Water Megatrend Creates Compelling Backdrop for Investors

Despite water covering 70.0% of the earth’s surface, only 3.0% is fresh, and just 0.5% accessible to humanity. Presently, 2.5 billion people, almost 40.0% of the world’s grain production, and approximately 25.0% of global GDP are at risk because of non‐sustainable water use1. The problems of water scarcity, contamination, and uneven distribution of the resource are becoming increasing prevalent around the world, as water use has grown at more than twice the rate of last century’s rise in population2. Consequently, pressure is mounting on the demand side as the global population increases while the availability of potable water dwindles and lessens supply. The supply and demand imbalance also increases pressure on food and energy security around the globe. As a result, according to Ladenburg Thalmann Senior Water Equity Research Analyst, Richard Verdi, water will be the resource to define the next several decades via a substantial increase in its value.

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Three Critical Steps for Extracting Great Insights (Step 2: Calm Their Concerns)

Meditate“I can’t believe you would be so insensitive!”

“How could you say something like that?”

Have you ever heard these statements directed at you? What was your initial reaction? A voice in your head probably said, “Be very, very careful what you say next.” It’s human nature to raise our defenses when we feel attacked, which is an important concept for equity research analysts to internalize when interviewing or emailing information sources (including management of the stocks under coverage).

In a prior post, I made the case that by using best practices found in journalism and the legal and law enforcement professions, analysts can elicit more thorough answers from their information sources.  Using my ICE™ framework, I discussed the “I” for identifying parameters as the first step for success. In this post I cover the “C” to calm their concerns.

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The Great Mismatch: Addressing Barriers to Global Capital Flows (Part III)

PART III: The Barriers to Efficient Capital Flows (continued)

Efficient cross-border capital flows—allowing investors to search for reliable returns, and in the process, meet legitimate capital needs wherever they are—would be a more effective way to finance the global economy than today’s system. In theory, few dispute this. In practice, many barriers have been erected that hamper efficient flows. The deliberate or inadvertent barriers to efficient global capital flows have been erected by a unique combination of regulators, governments, historical conventions and path-dependencies, investor mindsets and capital-seekers themselves (see below exhibit).

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Mastering ’Metrics: The Path from Cause to Effect

The authors provide an easy-to-read overview of key concepts in econometrics for anyone desiring a strong intuitive description of how to conduct analysis using simple techniques. Covering a limited number of topics with practical examples of each, they offer a useful framework for conducting fundamental econometric analysis. Although the book does not directly discuss financial issues, it provides a good foundational review for the financial empiricist who wishes to better structure econometric tests.

Statistics is second only to accounting among the technical skills necessary for engaging in modern finance and is fundamental for anyone who considers quantitative work a core element of finance. Unfortunately, practitioners’ actual statistical and econometric knowledge and intuition may be more limited than their level of academic exposure would suggest. No one willingly reads a book on econometrics to close this knowledge gap, so technical skills atrophy rather than advance with money management experience.

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Elections and Financial Stability

When Hillary Clinton unveiled her proposals to assure financial stability earlier this month, few people bothered to notice. Nonetheless, one central piece of legislature Clinton proposed to increase trust of the everyday investor in our financial markets, a “tax on the high-frequency trading that makes our markets less stable and less fair,” has potentially far-reaching consequences. The Clinton proposals elicited 550-something comments on Bloomberg, with criticism coming from the usual suspects. We are all acquainted with a contemporary practice whereby political operatives stuff “comments” sections with their talking points and completely flood the exchange between the readers.

Heretofore, I took notice only when Larry Harris, a highly respected expert on market microstructure and the author of a seminal textbook, Trading and Exchanges: Market Microstructure for Practitioners, suggested that “any tax on high frequency trading firms’ trading activity will increase the cost of trading for retail investors and for pensions that serve retirees.” In the preface to my 2009 book, Microstructure and Noise in Financial Markets: Rigorous and not-so rigorous results in market microstructure, I quoted his testimony to the US Congress as a model explanation of market microstructure to the laypeople.

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Three Critical Steps for Extracting Great Insights (Step 1: Identify Parameters)

Icepic1Think of your favorite CNBC journalist and ask why he or she is likely to get more information from a CEO than a typical analyst. If you don’t have an answer, it’s because the top journalists have been trained to use best practices for interviewing (or even “interrogating”) which can make them incredibly effective.

Throughout my career as an equity research analyst, I observed some analysts were much better than others at extracting insights from information sources (e.g. proprietary industry sources, company management, etc.), but I didn’t know exactly why. Now in the role of training analysts, I’m routinely asked, “How do I get more insights from others?” In my effort to answer this question and determine why some analysts are better than others in getting insights from others, I identified the best practices in this area, which primarily come from journalism, the legal industry and law enforcement (yes, some of the most sophisticated interviewing practices are used by law enforcement).

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THE GREAT MISMATCH PART II: The Barriers to Efficient Capital Flows

Efficient cross-border capital flows—allowing investors to search for reliable returns, and in the process, meet legitimate capital needs wherever they are—would be a more effective way to finance the global economy than today’s system. In theory, few dispute this. In practice, many barriers have been erected that hamper efficient flows. The deliberate or inadvertent barriers to efficient global capital flows have been erected by a unique combination of regulators, governments, historical conventions and path-dependencies, investor mindsets and capital-seekers themselves (see below exhibit).


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Not game over for China

If popularity has its price, then major investors in China are now paying those consequences. Chinese stock markets have taken a plunge and continue to face a roller-coaster path of sorts. There’s no telling how long the ride is or what turns lie ahead, which means investors have been increasingly concerned over the uncertainty.

But it’s not the time to panic. It never really is. The foundation of investing isn’t and never was based on making flash gains. It’s always been about making strategic decisions for a potential haul in the long term.

We still believe in China’s potential because many companies still have attractive long-term growth prospects, in our opinion. The challenge for us as stock pickers, of course, is what to buy.

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The Great Mismatch: Addressing Barriers to Global Capital Flows

Executive Summary

Cross-border capital flows are at an inflection point. While in aggregate they
have not returned to pre-crisis high watermarks—primarily driven by a significant decline in bank lending—they are increasingly varied in their scope and direction. More countries around the world are seeking and providing capital across borders than ever before. And asset managers and asset owners—not just governments, corporations and banks—are becoming increasingly influential in determining the scale and stability of global capital flows.

Yet capital around the world is being deployed inefficiently—large pools are not getting the returns they should, even as many needs for investment, both public and private, go unmet. This “great mismatch” is driven by a confluence of governments focused on near-term electoral cycles and rent-seeking, emerging-market financial institutions lacking investment management expertise and depth, and investors prioritizing short-term gains over sustainable long-term investment priorities.

Correcting this mismatch represents one of the most significant opportunities for global growth over the next decade. Success will require both long-term institutional investors and policymakers re-thinking long-standing assumptions and re-shaping their role in global markets. This report provides the backdrop and lays the case for six key recommendations over both the nearer and longer term:

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Credit sources fairly in your financial blog posts

IntegrityYou want to do the right thing when you find an interesting idea, statistic, or quote that you use on your blog. That means crediting your source. How much information must you provide?

Citation rules for blogs aren’t as clear as for books, where sources such as The Chicago Manual of Style lay out rules. I’ve developed suggestions for you based on my experience, Ann Handley’s Everybody Writes: Your Guide to Creating Ridiculously Good Content, and other resources.


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Positive Psychology: Assessing Personal and Professional Performance

Applied psychology has historically focused on the treatment of emotional/behavioral disorders and the remediation of conflicts and life problems.  This focus has been enshrined in the reimbursement system, as insurance entities require Diagnostic and Statistical Manual codings of illnesses to justify reimbursement. 

In spite of this “medically necessary” emphasis, a parallel industry has sprung up around self-help, coaching, and work with normal populations.  Much of this work stresses the enhancement of positives rather than the elimination of negatives.  Until recently, very little research guided this positive branch of applied psychology.  With the pioneering work of Seligman, positive psychology—the study of optimal functioning and well-being—has become a legitimate research focus in academic psychology.  A health-based classification system has gained traction and a wealth of resources, including validated psychological tests, are now available.

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Warning! Don’t make these interview mistakes

So you landed a fantastic interview opportunity, and now you need to seal the deal to get the job offer. Whether you are interviewing at a bank, asset manager, hedge fund or any other type of financial institution, it’s hard to predict the type of interview you will have. 

As an executive and career coach, I work with many clients on preparing them for high-stakes interviews. Having interviewed several hundreds of finance professionals throughout my career either as a coach or, formerly, as a fixed income sales professional at investment banks, I have started to notice the following patterns. These three behaviors are surprisingly common and detrimental to your success:

Thinking that if it’s on your resume you don’t need to mention it

I can’t tell you how frequently I hear, “It’s on my resume, so I figured I don’t need to say it again.” Your resume on average will have about 400 words. I can guarantee that even if your interviewer was thorough when reviewing your resume, they paid attention to no more than 100 of those words. Don’t let your resume jewels fade into the background. Make sure you have a method for bringing them to the forefront during your interview. Preparing and practicing your stories with a mock interview is a great idea! 

Not engaging in casual banter with your interviewer

What is it about interviews that make people throw their awesome personality out the window? Think about it. If you were interviewing someone, would you prefer to hire a robot with no personality or a charismatic and engaging person with whom you share common interests? We spend more time with our colleagues than we do with our family and friends. Your interviewer is trying to figure out if you would fit the culture of the firm and if you would be fun to sit next to on a plane for six hours. Next time you are asked “What do you like to do for fun?” don’t over think the answer and let your personality shine through. Also, if at the mention of tennis, your interviewer starts to talk about his high school tennis years, indulge him. Don’t worry that your interviewer isn’t peppering you with technical questions, instead see this as a bonding opportunity. The more shared interests you and your interviewer have, the greater your chances of getting hired!

Not asking the interviewer about themselves

Most people are quite selfish in their interviews.

“I did this…”

“My background is this...”

“My weaknesses/strengths are these…” 

Yes, the interview is a meeting where the sole agenda is for you to talk about yourself. However, if you want to land this job, you will make your interviewer feel that he/she is the interesting one.  Most interviews end with the dreaded question of “Do you have any questions for me?” This question is the interviewer’s chance to shine after having to listen to you for 30-60 minutes. Don’t disappoint them with generic questions such as,

“What are the next steps?”

“What is the culture here?” or

“Tell me about the needs of role for which I am interviewing.”

Instead, I encourage you to ask a question directed at the interviewer and about the interviewer. Here are some examples: 

“What are some of your favorite projects you have worked on here?”

“What has been your path at the firm and prior?”

People love to talk about themselves. As Dale Carnegie teaches us, by encouraging others to talk about themselves, we are ultimately getting them to like us more. And isn’t that the point of your interview?

-Helen Dayen is the founder and CEO of Dayen Group. She is a career development & communication coach.

NYSSA is proud to announce that we are launching a new interview prep coaching package in collaboration with the Dayen Group - an executive coaching company focused on the financial services industry. Please click here to explore our coaching packages and schedule a mock interview appointment.


Decomposition of Total Volatility: How Important is Idiosyncratic Risk?


In recent years there has been a lot of debate about volatility, and the components of volatility. A lot has been said about the risk-on, risk-off market with a focus on macro and factor risks. There are many dimensions to volatility, and this paper uses the methodology of Campbell et al. (2001) to break down the total volatility in US equities into the three components of Market, Industry and Firm (idiosyncratic risk), and analyzes the trends in their share over time. We look at the time period January 2005 through December 2014, incorporating the years prior to, during and post financial crisis, and use S&P 500 as a proxy for the US equities, with the Global Industry Classification Standard (GICs) sector classification. The main conclusion is that there is a strong payoff to stock selection even in the post-financial crisis era where market participants often think of risk only in terms of risk-on and risk-off. The share of idiosyncratic risk indicating benefits of stock selection decreased a lot during the crisis. It is now at the highest level since the start of the financial crisis, though still much lower than in the pre-crisis years.   

Active stock selection can make the greatest contribution when idiosyncratic risk becomes a bigger component of total volatility. Campbell et al. (2001) laid out some important reasons for decomposing aggregate volatility into its sub-components of market, industry and firm. Aggregate volatility, important in any theory of risk and return, is the volatility experienced by holders of aggregate index funds. But aggregate market return is only one component of an individual stock’s return, with industry-level and idiosyncratic firm-level shocks being two other important components. Some reasons to be interested in volatility of the sub-components include holding portfolios that may not be diversified enough, or arbitrageurs trading stock mispricings facing risks related to idiosyncratic volatility. The optimum number of portfolio holdings needed to make it well-diversified is itself a function of the level of idiosyncratic risk.

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Operational Due Diligence: The Forgotten Part of Due Diligence

FPPpicThe evaluation and selection of investment managers is dominated by an Investment Due Diligence process focused on strategy, performance, and client objectives. Often overlooked and considerably undervalued is the Operational Due Diligence process
which looks into the quality of a firm’s operations. As a necessary component of a complete due diligence process, it can be considered as the part of the process that confirms the validity of the findings resulting from investment due diligence. Comparatively, the operational process is more focused on the qualitative aspects of an investment firm and looks at areas such as people, processes, products, policy, and providers.


The overall objective of looking at the people who are employed within a firm is to verify whether their experience, qualifications and compensation are appropriate with respect to the portfolios managed, strategies employed and clients’ needs. Most investment firms can be broken down into three units: that is, a Front Office, a Middle Office and a Back Office.

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Shocker! When you self-promote you actually help others

As a career coach, I work with clients who are top professionals in their fields. Despite their accomplishments and the desire to have more visibility in their careers, many struggle with self-promotion and self-advocacy. They come to me hoping to learn to articulate their value proposition and accomplishments to key stakeholders (i.e. managers, prospective employers, clients) without being perceived as boastful or bragging. 

The shocking thing is that most of my clients are confident individuals yet they get stuck when it comes to talking about themselves. Shying away from self-promotion prevents them from getting assigned to desirable projects, obtaining greater responsibility, and earning more money.

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