Throughout my years in the futures industry, I have come to a conclusion in regards to the difference between winning and losing as a trader. In my opinion, the primary characteristic of successful traders is the ability to stay calm through thick and thin. This means avoiding the panic feeling that overcomes logic when trades are going against the speculation, and resisting the over-confidence that can come with a few winning endeavors. Each of these symptoms can have a severely negative impact on future trading decisions and profitability.
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This 1882 cover of Puck lampoons Jay Gould, a leading railroad developer of the times. Labeled the “Robber Baron” by the press, Gould considered himself the most hated man in late-19th-century America. He was often vilified as a reckless speculator and brutal strikebreaker. Although he sought to create intricate railroad and communication systems in New York City, his hand in bribery and stock manipulation overshadowed his contribution to the development of American industry.
Continue reading "Artifacts of Finance: Puck Lampoons Jay Gould" »
The movie Stalag 17 opens with an escape attempt from an Austrian POW camp during World War II. Two POWs, Manfredi and Johnson, are preparing to escape through a tunnel that has been secretly constructed beneath one of the camp’s latrines. As the two would-be escapees go through a last minute review of their plans with Hoffy, the barrack chief, and Price, the barrack security officer, a skeptical POW asks a key question.
Continue reading "Just One Question:
Did You Calculate the Risk?" »
Michael Lewis’s anthology Panic: The Story of Modern Financial Insanity examines four events, linked but distinct, that span a period of just over twenty years: the 1987 crash, the Asian crisis, the dot-com bubble, and the subprime crisis. Lewis has collected book, newspaper, and magazine articles written before, during, and shortly after each crisis; the contemporaneity of the analyses with the events precludes any hindsight or backward thinking. Instead, Panic is comprised of unfiltered accounts, admissions of bewilderment, clumsy stabs at solutions, and some examples of far-sighted predictions.
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With all the Wall Street types who are looking for jobs, and those eager to jump ship, Aram Fuchs, a partner at Fertilemind Capital, figured it’d be no problem filling a senior and junior analyst position at his hedge fund. But when his networking, interviews and other efforts didn’t yield the kind of candidates he was looking for, he decided to take another tack: hold a contest à la Donald Trump’s the Apprentice and award the gigs to the winners.
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King of Capital: The Remarkable Rise, Fall, and Rise Again of Steve Schwarzman and Blackstone, by David Carey and John E. Morris, recounts the history of one of the financial industry’s most successful firms and one of the current generation’s top financiers. It also offers an education in the world of deals, and in coping with management challenges.
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Nuclear energy appeared poised for a renaissance in recent years as policymakers around the world scrambled to offer incentives for new power plant construction to meet low-carbon energy targets. But the catastrophic events unfolding in and around Japan’s nuclear power plants following last week’s earthquake and tsunami serve as grim reminders to both policymakers and investors that while nuclear may be a low-carbon energy source the risks associated with its deployment are high, some of them immeasurable, and many of them beyond human control.
Continue reading "Does Japan’s Nuclear Catastrophe Point to the End of Economic Growth as We Know It?" »
The acronym BRIC—Brazil, Russia, India, and China—coined by the Goldman Sachs economist Jim O’Neill (2001) is now a widely accepted and understood term. The justification for such a grouping is clear, as the BRICs are comparable in terms of territory, population, GDP, stock markets, and sociopolitical factors (see Table 1). The acronym CIVETS—Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa—was conceived in 2009 by Robert Ward, director of global forecasting for the Economist Intelligence Unit (see Economist 2009), and popularized by Michael Geoghegan (2010), group chief executive of HSBC Holdings plc, shortly after. As the newer term makes its way into the investment lexicon, we need to ask whether these six countries merit such a grouping.
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Picking out a single stock for one’s portfolio had become a mug’s game, the equivalent of buying a lottery ticket. So, too, had long-term investing. Investors who had lost their shirts in 2007 and 2008 now held onto their investments for shorter periods. They had been badly scalded by following the conventional wisdom about stocks being the superior investment over the long term. Like sage cats, they’d never again jump on that stove top. The game now was to make 15% to 20% in a few weeks like the big boys at the hedge funds.
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INDONESIAN EQUITIES IMPRESS | RUMINATIONS ON THE RUPIAH | CONCLUSION
Worldview’s last piece on Indonesia highlighted the historical development of Indonesia’s economy and the success of its export-led growth model in spite of high corruption levels, legacy state-controlled enterprises, and political uncertainty in the aftermath of the Asian currency crisis and subsequent rise of Indonesian democracy. This follow-up article covers the recent performance of Indonesia’s equity and currency markets, putting Indonesia’s phenomenal gains in greater context.
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I attended the annual US Department of Agriculture conference this week in Washington DC. My job was to participate on a panel with The Savory Institute, organized by the Risk Management Agency of the USDA. Our topic was “Critical Thinking: The Best Risk Management Tool.”
My message was about systems thinking, and how the financial system collapse should be understood as the “canary in the coal mine” for our unsustainable industrial agriculture industry. The parallels are eerie, but I could tell many in the audience were having trouble seeing the connection.
Continue reading "Eerie Parallels: Our Unsustainable Financial System and Industrial Agribusiness" »
Fraud is an occupational hazard for even the most scrupulous financial professionals and their firms. Cases of fraud typically come to light during a financial collapse. The Madoff scandal is the most infamous case of financial fraud in our time, but it is just one case. If history is any guide, more schemes will be perpetrated, and exposed, in the years ahead.
In addition to the monetary cost, fraud takes a huge huge toll on the reputations of companies and their employees. The innocent as well as the guilty can get swept up in the intense media coverage, government investigation, and litigation that ensue from a scandal. Kenneth S. Springer and Joelle Scott’s new book, Digging for Disclosure: Tactics for Protecting Your Firm's Assets from Swindlers, Scammers, and Imposters , teaches you how to spot fraud in advance and avoid becoming another victim.
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After Lehman fell, the scope of the financial crisis became so great that the fiscal and monetary authorities throughout the world possessed the only balance sheets large enough to resolve the crisis. In essence, the ills of the private sector were set to shift to the public sector. The sense at the time was that it would work; after all, the borrowing ability of the United States and the rest of the developed world were proven, and the ability of central banks to print money was and remains indisputable. Nevertheless, there was a sense of discomfort in the supposed solution.
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NYSSA is calling for nominations for its Volunteer of the Year Award and introducing three new awards—one for distinguished service, another for outstanding research, and an award for early career professionals.
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“Capturing Alpha in the Alpha Capture System: Do Trade Ideas Generate Alpha?” The Journal of Investing (Spring 2011). Jean W. Thomas.
In the wake of recent failures of such factors as price momentum and estimate revision to generate excess returns to traditional and quantitative strategies, this study explores the potential for using Trade Ideas as a new source of alpha in long-only and hedge strategies.
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Generating and understanding performance are two distinct processes that often require different skill sets and are typically performed by different arms within a hedge fund organization. The former falls under the realm of the portfolio manager; the latter is often provided by the CFO, COO, or investor-relations functions at the hedge fund. Editor John Longo skillfully combines explanations of both processes in the Hedge Fund Alpha: A Framework for Generating and Understanding Investment Performance. The essays in this book elucidate what the alpha-generation process is, as well as how the outcome of that process is assessed, evaluated, and monitored. While these are separate questions, there is a feedback mechanism between the two, which reinforces the importance of understanding both topics.
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The traditional MVO (mean-variance optimization) of Harry Markowitz (1952) and the versions that followed constitute an analytical approach to identifying optimal asset allocations from the universe of investable securities. The data needed for the traditional MVO are the expected rates of return, the risks of individual securities, and the covariance among securities. The outcome of this approach is usually illustrated as a curve on which optimal portfolios lie. Each portfolio on this curve, known as the efficient frontier, has the smallest degree of risk for its level of expected return. Markowitz’s traditional MVO was extended and simplified by William Sharpe (1963), in Sharpe’s well-known CAPM (capital asset pricing model). For an intuitive explanation of CAPM and portfolio optimization, refer to Markowitz’s “Crisis Mode” in the Spring 2009 issue of the Investment Professional.
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JUMP TO: TIMELINE | Q&A | THE ADMINISTRATION'S PLAN
The goal of reforming housing finance should be to ensure economic efficiency, both in the primary mortgage market (origination) as well as in the secondary mortgage market (securitization). By economic efficiency, we have in mind a housing finance system that
- corrects any market failures if they exist; notably in this case is the externality from originators and securitizers undertaking too much credit and interest rate risk as this risk is inherently systemic in nature;
- maintains a level-playing field between the different financial players in the mortgage market to limit a concentrated build-up of systemic risk; and
- does not engender moral hazard issues in mortgage origination and securitization.
Motivated from economic theory, we argue that such a mortgage finance system should be primarily private in nature. It should involve origination and securitization of mortgages that are standardized and conform to reasonable credit quality. The credit risk underlying the mortgages should be borne by market investors, perhaps with some support from private guarantors. There should be few guarantees, if any, from the government.
Continue reading "A Blueprint for Mortgage Finance Reform" »
Many people know of the historic dinner where bitter foes Alexander Hamilton and Thomas Jefferson, moderated by James Madison, hashed out a compromise that put the United States on a sound economic footing over many bottles of claret: federal assumption of the states’ Revolutionary War debts in exchange for a new capital to be built in the South. Although it was not quite so momentous, a similar evening of earnest discussion and good wine enabled the various regional stock exchanges in Canada to combine to form what is today the Venture Exchange. While that institution is formally only 12 years old, its predecessor exchanges trace their heritage back more than a century.
Continue reading "Nothing Ventured, Nothing Gained: The Rise of Canada’s Unique Capital Market for Start-Ups" »
The first decade of the twenty-first century has not been kind to investors. On average, stocks lost about 1% per year over the ten-year period or more than 10% for the entire decade. During the decade we saw the collapse of three bubbles: the dot-com boom came to an end in 2000, the meteoric rise in housing prices in the middle years of the decade reversed sharply in 2007, and then in 2008 the massive over-leveraging of the banking system came home to roost, very nearly destroying the economy.
Continue reading "Three Paths to a Prosperous Future" »