Tag Archives: Investing

Where Friedman Was Wrong

A new paper by Oliver Hart and Luigi Zingales argues that a company’s objective should be the maximization of shareholders’ welfare, not value.
By Asher Schechter – In 1970, Milton Friedman famously argued that corporate managers should “conduct the business in accordance with [shareholders’] desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.”

Since then, Friedman’s view that the sole social responsibility of the firm is to maximize profits—leaving ethical questions to individuals and governments—has become dominant both in finance and law. It also laid the intellectual foundations for the “shareholder value” revolution of the 1980s.

Friedman’s position has been attacked by many critics on the grounds that corporate boards should consider other stakeholders in their decisions.

Yet, if the owner of a privately held firm is under no obligation to care about anybody’s interest but her own, why should it be different for a publicly traded company? more> https://goo.gl/8y3wWZ

7 Investing Lessons from Behavioral Psychology

Psy-Fi Blog – You could start by not wasting your time clicking on stupid clickbait articles, I suppose. But since you’re here you might as well learn something.

Given the vast amount of information that flies about the investing world you’d be forgiven for assuming that there are a lot of people who know what’s going on.

The truth is exactly the opposite – no one knows anything. Everyone is speculating because that’s what humans do when faced with uncertainty – we try to make sense of it.

But investment experts pontificating on the latest or next market moves are simply the modern day equivalent of prehistory shamans, high on drugs and low on effective prophesy. They have as much chance of predicting the next market earthquake as their ancient counterparts did, and at least the shamans had the consolation of getting high.

Diversification is the one free lunch in the market, and that’s not very exciting. more> http://goo.gl/edgl6v

Economists overvalue stock markets

English: diagram of keynesian macroeconomic mo...

English: diagram of keynesian macroeconomic model (no idea what it is really called in English) Deutsch: Keynesianisches Totalmodell (Photo credit: Wikipedia)

By Edward Hadas – Market researchers have produced a mountain of studies, but they rarely consider the macroeconomic, ethical and social meaning of equity investing.

For the economy as a whole, changes in individual stock prices are basically irrelevant. The companies receive no cash when existing shares trade hands, whatever the price. The trading shareholders may have gains and losses, but they cancel each other out. The net economic effect of frenetic stock markets is zero.

I’m sure Fama and Shiller deserved their prizes. Shiller, in particular, has shown that the whole stock market can be overvalued – a helpful indicator of excess in the financial system. But far too much attention has been paid to the search for relative outperformance, which amounts to an economically pointless effort to gain an elusive and potentially unethical edge. more> http://tinyurl.com/mbmojp9

Finding value when the market misbehaves

By John Wasik – If you can find managers focused on buying and holding the best stocks – no matter how the rest of the market is behaving – you might reap higher gains over time.

“Perverse industry incentives and emotional investors combine to incent funds to invest in other than best idea stocks and so performance declines accordingly,” C. Thomas Howard, professor emeritus at the University of Denver told me in an email. “Funds underperform not because of the lack of skill, but because of the incentives they face.” more> http://tinyurl.com/m7g8qd4

It’s not Apple’s fault, it’s ours

English: Apple's headquarters at Infinite Loop...

English: Apple’s headquarters at Infinite Loop in Cupertino, California, USA. (Photo credit: Wikipedia)

By James Saft – Apple is a great company making great products, and has an outstanding record of creating new markets. It enjoys margins closer to those of a software company than a consumer giant, has more than $130 billion in cash and a historically unique franchise, one it has been able to expand time and again.

The saga of Apple is actually a great lesson in a fundamental truth of investing – most of your problems, and opportunities, come courtesy of other investors.

“Much (perhaps most) of the risk in investing comes not from companies, institutions or securities involved,” famed hedge fund manager Howard Marks of Oaktree Capital Management wrote in his most recent client letter. here “It comes from the behavior of other investors.” more> http://tinyurl.com/avh37x7

Investors opt for gold ahead of U.S. “fiscal cliff”

By Eric Onstad – Investors are going for gold as their top commodities choice in what looks like a turbulent fourth quarter for the sector, planning for the possibility of a “fiscal cliff” that could shrink the U.S. economy and spur more money printing.

Previous bouts of quantitative easing (QE) have sent commodity markets soaring with other risk assets, but commodities have recently broken away from tracking equities as investors question the impact of the third round of U.S. bond-buying along with other programs in Europe, Japan and China. more> http://tinyurl.com/9jsa2f2

Five Tips about Capital Gain for Everyone (Not just Mitt Romney)

By Robert W. Wood – With all the debate over types of income and whether capital gain rates should continue it’s easy to lose sight of a fundamental fact: You too can benefit while capital gain rates remain a bargain. You don’t even have to be a hedge fund king.

The millions and billions the hedge fund guys reap;
Those obscenely big earnings? They mostly do keep.
For tax law rains gently on pockets so deep;
Their interests are subject to rates oh so cheap.
It may seem unfair, this capital gain;
For wage slaves are truly left out in the rain.

more> http://tinyurl.com/8arquze

Flash crash or a turning point for oil prices?

By John Kemp – Monday’s (Sep 17) sudden dive in oil prices appears more and more unusual with hindsight, and poses questions for traders, regulators and exchanges alike about just who or what caused such a major turnaround in the market.

Explanations range from a “fat fingertrading error or a high-frequency computer trading program run amok to a concentration of stop-loss orders being triggered or a single large trade by a hedge fund selling up to 10 million barrels of crude in a single clip, though no one appears to know for certain.

The September 17 price drop had characteristics of both a flash crash and a more significant and long-lived turning point. more> http://tinyurl.com/8dk3ctg

Has the Housing Market Finally Hit Bottom?

By Christopher Matthews – Housing and jobs: these are the two keys to the economic recovery really taking off, and while we’ve gotten some positive news on the jobs front recently, real estate prices have more or less continued to decline steadily since their peak in 2007. Housing represents a huge portion of yearly GDP, but more than that it is most consumers main source of wealth. If home prices are rising, so are American‘s net worth, and increased wealth will usually lead to increased confidence and spending.

The mechanics of the housing bubble: According Barry Ritholtz, after bubbles pop they usually fall a long way:

“Regardless of the asset class — stocks, bonds, commodities, houses, etc. — assets do not merely stabilize. We have never seen a stock market run up into bubble territory and then revert to fair value. Instead, we careen wildly past that level, to deeply undersold and exceedingly cheap.”

more> http://is.gd/VTjy60

Why the Euro Crisis Proves Stocks Are The New Bonds

By Rana Foroohar – So far, U.S. T-bills have benefited somewhat from the chaos overseas, but that relative advantage may not last.

One interesting upshot of all this is that blue chip stocks have become the new bonds. The smartest money has been selling government debt and buying up the stocks of large multinational franchise firms for some time now. After all, which would you rather own – exploding Eurobonds or sleepy T-bills that aren’t even keeping pace with inflation, or the stock of a large global franchise firm (think Coke or IBM) growing fast in hot emerging markets and paying out a safe and predictable 3 percent a year dividend in the mean time? more> http://is.gd/M28nl4