us. But you can also use your mental accounting in a way that steers you right.
Say your portfolio is down 30% from its 2007 high, even after the recent stock-market bounce. You feel like a loser. But money is worth nothing when it is not attached to a goal, whether buying a new TV, funding retirement, or leaving an inheritance to your children or favorite charity.
A stock-market crash is akin to an automobile crash. We check ourselves. Is anyone bleeding? Can we drive the car to a garage, or do we need a tow truck? We must check ourselves after a market crash as well. Suppose that you divide your portfolio into mental accounts: one for your retirement income, one for college education of your grandchildren, and one for bequests to your children. Now you can see that the terrible market has wrecked your bequest mental account and dented your education mental account, but left your retirement mental account without a scratch. You still have all the money you need for food and shelter, and you even have the money for a trip around the country in a new RV. You might want to affix to it a new version of the old bumper sticker: "I've only lost my children's inheritance."
So here's my advice: Ask yourself whether the market damaged your retirement prospects or only deflated your ego. If the market has damaged your retirement prospects, then you'll have to save more, spend less or retire later. But don't worry about your ego. In time it will inflate to its former size.
No. 8 Dollar-cost averaging is not rational, but it is pretty smart.
HOUSTON -- Farouk Shami, a Palestinian-born hairdresser who built a $1 billion manufacturing company around a popular line of hair irons, is moving all of his production of hand-held appliances from China to a sprawling new factory here.
The move flies in the face of conventional wisdom, which says gadgets like this are best made in a low-cost country. But, he says, outsourcing has led to a loss of control over manufacturing and distribution.
"We'll make more money this way -- because we'll have better quality and a better image," says the 66-year-old, who says his company, Farouk Systems Inc., spends about $500,000 a month fighting counterfeits, most of which he says originate in China. The company collects the fake products and tracks the source, and then brings action in China to shut down illegal producers.....
Monday, August 24, 2009
Saturday, August 15, 2009
Saturday, August 8, 2009
Thursday, July 30, 2009
Wednesday, July 29, 2009
All this exposed the difficulties of slowing the progression of such developments in the presence of a general ‘feel-good’ factor. Households benefited from low unemployment, cheap consumer goods and ready credit. Businesses benefited from lower borrowing costs. Bankers ere earning bumper bonuses and expanding their business around the world. The government benefited from high tax revenues enabling them to increase public spending on schools and hospitals. This was bound to create a psychology of denial. It was a cycle fuelled, in significant measure, not by virtue but by delusion.
Sunday, July 26, 2009
Tuesday, July 21, 2009
Sunday, July 12, 2009
Wednesday, July 8, 2009
Friday, July 3, 2009
Friday, June 19, 2009
Thursday, June 18, 2009
Monday, June 15, 2009
Thursday, June 11, 2009
Friday, May 29, 2009
Thursday, May 28, 2009
Monday, May 25, 2009
Sunday, May 24, 2009
Saturday, May 16, 2009
Less-likely default cardholder: buy felt-pad, visit dentist, getting married, having a child.
More-likely default cardholder: buy chrome-skull, go to bar, pawnshop, marriage therapy.
"....Although Mr. Barsky has clearly gotten rich, he was surprisingly clear-eyed about the societal imbalances of hedge fund mania. The industry, he told me, “was part of this huge trend towards the celebration of wealth. Hedge fund managers overearned. It just became too easy. There has been a massive misallocation of human resources. I have so many smart guys here who were making seven figures. And I think it is a fair question to ask: what would they have been doing in 1948 — going into the foreign service? If Obama does anything, the best thing he could do is change a generation’s values.”
He continued: “I have a friend whose son is a senior at Princeton. She said all his friends want to work for Goldman Sachs.” He added, “We have an overground railroad to finance. It is not the best way for a society to be run.”..........."
Thursday, May 14, 2009
Saturday, May 9, 2009
Monday, April 27, 2009
Tuesday, April 21, 2009
Sunday, April 19, 2009
Thursday, April 16, 2009
Sunday, April 12, 2009
Here is an article to introduce the Adam Smith's masterpiece.
Friday, April 10, 2009
Wednesday, April 8, 2009
Monday, April 6, 2009
How could this happen? In 1983, the Bureau of Labor Statistics began to use rental equivalence for homeowner-occupied units instead of direct home-ownership
costs. Between 1983 and 1996, the price-to-rental ratio increased from 19.0 to
20.2, so the change had little effect on measured inflation: The CPI
underestimated inflation by about 0.1 percentage point per year during this
period. Between 1999 and 2006, the price-to-rent ratio shot up from 20.8 to
With home price increases out of the CPI and the price-to-rent ratio rapidly increasing, an important component of inflation remained outside the index. In 2004 alone, the price-rent ratio increased 12.3%. Inflation for that year was underestimated by 2.9 percentage points (since "owners' equivalent
rent" is about 23% of the CPI). If home-ownership costs were included in the
CPI, inflation would have been 6.2% instead of 3.3%.
Earlier, during the downturn in the equities market between December 1999 and September 2002, approximately $10 trillion of equity was erased. But a
measure of financial system performance, the Keefe, Bruyette, & Woods BKX index of financial firms, fell less than 6% during that period. In the current downturn, the value of residential real estate has fallen by approximately $3 trillion, but the BKX index has now fallen 75% from its peak of January 2007.
The financial sector has been devastated in this crisis, whereas it was almost completely unaffected by the downturn in the equities market early in this decade.
How can one crash that wipes out $10 trillion in assets cause no damage to the financial system and another that causes $3 trillion in losses devastate the financial system?
In the equities-market downturn early in this decade, declining assets were held by institutional and individual investors that either owned the assets outright, or held only a small fraction on margin, so losses were absorbed by their owners. In the current crisis, declining housing assets were often, in effect, purchased between 90% and 100% on margin.
In some of the cities hit hardest, borrowers who purchased in the low-price tier at the peak of the bubble have seen their home value decline 50% or more. Over the past 18 months as housing prices have fallen, millions of homes became worth less than the loans on them, huge losses have been transmitted to lending institutions, investment banks, investors in mortgage-backed securities, sellers of credit default swaps, and the insurer of last resort, the U.S. Treasury....................
Saturday, April 4, 2009
Friday, April 3, 2009
Aagain I think this is very very bad corporate governance!!
Wednesday, April 1, 2009
In addition to all these financial system overhauls, I propose an easy market-based regulation to prevent "too big to fail." We could impose "too big to fail" tax on banks based on the size of their assets.
Monday, March 30, 2009
Quite an interesting story.
Sunday, March 29, 2009
Monday, March 23, 2009
Friday, March 20, 2009
Tuesday, March 17, 2009
Monday, March 16, 2009
Friday, March 13, 2009
Wednesday, March 11, 2009
Tuesday, March 10, 2009
Monday, March 9, 2009
Tuesday, March 3, 2009
Monday, March 2, 2009
Wednesday, February 25, 2009
Tuesday, February 24, 2009
Update: After watching President Obama's speech to Congress tonight, I think Obama is really willing to do all these ambitious reforms and will have a chance to be successful for many of the plans in the long run. Why? Becuase I think he understands the current core problems of the US and he really can talk!
Tuesday, February 17, 2009
Saturday, February 14, 2009
Thursday, February 12, 2009
Wednesday, February 11, 2009
Saturday, February 7, 2009
.... men in China today feel compelled to save in order to find a bride. The same week, a former student of mine who lost his lucrative financial-sector job explained that he had no savings because it was so expensive to date in New York!An example of cultural difference about savings.
Sunday, February 1, 2009
Thursday, January 29, 2009
I have two questions. First is that how dare they are. Second is how could the government let this happan again. If you read WSJ everyday, you could exactly know they are doing it. On the one hand, we have greedy private sectors; on the other hand, we have a sleepy government. And the financial crisis in September didn't change this nature.
Updated: Another angry man about Wall Street.
My third question: Do you trust Wall Street now?
Wednesday, January 28, 2009
Monday, January 26, 2009
Saturday, January 24, 2009
Tuesday, January 20, 2009
Sunday, January 18, 2009
Thursday, January 15, 2009
One part is about higher education:
Education for the 21st Century: To enable more children to learn in 21st century classrooms, labs, and libraries to help our kids compete with any worker in the world, this package provides:
• $41 billion to local school districts through Title I ($13 billion), IDEA ($13 billion), a new School Modernization and Repair Program ($14 billion), and the Education Technology program ($1 billion).
• $79 billion in state fiscal relief to prevent cutbacks to key services, including $39 billion to local school districts and public colleges and universities distributed through existing state and federal formulas, $15 billion to states as bonus grants as a reward for meeting key performance measures, and $25 billion to states for other high priority needs such as public safety and other critical services, which may include education.
• $15.6 billion to increase the Pell grant by $500.
• $6 billion for higher education modernization.
Wednesday, January 14, 2009
Dear Sir or Madam,
I have three suggestions:
1. Based on the Obama's "the Job Impact of American Recovery and Reinvestment Plan" released on January 10, 2009, one of the key components of $775 billion will be spent on state fiscal relief designed to alleviate cuts in healthcare, education, and prevent increases in state and local taxes (p.4). I predict that this stimulus package will be passed by Congress soon (no later than February 2009). Therefore, I suggest that WSU, MnSCU, and Minnesota government (congressmen) should work together to make sure that our state will get the appropriate proportion of this federal handout sooner than later. Our WSU 2010-11 budget should be planned based on this practical assumption.
2. In addition to our projected budget shortfall, the stimulus money will be desperately looking for shovel-ready investment projects which will enhance country’s long-term productivity (such as infrastructure, school repair etc) because of its timely mission fighting recession. So now WSU could prepare and get these kinds of projects ready and then we can do it right away when the possible stimulus funding is handed.
3. I expect that WSU's enrollment will probably increase in 2010-11 for two reasons. First, under the current recession, opportunity cost of being a student is lower (wage is lower, unemployment is higher), so enrollment will go up. Second, some private-college students will come (transfer) to WSU for a relatively lower tuition cost. WSU should plan the budget based on this assumption.
Basically I think that the current budget crisis and recession bring WSU more resources if we could understand the big picture of the stimulus package and use it well.
Wei-Choun Yu, Assistant Professor
Economics and Finance Department, College of Business
Sunday, January 11, 2009
Other related works could be found in the working group of Hoover institution.
Saturday, January 10, 2009
- Investments in infrastructure, education, health, and energy
- Increases in food stamps and expansions of unemployment insurance
- State fiscal relief to alleviate cuts in health care, education, and prevent increases in state and local taxes (I hope state governors read it!)
- Business investment incentives
- A middle class tax cut
The plan also shows the detailed breakdown of the stimulus impact on employment increases. It is a little bit weird that it didn't show the breakdown of money spending. It seems missing something. Anyway, it looks OK.