< The Finance Professionals' Post: August 2011

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20 posts from August 2011


Blogs for the Buyside: Creditwritedowns.com

Blogs for the BuysideAre you tired of the simple sound bites you hear on the Bloomberg regarding issues as dense and esoteric as central banks and currencies? Do you need some extra analysis from someone who has studied both different countries as well as different eras of U.S. economic history? Check out Edward Harrison's Creditwritedowns.com.


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The CREDO for CFA Study Group Success

CFA San FranciscoIf done right, participating in a study group is one of the best ways to prepare for the CFA exams. An informal survey of candidates in study groups shows that successful study groups are:

Committed. Study groups only work if people attend consistently and contribute regularly. Meet once a week at a set time and place. So show up to each and every meeting! Agree on an attendance policy and hold members accountable.

Reliable. Come prepared to discuss that week’s topic. All group members should read the curriculum, do associated problems and/or construct practice questions beforehand.

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Book Review: The Global Economic System

The Global Economic SystemThe financial crisis that began in 2008 continues to produce aftershocks, and the way in which the current troubles will be resolved remains unclear. The impact of liquidity shock in today’s Great Recession, as well as in the Great Depression and Japan’s Lost Decade, is the subject of a new book by George Chacko, Carolyn L. Evans, Hans Gunawan, and Anders Sjöman. In The Global Economic System: How Liquidity Shocks Affect Financial Institutions and Lead to Economic Crises , these authors present their analyses and conclusions in a systematic, easily understood fashion, illustrating their points with well-chosen and instructive charts.

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CFA Exam Strategies: What to Do on the Day of the Exam

In the final part of William A. Trent's speech, he provides candidates with detailed test-taking tips for the day of the exam. 


Worldview Podcast: Expecting the Unexpected

Worldview PodcastThej Gurumurthy, the cofounder and COO of Syven Global Services, a research and analytics firm, shares a personal anecdote regarding the unforeseen pitfalls of doing business in our globalizing world. Corruption, he suggests, is an unfortunate fact of life in many places, and as difficult as it may be to understand and navigate these cultural differences, anyone doing business outside of their comfort zone must be prepared to deal with anything.

If you want to watch the webcast of this entire event or any other NYSSA program, visit NYSSA's On-Demand website.


Goldman Coach Advises on How to Jump Corporate Boundaries without Ticking Off Your Boss

EFinancialCareersIn the Broadway revival of the musical, How to Succeed in Business Without Really Trying, protagonist J. Pierpont Finch consistently finds ways to sidle up to company brass while pressing flesh, spelling out his name in a millisecond, and making uncanny personal connections that take him from mail boy to the top of the food chain before you can say, “smooth operator.”

That’s a lot tougher than it looks. Just ask San Francisco-based career coach and jobs transition specialist Don Asher who was in New York City recently coaching high-potential young executives at Goldman Sachs.

In a subsequent interview with eFinancial Careers he shared some of his own insights toward jumping the corporate boundaries gracefully.

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Schrödinger’s Morning Paper: The Impact of Barron's on Stock Prices

Barron'sBarron’s magazine hits newsstands on the first trading day of the week, and its cover story generally becomes an immediate topic of discussion in the business media, including CNBC, before the exchanges have even opened. Companies featured in Barron’s cover stories experience significant impacts on their stock returns and stock volumes during the first day of trading after publication. What’s more, the markets react to the stories as to brand-new information, and tend to trade on that information very quickly, especially in recent years.

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Converting Mission-Related Investing into Action in the Foundation World

The global economy appears to be settling into a period of protracted sluggish growth where “outsized” returns will be harder to come by. At the same time, trust in the conventional financial markets has sunk to an all-time low. The moment may therefore have arrived for foundations to move in a meaningful way beyond granting making and the occasional program-related investment (PRI) as the sole tool for expressing their missions and to begin deploying their endowments in the service of their missions through mission-related investing.

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Commentary: The Big Choice

A $20 trillion “externality” appears to present civilization with its BIG CHOICE: economic destruction or ecological destruction, both with chilling global security implications. Here’s why, along with a practical and more hopeful alternative to “Sophie’s Choice.”

Carbon Tracker has released an illuminating report, “Unburnable Carbon—Are the world’s financial markets carrying a carbon bubble?

The report nicely describes the potential “stranded asset risk” to resource company investors, and calls for a regulatory response on disclosure. What the report does not make explicit is the BIG CHOICE: Barring a miracle technology advance in the next decade (keep working brilliant scientists and entrepreneurs), if we want to avoid civilization-transforming and global security threatening climate change, we must absorb a global security threatening a $20 trillion write off (that’s 40 percent of global GDP) into our already stressed global economy. Even if gradually spread over a decade or more, with partial offsetting value creation in sustainable energy industries, this is an unprecedented challenge.

First the essential facts as per the report:

  • The Potsdam Institute calculates that in order to reduce the risk of exceeding 2 degrees Celsius warming to a 20 percent chance (not all that comforting), the global carbon budget for 2000–2050 cannot exceed 886 GtC02. Minus emissions in the first decade of the century, this leaves a budget of 565 GtC02 over the next 40 years.
  • Total “proved” fossil fuel reserves listed on public company balance sheets and State reported reserves is estimated at 2795 GtC02, nearly 5 times the remaining budget, implying 80 percent of these reserves should be left in the ground.
  • Seventy four percent of these reserves are State owned (Russia, China, Saudi, Venezuela, Iran, Iraq, etc.) or owned by private companies, 26 percent are owned by the 200 largest public energy companies.

According to James Leaton at Carbon Tracker, the market value of the top 100 public oil and gas companies and the top 100 public coal companies listed in the report exceeds $7 trillion, approximately 12% of the global public equity market. Making a simple assumption1 that State-owned companies and reserves have an equivalent market value per unit of carbon would suggest the global market value of proved fossil fuel reserves equals $27 trillion.

A real cap on carbon emissions designed to limit warming to two degrees implies sovereign states and public corporations will need to strand 80 percent of their $27 trillion of proved reserves. Rounding down, this implies a potential $20 trillion write off.2

The risk of systemic collapse of an already fragile, interconnected global economy is high if we incur a write off of this magnitude. Fossil fuel intensive economies and investors would be severely damaged, no doubt triggering a deep and prolonged recession while the losses were absorbed. Some, like Saudi Arabia where energy represents 75% of government revenues, and Venezuela (50% of government revenues) would face economic devastation leading to widespread social unrest.

Not surprisingly, the markets are ignoring this risk today as the Carbon Tracker report makes clear. Why would they do otherwise when, as Bill McKibben pointed out, the US House of Representatives recently defeated a resolution stating simply that “climate change is occurring, is caused largely by human activities, and poses significant risks for public health and welfare”? Why listen to the broad scientific consensus when we can invent a more accommodating (and remarkably partisan) physics? No surprise that this week, American Electric Power announced that it is shelving plans for its $668-million, full-scale carbon capture plant at Mountaineer in West Virginia, the nation’s most prominent effort to capture carbon dioxide from a coal-burning power plant in the United States, “until economic and policy conditions create a viable path forward.”

Rising fossil fuel stock prices coupled with no game-changing promise of carbon sequestration technologies (the present reality) implies the markets assume we blow past the 2 degree warming limit into catastrophic climate change.

Is there an alternative to the BIG CHOICE between ecological destruction and economic destruction? I think the answer is “yes,” but not with the simple happy talk of “CSR” and “growing the green economy.” A viable plan will entail real costs, unprecedented commitment, and shared sacrifice.

Costs: The seminal “Stern Review” on the economics of climate change suggests that for a range of manageable costs centered around a 1% reduction of GDP growth, greenhouse gasses can be stabilized at 500 to 550 ppm by 2050. While this modeling exercise is highly complex, it contains at least two fundamental flaws. First, it presumes 500 ppm is consistent with the 2 degree goal, when the scientific consensus, propelled by increasingly disturbing new evidence of climate change, is calling for a limit of only 350 ppm, what Bill McKibben calls “the most important number in the world.” And second, it appears to ignore the $20 trillion stranded asset write down and associated economic spillovers by assuming carbon sequestration capabilities will allow us to continue burning fossil fuels largely unabated.

I can only speculate on what portion of the $20 trillion stranded cost potential will need to be incurred. It will depend on the success of carbon sequestration technologies (unknowable), and their cost (also unknowable). But it will not be cheap. Prudence suggests we should plan to incur at least half of these costs, still a profound multi-decade economic challenge. We must also determine what combination of caps, taxes, and regulation will best manage the difficult carbon-limiting prioritization decisions among coal, various qualities of oil, and gas, and among the resource bases of sovereign states (with armies) and multinational corporations that we decide to burn, all having profound financial, political, social, and security implications.

Unprecedented commitment: At the core, our challenge and our greatest chance to mitigate the most horrendous consequences of the BIG CHOICE boils down to a capital allocation decision. We must of course invest aggressively in the “green economy” of clean technologies including carbon sequestration, energy efficiency, and alternative energy. Indeed this process has begun as documented by Ethical Market’s Green Transition Scoreboard, which now documents over $2 trillion of private sector investments in, and commitments to, the “Green Transition.” We must accelerate low technology paths such as avoided deforestation and grassland restoration3 to sequester carbon. But we must also remove subsidies and divest from the destructive fossil-fuel- based energy, transportation, and industrial agriculture systems, and from the destabilizing and counterproductive speculation of the Wall Street financial system. Only if we marshal unprecedented private and public resources to the great energy system transition can we hope to manage the BIG CHOICE.

Shared sacrifice: It’s time for true leadership around shared sacrifice. This must start with the richest half billion people, less than 10% of the human race, whose consumption and investment decisions will determine the fate of civilization. It’s time we awaken to the burden we bear. Seeking justice, our children will ask—What did you do, once you knew?

–John Fullerton is the founder and president of the Capital Institute. He is also the principal of Level 3 Capital Advisors, LLC, an investment firm focused on high impact sustainable private investments. This article originally appeared on his blog, the Future of Finance.

1. This assumption is somewhat flawed because the market capitalization of a resource company should and usually does exceed the present value of its “proved reserves” because as a going concern, it is expected to create incremental value beyond its current reserves. However, my assumption remains conservative because it also ignores all “unproved” reserves whose values are only partially reflected in company valuations, and ignores reserves held by all private companies and public companies not in the top 100 lists. World recoverable reserves certainly exceed by a wide margin, some argue by multiples, the current quantity of “proved reserves” on the books, meaning the total potential for stranded reserves is far greater than indicated here.

2. Yes this analysis ignores the potential of carbon sequestration technologies, but they are probably at least a decade away and uncertain. It also probably overstates the sovereign value of reserves, given the widely held belief that some governments overstate their reserves for political reasons. But it also ignores the value of many refining assets, power plants, shipping, rail, and pipeline infrastructure that will be devalued if we decide to leave fossil fuels in the ground in order to limit carbon pollution. It ignores the value of all private and smaller energy companies. It ignores the value to dependent governments of all associated production and consumption tax receipts associated with fossil fuels which have tremendous economic value. And, it only achieves an 80 percent confidence that we don’t exceed the 2 degrees warming target. Overall, we believe the $20 trillion estimate of aggregate economic exposure is reasonable.

3. See www.savoryinstitute.com.


Putting a Dollar Value on a CFA Charter vs an MBA

Career DevelopmentEarning the CFA charter is a notoriously difficult process, one which requires hundreds of hours of hard work and study over many years, not to mention the thousands of dollars it costs in exam fees and test prep. While holding the charter is often seen as a career booster, many potential candidates wonder exactly how much more they will earn with a CFA charter than with, say, an MBA. Ultimately it boils down to whether or not there is there a way to put an intrinsic value on either designation, and, if there is such a value, what is it?

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CFA Exam Strategies: Be Prepared

In the second part of William A. Trent's speech on CFA exam strategies, he outlines some of the simple missteps that can trip up candidates. 


Book Review: The Most Important Thing

The Most Important Thing: Uncommon Sense for Thoughtful InvestorHoward Marks is chairman and co-founder of Oaktree Capital Management, which has over $80 billion in assets under management. His book The Most Important Thing: Uncommon Sense for the Thoughtful Investor is based on periodic memos sent to customers and serves as a clear presentation of his investment philosophy. Risk—“the most interesting, challenging and essential aspect of investing”—is at the core of his approach. A few years ago, his thinking would have seemed old fashioned; the recent financial crisis has made it relevant again. Marks’ decades of experience lend his book extra credibility.

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Rare Earths in Rare Lands


Count Otto von Bismarck was not only the most visible European politician of his generation, but also a famous wiseacre. Driving home a point on the importance of hard power, he said that “if Germany will be weak, no armies of diplomats besieging European courts will further its interests. If on the contrary, it will be strong, its diplomatic representation can be delegated to the international corporation of dentists“ (cited from memory).

Today, the People’s Republic of China packs enough hard power for its diplomats to go into dentistry. It produces 97% of the world’s rare earth elements, which are essential components in many industries. When Japanese prime minister Naoto Kan tried to whip up nationalist sentiment by denying the wartime atrocities of the Japanese military against Chinese civilians, China instituted a technical shutdown of some of its rare earth mines. Several industries in Japan including automotive immediately felt the punch. Rare earths are necessary for the magnets used in cars’ electric motors, among many other technologies.

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Recent Research: Highlights from August 2011

Risk-Based Asset Allocation: A New Answer to an Old Question? The Journal of Portfolio Management (Summer 2011). Wai Lee.

In recent years, we have witnessed an alarmingly large and growing amount of literature on portfolio construction approaches focused on risks and diversification rather than on estimating expected returns. Numerous simulations applied to different universes have been documented in support of these approaches based on their apparent outperformance versus passive market capitalization–weighted or static fixed-weight portfolios. Many studies attribute the better performance of these risk-based asset allocation approaches to superior diversification. Given the absence of clearly defined investment objective functions behind these approaches as well as the metrics used by these studies to evaluate ex post performance, Lee puts these approaches into the same context of mean-variance efficiency in an attempt to understand their theoretical underpinnings. In doing so, he hopes to shed some light on what these approaches attempt to achieve and on the characteristics of the investment universe, if indeed these approaches are meant to approximate mean-variance efficiency. Rather than adding to the already large collection of simulation results, Lee uses some simple examples to compare and contrast the portfolio and risk characteristics of these approaches. He also reiterates that any portfolio which deviates from the market capitalization–weighted portfolio is an active portfolio. He concludes that there is no theory to predict, ex ante, that any of these risk-based approaches should outperform.

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A Catalogue of the Everyday Discriminations Commonplace in Financial Services Recruitment

EFinancialCareersBefore you get the call from a recruiter or employer, an unseen world passes by: candidate selection. In this world, subtle discrimination is standard—and more rich and varied than you could probably imagine.

From small prejudices to flagrant discrimination, we’ve spent the past few weeks collecting a list of the discriminatory statements made to recruiters by clients in investment banks, brokers, asset management firms and insurers.

This is what they told us:

1) Too old/too young…next!

 “28 years old? That’s too young. He won’t be able to stand up in front of clients.”

“This candidate is definitely too senior. He won’t get along with the other managers. We need someone around 35 years’ old—no more.”

“We don’t want candidates who are more than 45 years old because they’re harder to manage than younger people—and too expensive.”

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Peru (Part II): Currency and Equities


Part I of Worldview’s Peru coverage discussed Peru’s recent macroeconomic history and political economy, noting that Peru has been an impressive economic story that has stayed largely under the media radar. The recent election of Ollanta Humala, a candidate with a history on the far left of the political spectrum has cast the future performance of the economy into question, even if—as part of his runoff campaign—he has promised to govern the country from center-left policies rather than the far-left of Peru’s political spectrum and his base coalition. This piece examines the performance of Peru’s currency and equity markets and considers the attractiveness of the asset markets going forward.

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CFA Exam Strategies: Practice, Practice, Practice⎯and Check Out the Errata

At NYSSA's CFA Level I Orientation, William A. Trent, director of the exam development division at the CFA Institute, offered up his multipart strategy for passing the CFA Exam. In the first part of his speech he advises candidates to practice often and avail themselves of the materials on the CFA Institute website.

Two Ways to Take Studying for the CFA Exam to the Next Level


What? Why should I construct my own questions when there are plenty of study banks and practice exams out there? Here’s why. Constructing your own multiple choice questions:

  1. Shifts your focus from memorizing facts, definitions, and formulas to a deeper understanding of the material.
  2. Requires that you have a conceptual foundation of the material and therefore gives you insight to how the LOS can be asked. If you can’t write a question about a topic, how can you answer one?
  3. Forces you into an active study strategy. Relying on practice exams is a passive and less useful strategy. Writing your own forces you to engage with the material.

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Book Review: What Would Ben Graham Do Now?

What Would Ben Graham Do Now?In his new book, What Would Ben Graham Do Now?: A New Value Investing Playbook for a Global Age, Jeffrey Towson offers a unique glimpse into global investing at the very top levels of sophistication. Towson was head of direct investments for the Middle East, North Africa, and Asia Pacific for Prince Waleed, one of the most successful global investors. Towson adapts Benjamin Graham’s value concept to a world that is vastly different from the one Graham knew.

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9 Life and Career Lessons from Gary Cohn, COO of Goldman Sachs

EFinancialCareersDressed in something resembling a blue cape, Gary Cohn COO of Goldman Sachs recently gave a philosophical commencement speech to students at the Kogod School of Business, his alma mater.

We’ve broken Cohn’s speech into easily digestible career-related aphorisms below.

1) Be funny, be light, be grateful

Cohn is. He says: “I know I succeeded in life. I’ve never found a meal that I didn’t love. If you look at me I haven’t missed a lot meals in my life.”

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CFA® Level I 4-Day Boot Camp

Thursday November 12, 2015
Instructor: O. Nathan Ronen, CFA

CFA® Level II Weekly Review - Session A Monday

Monday January 11, 2016
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CFA® Level III Weekly Review - Session A Wednesday

Wednesday January 13, 2016
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CFA® Level III Weekly Review - Session B Thursday
Thursday January 21, 2016
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CFA® Level II Weekly Review - Session B Tuesday
Thursday January 26, 2016
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