< The Finance Professionals' Post: May 2011

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24 posts from May 2011


Book Review: The Forbes CFA Institute Investment Course


The Forbes/CFA Institute Investment Course: Timeless Principles for Building Wealth is a great introduction for the beginner investor as well as a great refresher for seasoned investors and finance practitioners. It explores a myriad of important topics, such as how stocks have historically outperformed cash and fixed-income investments, the various investment asset classes, asset allocation, the pros and cons of active versus passive investing, and how to determine your unique risk profile and investment horizon and how to use both to help define your investment goals. Additionally, the reading provides a strong appreciation for risk management as a counterbalance to the return-seeking attitude that many investors exhibit, as well as an effective comparison and contrast between fundamental and technical analysis.

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Bonuses in the Securities, Commodities, and Commercial Banking Industries Projected to Show a Moderate Increase

EFinancialCareersJohnson Associates are predicting moderate increases in incentive compensation across the financial services industry this year, but they expect that in most cases, bonuses will remain below the highs of 2007.

The compensation specialists say key drivers impacting bonuses are “the pace of the recent economic recovery, varying impact of regulation on business activities both globally and regionally, mix of business, and ongoing uncertainty in world markets.”

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Microsoft Excel for Stock and Options Traders: Build Your Own Analytical Tools for Higher Returns

Excel for Stock and Option Traders In August 2010, Cisco stock (ticker: CSCO) hovered just a few cents below $25. Several analysts identified the stock as a strong buy. They pointed to the rising demand for network infrastructure that, among other things, was being driven by explosive growth in online video gaming and Internet television. Cisco, they believed, would continue to dominate the consumer market while benefiting from a weak dollar and low manufacturing costs. They must have been wrong because the stock fell 15% when earnings were released on August 11. The price continued to decline until August 31, when it bottomed out at $19—24% below its previous high. About the time that everyone had given up and turned bearish, the stock began to rally. On November 10 the price was, once again, back up to $24.50. Then came another earnings report and another sharp decline. The price immediately fell 16% and continued plunging until, on December 3, it once again bottomed out at $19. These bizarre dynamics played out a third time, with the stock rallying steadily to $22 on February 9, 2011, before falling back to $18.92 the very next day after earnings were released—another 14% decline. Figure P.1 displays Cisco closing prices from June 1, 2010, to February 11, 2011.

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The Arithmetic of Reading and Writing: The Paradox of the College Savings Account

Tuition at American universities, both private and public, has been increasing at an average annual rate of 7.6% (private) and 7.87% (public) over the period 1976–2005. For 1976–2008, these averages declined slightly to 7.47% for private universities and 7.72% for public universities.

High tuition rate increases create financial hardship for many attempting to save for college. But college savings plans that invest solely in government bonds are unlikely to generate the necessary amounts. And as investors have recently and painfully experienced, investing solely in stocks is a risky proposition because equities may not outperform government bonds over any given period. Nor is a combination of stocks and government bonds a viable, risk-managed college tuition saving strategy.

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Investment Issues in Emerging Markets: A Review

CFA InstituteBecause of their higher economic growth and potentially higher returns, emerging markets have received increasing attention from investors in the developed world. They are also said to provide diversification benefits for U.S. investors because of their low correlations with U.S. assets.

It is well documented that the benefits of international diversification within developed markets have declined over time because of increasing correlations. Emerging markets, however, offer both lower correlations and an expanded number of markets to invest in, as demonstrated in Goetzmann, Li, and Rouwenhorst (2005). More recently, Eun and Lee (2010) have confirmed that, although their performance is converging to that of developed markets, emerging markets are still more distinct from one another than developed markets are and still provide diversification benefits to the global investor.

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Adventures in Hedge Fund Recruiting

EFinancialCareersRecruiters working with hedge funds often have a difficult job. When big money’s at stake, employers and employees can be a rather demanding lot.

One Los Angeles-based financial recruiter says hedge funds are notorious for having strong personalities at the helm. A visit to a well known player gave the recruiter a peek into the high pressure environment that some of the employees work under. One chief portfolio manager routinely threw computer monitors, and so much so that his staff kept a ready supply on hand for just that occasion.

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Commentary: The King’s Ransom

This week, Galleon hedge fund manager Raj (“King”) Rajaratnam was found guilty on all 14 counts of insider trading. The wiretap evidence incriminating “the King,” including (incredibly) tips from inside the Goldman Sachs boardroom by the former head of McKinsey, was overwhelming and created the specter of a gangster trial. The defense’s strategy suggesting it was all “public information” was insulting to common sense, even more so to market professionals, and was clearly unpersuasive to the jury.

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Sustainable Mining—An Oxymoron or a Challenge to be Met?

It can be argued that the mining industry is at a decided disadvantage as it attempts to establish its creds as a sector of the economy committed to making a contribution to a more sustainable economy. As Stephen D’Esposito, former executive director of Earthworks, suggests in an article published in  Corporate Ethics Monitor, “Is Mining Sustainable?” the very fact that mining is in the business of depleting finite natural resources argues that the term sustainable mining will forever be oxymoronic. However, mine we must, and the industry has much headway to make in reducing the tremendous amounts of energy it consumes, water it pollutes, toxins it emits, solid waste it produces, landscapes it scars, and habitats it disturbs in the process of extracting minerals and metals from the earth. The challenge on all these fronts becomes greater as the process of extraction becomes technically more difficult and more environmentally damaging as the richest mineral deposits are increasingly depleted, requiring that ever-larger volumes of rock and soil be disturbed to extract a given amount of mineral or metal.

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Six Counterintuitive Study Tips to Help You Pass the CFA Exam

CFA Exam PrepBeing a Chartered Financial Analyst may bring honor and recognition from your colleagues and clients, but getting the “CFA” after your name is a long-term endeavor. Certification requires that you pass three six-hour exams that take years to complete and less than half of the candidates last year passed their tests.

If you’ve already signed up to take the test this June, you’ve probably already been studying. Lots of companies offer services to help you pass the test, and even more websites dole out advice on how to study. Much of what passes for wisdom in test taking, however, is wrong. Your high school teacher may have encouraged you to find a quiet, uncluttered place to study. According to decades-old research, your high school teacher was wrong. What seems intuitive might actually create more frustration for you on test day.

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NYSSA Announces 2011 Award Winners

NYSSA volunteers are the living embodiment of Benjamin Graham’s goal of enriching and advancing the investment profession. This year we are introducing three new awards to mirror NYSSA’s growth: the Young Analyst Award to honor a new generation of analysts, the Furthering Research Award to promote excellence in research and education, and the Distinguished Service Award for those who have paved the way.

The awards will be presented at the Era of Excellence Reception fundraiser on June 7, 2011, at 230 Fifth, Manhattan's largest outdoor rooftop garden.


Irving Kahn Irving Kahn has worked on Wall Street as a stock broker, security analyst, portfolio manager and investment advisor since 1929. After leaving the City College of New York, he served as the second teaching assistant to Benjamin Graham at Columbia University’s Graduate School of Business. Over the years, he did research for and provided assistance to Mr. Graham for his lectures, articles and books, including for Security Analysis, Storage and Stability, and World Commodities and World Currencies. Mr. Kahn was a founding member of the New York Society of Security Analysts in 1937 and the Financial Analyst Journal in 1945.

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Do CEOs Get Penalized for Reporting Losses?

The decision to replace a CEO is probably one of the most important decisions made by the board of directors. The decision has long-term implications for a firm’s investment, operating, and financing decisions. CEO turnover was around 10% per year during the 1970s and 1980s and 11% in the 1990s. However, between 1992 and 2005, annual CEO turnover jumped to 15%. In the more recent years since 1998, CEO turnover is around 16.5%, implying that the average CEO tenure is just over six years. More importantly, boards have become more sensitive to firm performance and are acting decisively in response to poor performance. Overall, the results suggest that the CEO’s job is more precarious than previously thought.

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Book Review: When China Rules the World

When China Rules the WorldThe rise of China and the potential economic and political decline of the United States is a concern for many Americans. In When China Rules the World: The End of the Western World and the Birth of a New Global Order, Martin Jacques depicts a world in which Chinese influence is paramount. He challenges the assumption that China will adopt Western values. Chinese modernity, he argues, would be very different from Western modernity, and China would transform the world far more fundamentally than any other global power has done in the last two centuries.

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eFinancialCareers Survey Reflects Opportunities for Job Seekers in All Financial Sectors

EFinancialCareersThis could be a good year for job seekers in the financial sector. The latest eFinancialCareers survey released today found that nearly two out of three (62.1%) financial professionals plan on moving to a new employer in 2011. Moreover, four out of five (80.5%) say their current employer has not offered them any positive incentives to stop them from jumping ship.

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Recent Research: Highlights from May 2011

The Clash of the Cultures.” The Journal of Portfolio Management (Spring 2011). John C. Bogle.

During the recent era, the culture of short-term speculation has come to overwhelm the culture of long-term investment. The volume of transaction activity in the secondary financial markets has dwarfed the activity in the primary market where capital formation—once considered to be the principal economic mission of Wall Street—takes place. This change has been driven by many forces, including the institutionalization of stock ownership; the self-interested behavior of the financial agents who now hold 70% of all shares of U.S. stocks; the virtual disappearance of frictional trading costs (largely commissions and taxes); and the focus on the momentary illusion of stock prices rather than the eternal reality of intrinsic corporate values. The shift in the balance of mutual fund culture—from stewardship toward salesmanship—illustrates these trends and their negative impact on investors and on participation in corporate governance. Drawing on the timeless wisdom of Benjamin Graham, John Maynard Keynes, and Henry Kaufman, Bogle provides a range of recommendations that could likely foster the return to a financial system where the culture of speculation plays only a supporting role, with the starring role again played by the culture of investment.

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Book Review: The Big Secret for the Small Investor

The Big Secret for the Small InvestorJoel Greenblatt is a master of succinct and humorous writing about investment. He is also the founder and portfolio manager of hedge fund firm Gotham Capital and an adjunct professor at Columbia University’s Graduate School of Business, where he teaches courses in value investing. His latest work, the smart and simple The Big Secret for the Small Investor: A New Route to Long-Term Investment Success, would have saved me several years of research on the art of investing, had it been part of the CFA curriculum in the 1990s.

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Book Review: The Origin of Financial Crises

The origin of financial crises In The Origin of Financial Crises: Central Banks, Credit Bubbles, and the Efficient Market Fallacy, Dr. George Cooper, a former head of fixed income at JPMorgan Chase and currently a principal at Alignment Investors, argues that credit excesses are the wellspring of financial crises. Cooper’s book is a vigorous indictment of the EMH (efficient market hypothesis), in which laissez-faire economic theories are applied to financial markets. He skillfully dismantles the prevailing theoretical paradigm, which has failed to predict or explain the recent carnage in financial markets, and suggests an alternative based on economist Hyman Minsky’s financial instability hypothesis, which Cooper contends better fits recent market facts. Applying Minsky’s theory, Cooper proposes modifications of the mandates of central banks and suggests prescriptions for the current economic malaise. The book is a deftly reasoned contribution to the torrent of criticism surrounding orthodox financial market theories.

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Suggestions for Modern Security Analysts

Ben Graham Economics is the social science that most identifies itself with the natural sciences. There is much that can be written about this statement in light of the events that unfolded in the 2007–2008 credit crisis, but this article focuses on the consequences pertaining to the field of Security Analysis, which is an economics-based discipline.

Security Analysis seeks to value firms based on the goods and services sold to customers via the assets (tangible and intangible) and obligations (liabilities) generated to support those sales. Despite the simplicity of this exposition, and the related simplicity of cash flow-based valuation, assessing value can be extremely difficult. The difficulty stems from the well-known fact that value is subjective, and from the equally well-known fact that the future is uncertain. Subjectivity and uncertainty means that Security Analysis requires many working assumptions, which is important because modern economics is currently grounded in mathematics that accommodates only a limited number of assumptions. As a purely theoretical, science-like endeavor this may (or may not) work, but Security Analysis is a profession, and professions are concerned with decision-making in contrast to science, which is concerned with prediction.

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Profiting from ETF Rotation Strategies in Turbulent Markets

Profiting from ETF Rotation Strategies in Turbulent MarketsIn today’s volatile financial markets, many investors are having a hard time deciding whether or not to be invested in equities and/or bonds. After the stock market turbulence and two severe bear markets of the past decade, as well as the uncertainty about the future, you are probably more cautious than ever about your investments. You might have moved to bonds, relied on mutual funds, followed the broker-friendly “buy and hold” strategy, or deposited your funds in a money market fund (“cash”). You might have made your decisions based on emotion, rather than discipline and fact. You are not happy with the results. So, how can you do better?

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Future of Microcap Rally Uncertain in 2011

As is traditional when an economy begins to recover, microcap and smallcap stocks have ruled during the past several years. From the spring of 2008 until this spring, the Russell 2000 Index of smallcap companies has outperformed the S&P 500 by a staggering margin. While the S&P 500 has returned just 2 percent on an average annual basis during that time, smallcaps have returned 9 percent.

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BP’s Failure to Debias: Underscoring the Importance of Behavioral Corporate Finance

“BP has a systemic problem with its culture that runs deep.”

Ending the Management Illusion, Shefrin (2008), p. 95.

“In the view of the Commission, these findings highlight the importance of organizational culture and a consistent commitment to safety by industry, from the highest management levels on down.”

Report to the President, National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling, (2011), p. ix.


In this paper, we apply key concepts from behavioral finance to document how psychological biases and framing effects impacted corporate culture and management decisions at energy firm BP. On April 20, 2010, an accident drilling BP’s Macondo well in the Gulf of Mexico produced the worst environmental disaster in US history, an event which dominated the daily news during the spring and summer of 2010. In itself, this event makes for the study of BP’s decision making of interest, prompting the question of whether the April 20 accident was simply an unfavorable chance event or instead the result of biased decision making.

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Book Review: Money and Power

Money and PowerIn his New York Times bestsellers The Last Tycoons and House of Cards, William D. Cohan showed how the history and culture of Lazard Frères and Bear Stearns, respectively, led to the firms’ ultimate fates. He applies the same historical approach in his new book Money and Power: How Goldman Sachs Came to Rule the World.

Goldman Sachs is known for its strong corporate culture. Corporate cultures were typical of outstanding companies in the past and are seen in newer companies like Google, but are not very common in the contemporary financial industry. In contrast, culture continues to be at the heart of Goldman’s business. Cohan takes up a key issue that has been raised by the media and federal investigations—namely, whether the firm’s mission statement and guiding principles were eroded or ignored in the push for big, fast profits.

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Positions in Operational Risk On the Rise

EFinancialCareersOperational risk remains a focus for trading operations and for good reason. Banks and investment firms say they’re worried about repeating the errors of the past. But just where do the operational risk managers and the quants meet, for instance? That’s been a serious point of contention.

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Artifacts of Finance: Alexander Hamilton’s Society of the Cincinnati Badge

Hamilton's Society of the Cincinnati BadgeAlexander Hamilton is known for helping to create the US Mint and the first national bank—but he is also the founding father of our national debt, which, according to John Steele Gordon, eventually led to the creation of capital markets. Hamilton butted heads with Thomas Jefferson over the assumption of national debt—among many other issues—and revisiting these early debates seems apropos in light of recent politics.

The badge above, awarded to Hamilton by the Society of the Cincinnati and passed down through the generations to his descendants, is currently on display at the Museum of American Finance as part of the “Alexander Hamilton: Lineage and Legacy” exhibit (through July 12, 2011). According to guest curator Dr. Richard Sylla, “Hamilton’s principal goals—US independence, a stronger government and economic modernization—are also his legacy. The exhibit shows that Hamilton, the subject of many stiff portraits and cold statues, was really quite a passionate soldier, statesman and financier.” 


Skinny on Cantor Fitzgerald's Build-Out And Hiring Plans

Cantor Fitzgerald & Co. increased its equities department headcount 20% over the past year, bringing those ranks to 400 traders and analysts worldwide, and may go on to increase its staff by another 100 professionals globally, according to recent comments by company CEO Shawn Matthews.

Cantor is hoping to build itself into a full-service investment banking boutique that’s “trying to re-create a style of business that disappeared over the years as the bulge-bracket Wall Street banks tightened their grip on stock trading by snapping up smaller brokerages,” according to a recent Wall Street Journal post.

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