< The Finance Professionals' Post: November 2010

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25 posts from November 2010


Behavioral Finance: Theories and Evidence

CFA Institute That behavioral finance has revolutionized the way we think about investments cannot be denied. But its intellectual appeal may lie in its cross-disciplinary nature, marrying the field of investments with biology and psychology. This literature review discusses the relevant research in each component of what is known collectively as behavioral finance.

Click here to read the full literature review, written by Alistair Byrne, CFA, and Mike Brooks

Target-Date Funds: Not a Set-It-And-Forget-It Option

Since its inception, the 401(k) retirement plan has presented plan sponsors and participants with a significant challenge, requiring both groups to act as financial planners and portfolio managers for retirement investments. Participants are expected to forecast their retirement income needs, arrive at an appropriate asset allocation, and choose among contribution and investment options accordingly. Plan sponsors must create the universe of options from which participants choose and provide advice to participants, but only to the extent that such advice does not give rise to fiduciary responsibility under ERISA (Employee Retirement Income Security Act of 1974). This system has allowed a large number of plan participants to remain uninformed with respect to a very complex set of retirement plan decisions.

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Women in Quantitive Finance: Redefining Ourselves and Our Potential

While women have come a long way, we are still underpaid and underrepresented in the quantitative realms of financial services. I am coming to realize that many of the persistent obstacles we face are those that we construct for ourselves.

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The Perfect Swing Trading Alternative for Option Traders

The-perfect-swing-trading-alternative-for-option-traders(alt) Options, those high-risk, short-lived, and speculative instruments, can be used as a valuable alternative in swing trading strategies. The flexibility of options allows you to use either calls or puts, to go long or short, vary the number of contracts, or combine different approaches based on market conditions. The “swing trader” moves in and out of stock positions based on very short-term price movement (swings). The strategy relies on the tendency of prices to overreact to both good and bad news, creating exaggerated short-term price movement that will correct quickly, normally within a few trading sessions. In other words, short-term price movement is erratic and chaotic and cannot be relied upon for long-term timing. For the short term, however, this chaotic tendency is a great advantage for swing traders.

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The Rise of the State—Past and Prologue

Rise of the State At a party during a trip to China in the 1930s Nikos Kazantzakis, one of the foremost writers and thinkers to emerge from Greece in the 20th century, became involved in a deep conversation with a mandarin. Kazantzakis noted that both the communists and the Japanese were advancing toward Beijing from different directions. Was the man scared? Kazantzakis asked. The mandarin, at one time China’s ambassador to France, smiled. “Communism is ephemeral, Japan is ephemeral, but China is eternal,” he said.

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Ideas in Equity: New Companies, New Technologies

I am not a huge fan of the changes in the Wall Street Journal. The publication has not regressed to the level predicted by the cartoonists—“Girls of Wall Street Gone Wild” with glossy centerfolds—but neither has it improved much, in Technicolor.

Yet some of its sections retain the old luster and, for the equity lovers, I review some of the companies recognized in its 2010 Technology Innovation Awards. My choice of six companies out of fifty-something prizewinners and runners-up reflects only my own preferences and my ability to understand the underlying technology, with an expertise borrowed from the days of my misspent physics youth. In particular, I exclude software and biotech companies from my list because I cannot exercise anything close to professional judgment on the advantages and shortcomings of their achievements.

Continue reading "Ideas in Equity: New Companies, New Technologies" »


CFA Prep Podcast: Should You Take a Review Class?

CFA Exam Prep Podcast In this short clip, Jackie Rosner, a CFA charterholder working at UBP Asset Management, talks about the advantages of taking review courses for all three levels of the CFA exam.  “It's almost impossible to really get a complete understanding of everything, no matter how motivated you are,” he says.  Moreover, Rosner adds, review classes help build confidence.  

CFA Podcast: Should I take a review class?


Book Review: Fault Lines

Fault LinesRaghuram Rajan’s book, Fault Lines: How Hidden Fractures Still Threaten the World Economy, won the Financial Times and Goldman Sachs Business Book of the Year award. Rajan was the chief economist of the International Monetary Fund, and is a professor of finance at the University of Chicago’s Booth School of Business. In 2005, at the Jackson Hole central bankers conference, he predicted a serious “full-blown financial crisis” from the credit securities on the balance sheets of the banks. This was a time when bankers were in a self-congratulatory mode about having brought what they thought was risk spreading and stability to the financial system. But as the author points out, so many were making so much money from the new credit securities and mortgage loans that they had no reason to heed to this warning.

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Wind Industry Calls on Congress to Boost Investor Confidence

The wind industry has lately been the victim of a combination of Washington policy-making gridlock, a recession-related weakening of demand for energy, and the reluctance of banks to extend commercial credit. Although a record-breaking 10,000 megawatts of wind energy was added in the United States in 2009, the industry has recently been experiencing a dramatic slowdown, with only 395 megawatts of wind power added in the third quarter of 2010, the worst quarterly performance since the first quarter of 2007. This pushed industry performance down 72% in the first three quarters versus the same period a year ago.

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Recent Research: Highlights from November 2010

Is Patience a Virtue? The Unsentimental Case for the Long View in Evaluating Returns.” The Journal of Portfolio Management (Fall 2010). David L Donoho, Robert A Crenian, and Matthew H Scanlan.

In this article, Donoho, Crenian, and Scanlan report the results of their study into the cost of institutional investor impatience. Using Monte Carlo simulation techniques, the authors construct an idealized world with a universe of investment managers of precisely quantified skill, with skill levels varying among the managers. Although many institutions base manager hiring decisions heavily on the manager’s performance in the most recent months or years, the authors’ simulations show that institutions that rely on longer performance horizons of 5–10 years are more likely to find and stick with the better managers. This happens because on shorter time scales, the relatively few highly skilled managers are often temporarily outperformed by one of the many lesser-skilled managers, specifically, unskilled managers who have recently happened to simply be lucky. Hence, if a plan that previously was long-term oriented starts to hire managers based on short-term results, it will often find that the newly chosen manager underperforms both his own previous performance and also the manager previously managing the plan’s funds. It can, however, truly take patience to keep a skilled manager in a fund portfolio. In the authors’ simulations, skilled managers have deeper, longer, and more frequent drawdowns than many investors would expect.

Continue reading "Recent Research: Highlights from November 2010" »

How Can I Relieve a Margin Call?

There are three courses of action a trader can take to eliminate a margin call once it occurs: 1) add funds, 2) adjust positions, or 3) liquidate some or all of the trades in the account. Most will agree that depositing funds on short notice is the least desirable action. After all, if a margin call is triggered, it is probable that the account is suffering a draw down and throwing “good money after bad” isn’t a logical solution. On the other hand, if you did your homework prior to entering the positions in your account you likely have good reasons to believe that the market will eventually trade in your favor. One of the most mentally challenging aspects of trading is watching the market move in the manner that you had expected after trades have been liquidated. Failure to not benefit in an anticipated move is nearly as emotionally painful as being on the wrong side of a market and actually realizing losses.

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Commentary: Footprints and Foreclosure

The global economy now uses 1.5 times the earth’s capacity to regenerate the natural capital we use every year, up from the 1.4 times of the prior year, according to a report of the well-respected Global Footprint Network. In their Living Planet Report 2010, released this week but based on 2007 data, the most recent available, WWF together with the Global Footprint Network and the Zoological Society of London record the most significant milestone since we crossed parity (an ecological footprint of one) back in 1975. This is not good news.

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Excerpt: I’m Trading Against You

Trade the TraderI sat in front of my six screens like a hawk high on a limb, watching the flickering symbols race across my level-two quote box. Market breadth had been horrible all day, notching 5–1 decliners over advancers, capping off a week that looked as if the indices would finish close to 5% in the red. I had been nailing the short side all week and was ready to book hefty gains against unsuspecting latecomers and amateur traders who actually believe they have a leg up with their basic technical analysis. I sifted through countless charts, and each one walked a very fine line, looking as if at any moment they would plunge to their deaths, cratering into the abyss. I imagined the number of traders cuing up these exact charts for shorts, and I shook my head again at what would surely be their misfortune. For a moment, I remembered what it felt like to be in their shoes. I recalled the days when I felt empowered by my basic chart knowledge. It would be a time such as this that I would believe the moons had aligned for a perfect trade, a trade that would correspond with all that I had learned from basic trading, netting me huge profits. Unfortunately, over the years it became clear that basic strategy no longer was enough. I had witnessed time and again how the basics would work for only a moment, at which point an immediate change of character would set in, robbing me of my hard-earned capital. This time was different. This time I sat with the hawks, not with the unsuspecting squirrels gathering their charts like nuts, moments before those nuts were snatched up and taken away by a bigger, craftier prey. The same stage had been set this time, the players identical, and even though I already knew an incredible bounce was forthcoming, the exciting anticipation continued to build.

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Big Pharma Chases Biotech

Big pharma greeted the new century with the seemingly uncontested ability to deliver blockbuster drugs with the potential for blockbuster returns. Nearly 11 years later, the industry that went bust is still in search of a method to reinvent itself, and is looking at a familiar savior: biotechnology and specialty pharmaceutical companies.

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Four Simple Steps to Improve Your Relationships with Recruiters

EFinancialCareersThough more and more companies are actively seeking candidates online, nothing can yet compare to the advantages of using a flesh-and-blood recruiter who specializes in your field. eFinancialCareers provides some quick tips for getting the most out of your interaction with recruiters.

Click here to read the full article.


Book Review: Commodity Options, Trading and Hedging Volatility in the World's Most Lucrative Market

Commodity options Carley Garner and Paul Brittain, coauthors of Commodity Options: Trading and Hedging Volatility in the World's Most Lucrative Market, have so much confidence in their options trading philosophy that they publish their trades on the Internet and distribute them by e-mail before they execute them in the marketplace. That confidence is palpable throughout Commodity Options, as they describe endless esoteric convolutions of the four basic instruments in trading—long, short, call, and put—and show the risk and reward possibilities of each combination, from strangles and straddles to iron butterflies and iron condors.

Continue reading "Book Review: Commodity Options, Trading and Hedging Volatility in the World's Most Lucrative Market" »


CFA Prep Podcast: What is Passing?

CFA Exam Prep Podcast In this week's CFA Prep Podcast, Nathan Ronen answers the commonly asked question: "What is passing?" Some students believe that they will pass if they answer 70% of the questions correctly, while others say that a minimum of 170 questions must be correct. But, as Ronen explains in this clip, there is no magic number. 

CFA Podcast: What is Passing?


Pure Cycle's "Compelling Advantage" in a Water-Constrained Market

NYSSA’s upcoming 14th Annual Water Utilities Conference, to be held on December 1st, will focus on those companies that are best positioned to compete in a world where water supply will be increasingly constrained. We recently spoke with Mark Harding, CEO of Pure Cycle Corporation, an investor-owned vertically integrated water company providing water and wastewater services to the greater Denver, Colorado, metropolitan area to find out why he believes water ownership has “a compelling advantage” in its Western market.

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Book Review: Dealings: A Political and Financial Life

Dealings by Felix Rohatyn Dealings: A Political and Financial Life is the autobiography of Felix Rohatyn, who is viewed as the preeminent investment banker of his generation. In addition, he received widespread recognition for his role in the financial rescue of New York City in the 1970s. He is a classic relationship banker, who played a key part in a number of major mergers. Rohatyn's history serves as a valuable lesson to today's generation of financial professionals who are transaction focused to the point of missing the importance of relationship building in ongoing business and in job searches.

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Interview with Sebastian Mallaby, Author of "More Money Than God"

Sebastian MallabySebastion Mallaby is the director of the Maurice R. Greenberg Center for Geoeconomic Studies and Paul A. Volcker Senior Fellow for International Economics at the Council for Foreign Relations. He's just written an amazing book on the history of hedge funds called More Money Than God: Hedge Funds and the Making of a New Elite.

I highly recommend this book. It's long no doubt at 400 pages, but that includes the 60 pages of notes in the back of the book that are worth it alone.

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CFA Prep Podcast: The 60-30-10 Strategy to Passing the CFA Exam

CFA Exam Prep Podcast In this clip from Nathan Ronen's CFA Level I sample class, he teaches a unique strategy to taking the CFA Level I exam, which he calls the 60-30-10 game. "Sixty percent of the material gets asked over, and over, and over again," he says. Click to listen and find out what are the common topics in the exam.

CFA Podcast: IFRS Dominate CFA Curriculum


UBS Really Needs to Stop Paying So Much, but Absolutely Insists It Won’t

EFinancialCareerseFinancialCareers takes a look at the recently released financial results from UBS. Despite the fact that UBS is absolutely nowhere near reaching its targets, UBS insists that it WILL pay its investment bankers this year.

Click here to read the full article. 

Introduction to Islamic Finance (Part II): Structural Considerations

Part I of this essay, “Introduction to Islamic Finance (Part I): Context and Concepts,” discussed certain fundamental concepts, principles, and elements of modern Islamic finance. The following part, Part II, introduces, in generic forms, some of the transactional structures most frequently encountered in modern Islamic finance. Each of these forms, and others, will be discussed in greater detail in the half‐day session on Islamic finance being offered by the author and the NYSSA on November 23, 2010.

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Small World, Big Globe: Globalization in the Financial-Services Job Market

Global-careers Today’s job market in financial services presents a radical dichotomy. In the developed West, many jobs in banking are disappearing. Yet many of the institutions that are shrinking their workforces in New York and London continue to expand elsewhere—most visibly in Asia (particularly China) and the Middle East. Eastern Europe, India, and Latin America are benefiting, too. While comprehensive data on financial-sector job growth in emerging markets is hard to come by, a plentitude of anecdotal evidence suggests that investment banks are increasing their presence in those markets.

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Proceed with Caution: The Pitfalls of Value at Risk

Value at Risk, or VaR, continues to garner a great deal of attention from the investment community, the media, and academia. While it is commonly used at banks, in trading depart-ments, and by many asset managers, we must ask how reliable it is. In Lecturing Birds on Flying (2009), Pablo Triana criticizes it amply; however, there may be more objective ways to grasp its shortcomings.

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