How to Select the Optimal Valuation Method to Build Better Price Targets (Part 1 of 3)

Buy-and-Sell-300x166In a prior post I noted all stock picking best practices (or “tips”) can be put into one of the four elements of our TIER™ framework (see image below).

If you’re asking “why should I care?”, I’d reply that the best stock pickers have a consistent philosophy and methodology for picking stocks. If you already have one, that’s great, but if you’re looking for one, you might want to start here and make modifications to fit your style or investment philosophy. This 3-part series focuses on the “T” of the TIER™ framework shown below.

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The Stewardship of Wealth: Successful Private Wealth Management for Investors and Their Advisors

StewardshipofWealthIn his latest book, The Stewardship of Wealth: Successful Private Wealth Management for Investors and Their Advisors, Gregory Curtis goes beyond a traditional study on investment policy, asset selection and monitoring, and risk management of and the fiduciary issues involved in wealth management by thoroughly investigating the aspects of stewardship of the wealth of prosperous families. Curtis is the chairman and founder of Pittsburgh-based Greycourt & Co., a wealth advisory firm that serves high-net-worth families and select endowments on a global basis. This book builds on his Creative Capital: Managing Private Wealth in a Complex World. It provides a moral, ethical, economic, and investment compass for the wealthy.

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When Fear of Bonds Exceeds Fear of Stocks

Worried about your bonds? You’re not alone.

In speaking with our investors in recent weeks, the most universal theme by far was concern over their bond holdings. Historically low interest rates coupled with the prospect of the first Fed rate hike since 2006 (“rising rates”) were causing anxiety. And most importantly, the average bond fund was down in the first half of the year. There’s nothing more fear inducing to investors than short-term losses.

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Going Beyond GIPS

GIPSGlobal Investment Performance 
Standards, better known as GIPS, are a 
voluntary set of standards established to
 create transparency in the calculation and
 presentation of performance. From 
improving the credibility of compliant investment firms to providing clients the ability to fairly evaluate the performance of these firms, GIPS has arguably become the gold standard in investment performance. As client awareness has risen, demand for GIPS is pushing investment firms in becoming compliant in order to maintain their competitiveness. While this is a positive in an industry that sorely needs standards that encourage fairness and credibility, it would be short sighted for firms to stop at GIPS when it comes to their performance. We must remember that performance is not a part of GIPS but rather it is GIPS that is a part of performance. Meaning that, in the ever-growing field of investment performance, stopping at GIPS would rob a firm of maximizing the benefits of performance that go beyond GIPS.

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Can YOU simplify investment commentary better than this?

I am not perfect. I don’t have all of the answers for how to best simplify the complex sentences that abound in investment commentary and related publications. However, we would all benefit if the smart investment professionals could communicate more clearly and economically.

To spur conversation, I’m posting some before-and-after versions of sentences inspired by what I’ve read in online and printed investment pieces. Most of my tweaks are minor. They don’t dramatically ratchet up the sentences’ effectiveness. However, their simplicity means that they demonstrate techniques that would be easy for anyone to implement.

If you’re trying to improve your writing skills, I hope that you’ll find some inspiration. If you’re a veteran writer or editor, perhaps you can suggest better alternatives.

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Growth of Large Companies May Be Driving Wage Inequality


The global trend toward wage inequality may be driven by a rise in the share of people employed by the world’s largest companies, suggest Professor Holger Mueller and his co-authors, Paige P. Ouimet of the University of North Carolina at Chapel Hill’s Kenan-Flagler Business School and Elena Simintzi of the University of British Columbia’s Sauder School of Business, in their new working paper, “Wage Inequality and Firm Growth.”

Using a proprietary data set of employee pay at a broad cross-section of UK firms (both private and public) from 2004 to 2013, the researchers examined how the wage differences between jobs of differing skill levels within a single firm (“within-firm skill premia”) varied between firms and over time. They found that the wage differences between high-skill and low- or mid-skill jobs increased with firm size. As company size grew (measured by either number of employees or sales – both had the same results), the wages paid for high-skill jobs increased significantly, while the wages paid for low- or mid-skill jobs remained the same or decreased slightly. For example, the highest-level job at a company in the 75th percentile of company size carried a wage 280 percent greater than the highest-level job at a company in the 25th percentile. The result of this phenomenon is that as firms grow larger, a divide widens between the high-level and both the mid- and low-level job wages, driving greater wage inequality.

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11 Things Ultra-Productive People Do Differently

When it comes to productivity, we all face the same challenge—there are only 24 hours in a day. Yet some people seem to have twice the time; they have an uncanny ability to get things done. Even when juggling multiple projects, they reach their goals without fail.

Time is really the only capital that any human being has, and the only thing he can’t afford to lose. —Thomas Edison

It feels incredible when you leave the office after an ultra-productive day. With the right approach, you can make this happen every day. You don’t need to work longer or even do more—you just need to work smarter. Try these 11 productivity hacks that ultra-productive people rely on:

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How 30 Minutes Wasted Could Cost You $5,000

By James Valentine, CFA


We all have the same 24 hours in a day, but I find some analysts use it much more effectively than others. Based on my experience I don’t sense the level of a person’s time management skills has anything to do with their intelligence, professional experience or even their degree of ambition. It comes down to their level of self-discipline for staying focused.

To help get your attention, let me pose the issue this way: If an analyst is being compensated $100,000 per year, and he wastes just 30 minutes of a typical 10-hour day, that amounts to a loss of $5,000 per year. What would you do with an extra $5,000 a year?

To help frame the issue, let’s take a quiz.

Beware! These Toxic Thoughts are Success Killers

No matter who you are or what you do I am willing to bet that if you are having any of these thoughts below, then you are holding yourself back from achieving great success. As an executive coach, I am fortunate to work with and get into the brilliant minds of the brightest and most successful executives on Wall Street and beyond. Like the rest of us, my clients have insecurities that we work on recognizing and banishing from their minds. Here is the list of thoughts that are surprisingly common and are the greatest offenders to our success.

Beware of these toxic thoughts.

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Are Equities Overvalued?

MspenceBy Michael Spence

Since the global economic crisis, sharp divergences in economic performance have contributed to considerable stock-market volatility. Now, equity prices are reaching relatively high levels by conventional measures – and investors are starting to get nervous.

The question is whether stock valuations are excessive relative to future earnings potential. The answer depends on two key variables: the discount rate and future earnings growth. A lower discount rate and/or a higher rate of expected earnings growth would justify higher equity valuations.

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The Seven Challenges That Hold Back Great Stock Picking

By James Valentine, CFA

Imagine picking up your car after it’s been supposedly repaired and discovering it’s still not fixed. Then, after a second trip to the shop the problem is still not resolved. What if this issue was an industry-wide phenomena? How would you feel about auto mechanics?

According to the most recent SPIVA report, 60% of large-cap managers and 73% of small-cap managers in the U.S. under-performed their respective benchmarks for the prior 12 months. Furthermore, over 70% of domestic equity managers, across all capitalizations, failed to beat their benchmarks over a five-year period. 

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Should We Outlaw Advertising?

Megan McArdle, a libertarian-oriented commentator on economics, recently recalled her reaction to a proposed class-action suit of the early-2000s dealing with fast-food companies’ impact on public health.[1] McArdle challenged an author involved in the anti-obesity cause to point to any research demonstrating that the restaurant chains’ advertising induced children to increase their consumption of fast food. 

The question confused the author, who simply assumed that corporations would not spend millions of dollars on advertising unless it increased sales.  McDonald’s does not, however, advertise with an eye toward convincing kids to eat more fast food.   The goal is rather to persuade them to eat it at McDonald’s (NYSE: MCD) instead of Burger King or some other chain.  In general, advertising is better at stimulating specific demand (brand selection) as opposed to primary demand (the decision to consume).

This point was emphasized in the mid-20th century by critics of advertising, which at that time was mired in political controversy, much as the financial industry is today.  It became an article of faith among many economists that because advertising did nothing to increase overall consumption, it represented a waste of resources. 

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How Finance Can Help Save Our Planet

The following post was adapted from a chapter I wrote for John G. Taft’s new book, A Force for Good,  published just this past week by Palgrave Macmillan.  John is the CEO of RBC Wealth Management, and I am proud to be in the illustrious company of individuals like Mary Schapiro, Robert Shiller, Sheila Bair, Roger Martin, and Dominic Barton, who were invited by John to contribute to this book.  I think you will find A Force for Good a fascinating read as it explores, from a variety of experienced perspectives, how the financial industry can marshall, for the long-term public good, the creative energies and brainpower it has deployed in the past to develop derivatives, high-frequency-trading technologies, and other engineering complexities.  

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Insider Trading Law After the Newman Decision: What Does It Mean to Financial Industry Professionals?

In December 2014, the United States Court of Appeals for the Second Circuit issued what has been described as a landmark decision in United States v. Newman.  In its decision, the Court vacated the insider trading convictions and sentences of Anthony Chiasson and Todd Newman, two hedge fund professionals convicted of insider trading after trial in federal court in Manhattan.  The decision has been greeted by the white collar defense bar as an important repudiation of the Government’s heavy handed pursuit of insider trading. 

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Should Your Investment Commentary Be Different?

“Should your investment commentary present a distinctive point of view?” That’s the great question posed by a participant in one of my presentations on “How To Write Investment Commentary People Will Read.”

My answer? It depends.

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China: Ecological Civilization Rising?

Returning to China for the first time in a quarter century this month was equally awe inspiring and terrifying. The observation deck of the truly gorgeous Shanghai World Financial Center is breathtaking, a fitting testament to China’s rise. But it was the unexpected sense that we might be experiencing history at DeTao Group’s summit in Shanghai, “Future New Economy: Sustainable Model Toward an Ecological Economy,” that left an indelible mark on me.

I had the honor to address the DeTao Group summit on the topic of regenerative investing in natural capital. Inspired by the vision and leadership of DeTao Chairman George Lee, it was an extraordinary experience. The warm hospitality and genuine appreciation and respect extended to all the visiting “experts” was quite exceptional. As George told me, “in Chinese culture, we honor our teachers.”

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What Happened to the U.S. Constitution? Effects of Changing Interpretations on International Debt and Banking—Part II

In Part I of my article, I described how the decision of an obscure federal judge promises to transform world debt markets. I planned in Part II to describe the Argentinean debt deal, but in the interim Bloomberg published an article that elucidates this matter in sufficient detail (Levine 2014). Furthermore, the document describing the debt settlement is available online (Securities and Exchange Commission 2005). I cannot claim to have read the entire document—219 pages of prospectus and approximately 150 pages of supplement—but I gleaned enough by browsing. It contains interesting information on how international debt is settled, and if I were to teach international finance, I would make a case study out of it.

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Mongolia Investment Outlook

Mongolia is one of the world's fastest growing economies, with a year-on-year real growth rate of 7% in 2014. Recent growth has been primarily driven by development of new mining projects, growth in the real estate and agriculture sector, and an expansionary fiscal and monetary policy.

Mongolia's economy is highly dependent on trade with China. Economic growth has been negatively affected by a slowdown in the Chinese economy, which accounted for 94.1% of Mongolia's exports in 2013. In addition, Mongolia is dependent on Russia for all of its fuel and some of its energy needs, which makes Mongolia vulnerable to price pressure from Russia.

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Life After the CFA Charter

I still remember the feeling of happiness, relief, and complete sense of accomplishment when I received a congratulatory email from CFA Institute on August 6, 2013 letting me know that I passed the Level III CFA exam.  I officially became a CFA Charterholder in November 2013. The certificate is very big, and I feel proud every time I look at it.  It reminds me that hard work and determination will help me overcome any challenges that I am currently facing, or will face in the future, as they did when I embarked on the CFA journey.

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It Is Time for a Cyber FDIC

In today’s modern frictionless economy, the principal requisite for growth and order is the free flow of sensitive information, banking transactions, and private data on a global scale.

With this shift brought on by the unrelenting growth of e-commerce and mobile platforms comes the nagging reality that cyber risk is here to stay. It is the sort of drag on the market that needs to be priced into the system rather than treated like something that can be eliminated or perfectly controlled. Market and consumer expectations need to be adjusted accordingly and in the age of hyper transparency, people would be wise to remember that anything can be exposed to sunlight.

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Four Reasons You Should Not Write a White Paper

White papers can be great marketing tools. Done right, they give web surfers reasons to join your email list and persuade them that you understand—and have solutions to—their problems. However, done poorly, white papers waste your time—and your readers’ time. To help you avoid pointlessly sinking your energy into white papers, I’m sharing four reasons you should not write a white paper.

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How About a "Not-So-Fast" Track for the Trans-Pacific Partnership?

The Trans-Pacific Partnership, a potentially historic trade agreement being aggressively pursued by the Obama administration, represents a cornerstone in its strategic pivot to Asia. If ratified by all 12 Pacific Rim countries currently engaged in the negotiations, it would create the largest free-trade zone in the world, accounting for some 40% of global GDP and a third of global trade.

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NYSSA TV™: A Fireside Chat with William Thorndike and William Cohan

Authors William Thorndike and William Cohan share a “Fireside Chat” about the challenge for management to create value in a climate of rising shareholder activism and increased M&A activity.


MONEYBALL: Reinventing the Game of Capitalism Using a New Scientific Model

There is an epidemic failure within the game to understand what is really going on. And this leads those who run major league teams to misjudge their players and mismanage their teams… Baseball thinking is medieval. They are asking all the wrong questions.

People see this new way of thinking as a threat, and not just to a way of doing business, but, in their minds, it’s a threat to the game itself…

But anybody who is not tearing their team down right now and rebuilding it using your model − they’re dinosaurs.

- Dialog from the movie Moneyball

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The Club of Rome’s Next Act

The Club of Rome was founded in 1968 but really came into the public eye with the publication of Limits to Growth in 1972. The controversial book, which sold 12 million copies in 37 languages, first called attention to the systemic limitations of the exponential expansion of the human population and the related material inputs and waste outputs of its economic system on a planet that is fixed in scale.

The concept is not complicated. Sooner or later, the endless expansion of the metabolism of a system within a finite body will cease.

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Free Help for Wordy Writers!

Wordiness is a curse. Long-winded writing obscures your meaning and scares off readers. However, many writers don’t realize that their writing drags on endlessly.

A free online tool—the Hemingway App—can help you recognize when your sentences are too long. Hemingway will highlight them, and also suggests some ways to improve your writing. You could identify long sentences using your word processing software, but Hemingway is easier to use.

I’ll walk you through an example of how to use Hemingway.

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How to Manage a Tough Job Environment for Equity Research

The job market for equity research in 2014 is highly competitive. What with across-the-board consolidation, tightening regulation, and a slimmed down banking sector, how can a candidate stand out given the crowded, narrow space?

Increasingly, specialization is sought after. Sector focus—rather than a generalist background—is more favorable, be it in biotechnology, insurance, or any niche.  

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What Happened to the U.S. Constitution? Effects of Changing Interpretations on International Debt and Banking—Part I

Contrary to the wishes of originalists, the U.S. Constitution evolves. However, it evolves in strange, almost incomprehensible ways.

For instance, the reach of the First and Second Amendments has increased drastically. The “freedom of speech” clause in the First Amendment, once admitting restrictive Comstock obscenity laws, now has extended to freedom (and anonymity) of money spent by corporations on political advertising, thanks to the Supreme Court’s ruling in Citizens United. The Second Amendment entitles every citizen, age and mental state notwithstanding, to obtain firepower on the scale of a post–Revolutionary War battalion—and much more accurate at that.

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The Courage to Lead

This post previously ran on the Huffington Post as part of the “Plan B for Business” series to help articulate a Plan B for Business.

Henrik O. Madsen joined Norway’s DNV, the world’s leading ship and offshore classification company, in 1982.  Thirty-two years later, as Group CEO of the recently merged DNV GL, now a Euro 2.5 billion global enterprise, Henrik made a speech few CEOs will ever have the opportunity to attempt.

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Plain Language: Let’s Get Parenthetical

Plain language makes your documents more appealing and easier to understand. But circumstances may require you to use jargon. For example, you may be a financial marketer or professional working for bosses or departments that insist on using technical or unfamiliar terms. You can help reader comprehension by explaining the term in the sentence where it first appears. Parenthetical explanations are useful, whether you literally enclose the explanation in parentheses or set it off using some other technique.

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What Type of Financial Advisor Advises You?

For individual investors seeking advice, the world they enter can be a confusing place. I’m thinking here of the different types of financial advisors that offer to help investors deploy their capital.  Non-finance people shouldn’t need to bother themselves with subtle elements of the investing regulatory landscape, but there are some things they’re better off knowing. Financial advisors don’t all operate with the same set of objectives. Some, who work for investment advisory firms and are Registered Investment Advisors (RIAs) are bound by the 1940 Investment Advisors Act to conduct themselves as a fiduciary, meaning they’re legally obliged to put their clients’ interests first. It seems like a sensible standard, but it’s not the only standard. There’s another class of financial advisor who work for broker-dealers rather than investment advisory firms. Their activities are bound by a lower standard of suitability and disclosure.

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John Lennon Said It Best: “Living is Easy with Eyes Closed"

I was floored by this* Saturday’s New York Times article, “Seeing a Supersize Yacht as a Job Engine, Not a Self-Indulgence.”  I was amazed not only by how the subject of the article, Mr. Jones, rationalized his extraordinary consumption habits, but also by the mere fact that the article was published.

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The Central Contradiction of Capitalism that Piketty Overlooked

It is instructive to observe the reaction to the Piketty phenomenon — a 700-page treatise on political economy that became an overnight Amazon bestseller deserving, according to Larry Summers, of a Nobel Prize. It is similarly instructive to note the spectacle of the viral Russell Brand interview with the BBC’s Jeremy Paxman in which Brand pretty much shreds Paxman and calls for revolution. I can’t claim to have actually read Piketty’s tome, but I’ve read a lot of the reviews, and I have watched the Russell Brand video. Regardless of where you come down on their arguments, the response to Piketty’s book and the wide appeal of Brand’s rant taken together tell us that trouble is brewing.

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Forward Thinking on Collateral Management

Most financial firms in the present day would need an overhaul of their current collateral management practices. This comes in the midst of the burden being experienced by an already intensely regulated financial industry and the new measures of regulation on OTC derivatives in the post financial crisis world. The costs of regulation are near-crippling to some firms. Big dealers are planning to exit or divest certain lines of business that will face huge operational costs as a result of regulation, and are no longer deemed profitable.

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When Markets Fail: Part Two

There are five main reasons for market dysfunction:

  •  Transaction costs and market frictions;
  • Information asymmetry and adverse selection;
  • Market externalities;
  • Existence of public goods (bads), nonexclusivity of consumption, and Pigovian markets (activities that reduce society’s welfare, or marketing bads); and
  • Problems of collective action (e.g., arms races).

In Part I of this article, I discussed the first two reasons. Below I cover the remaining three.

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High-Frequency Trading Is a Blight on Markets. Tobin Tax Can Help.

This blog post previously ran in The Guardian's Business section.

The dark side of the world of algorithmic trading in financial markets has twice been in the spotlight this week. First was the release of Michael Lewis' explosive new book, Flash Boys: Cracking the Money Code, which highlights many worrying practices in a sector that accounts for about half of all trades on the New York and London Stock Exchanges. Second was the FBI's announcement on April 2 that it would begin a criminal investigation into wrongdoing in the sector.

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Five Reasons to Consider Mongolia As Your Top Investment Destination

Mongolia submission

It's the second fastest growing economy in the world: Strong economic growth is expected for the mineral resource–rich Mongolia, with rising mining output from world-class mining projects such as Oyu Tolgoi—a copper and gold mining operation, where Rio-tinto owns 66% and the government owns 33%. This project is expected to contribute 1/3 of Mongolia GDP alone. The Economist Intelligence Unit has projected that Mongolia will be the second-fastest growing economy in the world in 2014 with gross domestic product rising 15.3% thanks to the first full year of operations of Oyu Tolgoi. And, though IMF predicts that growth will slow down to 9.5% (owing to a slow-down in China, the main export destination for Mongolian minerals), the economic growth is high even by regional, let alone international, standards.

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Yellen’s 2.25% Target for 2016 May Be a Huge Mistake

Janet Yellen surprised almost everyone on March 19 by speaking off-script and providing forward policy guidance that can undermine the Fed’s credibility, at best, or cause another crisis, at worst. If the economic data comes in weak by the end of tapering and the markets swoon, the Fed will have no choice but to implicitly admit it was wrong and keep interest rates close to zero indefinitely. However, if the Fed continues with its plan to raise rates in the face of a weaker economy and declining market, the actions may cause another violent crash.

Zero short-term rates and the first round of QE were essential to avoid a complete financial meltdown. Subsequent rounds did little for the real economy yet unintentionally produced high leverage and asset bubbles in various places by providing cheap financing for companies, investors, and speculators alike. The policy also resulted in a massive transfer of wealth from labor to asset owners leading to the largest wealth and income inequality in recent history.

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Don’t Sabotage Your Website’s News Page

A news page featuring your firm’s mentions in the media can boost your credibility as long as you avoid one financial advisor’s mistake.

“Wow! This advisor hasn’t gotten any press since 2006.” That was my first thought when I looked at this advisor’s news page earlier this year. I immediately thought, “He should delete his news page.”

But then I scanned the rest of the page. I realized that the advisor had listed his media coverage in chronological order. He started in 2006 and continued up to the present day way, way down the page.

Unfortunately, most readers won’t scan the entire page. They’ll stop with the misperception that the advisor is a dud at getting the attention of the press.

The lesson for you? List your news coverage in reverse chronological order, putting the most recent items at the top of your page. For an example, see my “In the News” page.

Using the proper order is a small step with a big impact.



–Susan Weiner, CFA, is the author of Financial Blogging: How to Write Powerful Posts That Attract Clients, which is tailored to financial planners, wealth managers, investment managers, and the marketing and communications staff that supports them. Read her blog or follow her on Twitter, Google+ or the Investment Writing Facebook page.


Can We Escape Bank Regulation by Lawsuit?

When I worked at JPMorgan in the 80s and 90s, even in the context of deregulation, the concept of “self-regulation” in the financial industry was discussed with a straight face. 

Last week, Better Markets, a sophisticated civil society non-profit organization, run by former Skadden attorney Dennis Kelleher and committed to protecting the public interest in the government’s regulatory response to the financial crisis, filed a lawsuit against the Justice Department and Attorney General Eric Holder.  The suit seeks to block what Better Markets calls an “unlawful” $13 billion settlement with JPMorgan Chase & Co. over bad mortgage loans sold to investors leading up to the crisis.  We now have lawyers suing the United States Attorney General on the public’s behalf for failing to properly prosecute a record $13 billion settlement on the nation’s most powerful and flagrant abuser of the self-regulation ethic.

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Transcending the Tension between Climate Change and Inequality

This year’s gathering of the World Economic Forum at Davos was kicked off with the reading of a letter from Pope Francis, which ends: “I ask you to ensure that humanity is served by wealth and not ruled by it.” One can almost feel the squirming.

I recently participated in a roundtable among leading thinkers, activists, and social entrepreneurs on the need to put "system change" not just problem-solving on the agenda in places like Davos. This discussion is not about capitalism versus socialism. No existing system, not social democracies nor communist states, operate sustainably. As is often the case in these discussions, the inevitable and emotion-packed debate on priorities emerged.

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How I Passed the CFA Level I Exam with Just 2 Weeks' Studying

My name is Scott, and in the summer of 2011, I passed my CFA Level I with just 2 weeks worth of studying. <

I started two Saturdays away from the actual test having done no more than a cursory glance at my books beforehand. And somehow, incredibly, I managed to pass. Zee wrote to me one day asking if I'd like to share my story with 300 Hours readers, and over the course of the Christmas holidays, I wrote my experience down.

Here is my story.

An Important Success Factor: My Job and Education

I believe a significant factor that allowed me to pull this off was my background, both in work and education

I read Economics at Oxford and did pretty well - that helped me save time in some of the basics of CFA Level I. I was also a management consultant for investment banks and wealth managers. Consultant projects range from several weeks to several months, and having 3 years experience at the time, I had a wide range of knowledge and expertise across several financial sectors.

Without a relevant background in work and education, I don't think this would have been possible for me.

Desperate Times Call for Desperate Measures

I didn't choose to attempt to take CFA Level I with only two weeks' prep - I basically had no other choice.

My biggest mistake was to underestimate how little time and drive I would have for the exams. I always did well in exams in the past and thought that this would be just like the others. Although the exam itself was probably not too different in difficulty, balancing it with work was the problem.

I was rammed with a high-pressure project about 3 months before the exam, working 80-100 hour weeks. This meant that I didn't have any time to do anything else, never mind think about studying for the CFA exams. As the exams approached, I had two choices - either forgo the exam and waste the money I paid for the signup fees and materials, or try and pass with by the skin of my teeth.

Two weeks before E-day, I chose to push for it and see what happens.

My Two Weeks of Studying Hell

I took a full 10 working days off to study for the CFA Level I. That was already a very painful sacrifice, but nothing compared to what I had to endure in the following two weeks.

Through the entire two weeks, I dedicated all of my time to studying. I didn't leave my flat and lived off takeout meals. I had told my friends, girlfriend and parents that I would be incommunicado for two weeks so I didn't speak to any of them either, save for a few online chats here and there. Basically I became a hobo for two weeks in my own home.

And what did I get done? I'd say there were 3 important things that I got right, given my situation.

I started with practice exams, and did as many as I could
Starting with exam papers allowed me to roughly understand what areas I would need more studying in and what areas I could go light on. By the end of the two weeks, I managed about 4 papers under proper exam conditions, and speed-read about 6 more - reading the question and immediately going through the model answers. Practice exams really helped tune my studying - I would recommend it regardless of whether you're time constrained or not.

I outright binned a few topics.
Apart from doing the practice questions in the exams, I skipped these 3 topics:

  • Economics: light weighting in exam, and I could wing it a little based on what I learned in school
  • Corporate Finance: light weighting in exam, and I had a bit of experience from my job that helped me
  • Derivatives: light weighting in exam, and I also found the exam questions very confusing and not worth the time


–300 Hours

This exerpt was reposted with permission from 300 Hours, a site dedicated to CFA candidates and charterholders.

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Harvard and Brown Fail Moral Leadership Exam

At a time when institutions of business and government continue to fail society, two of our leading academic institutions missed the opportunity to provide essential moral leadership on the most pressing challenge ever faced in the history of human civilization.

Harvard President Drew Faust issued her October statement first: She and her colleagues on the Board do not believe “that university divestment from the fossil fuel industry is warranted or wise.”

Brown President Christina Paxson followed three weeks later with her own statement: “Our consideration of divestment [from coal] is over.”

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Will the Fed Need a Bailout? Nonsense!

“As stimulus tab rises for Fed, worries grow it may require a bailout” is the title of an article published in Los Angeles Times and blogged in CFA Institute's "Future of Finance."

I'll say it bluntly: This is nonsense. The logic goes that as interest rates rise, the value of the bonds on the Fed's balance sheet lose value and the central bank will be bankrupt—requiring the taxpayers to bail it out. This is wrong on many different levels.

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The Wisdom of Stupid Questions

One Eastern fable tells of animals that want to build a bridge to greener pastures. The elephant proposes to build a wide, strong bridge, the bunny wants to build a light one, and so on. The jackass says that the group should decide whether to build the bridge across or along the river.

Sitting in the midst of the Marcellus shale, considering the debates between energy companies and environmentalists about the costs and benefits of fracking, I develop a feeling similar to the donkey’s. The proponents of fracking emphasize the supposed contribution of a cheap “natural” gas to the national economy. Environmentalists concentrate on the emission of greenhouse gases and the pollution of streams and water tables. Yet I have not been able to find an answer to a simple question, one that I formulated long ago: is fracked gas (a product of underground gasification of hydrocarbon-saturated shale—I call it “shale gas” below) a complete substitute for natural gas that comes from traditional sources (“wellhead gas”)?  

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Are We Not All Jasmines Now?

What is it about a Woody Allen film that leaves us always with a discomforting feeling of identification with its most abysmal character? This is certainly true with his latest film “Blue Jasmine,” which initially disappointed me, Kate Blanchett’s hauntingly brilliant performance notwithstanding. But given a little more time and reflection, its deeply disquieting meaning slowly seeped in.

I began to realize that it was more than an overdone cliché about a greedy Wall Street huckster who lavishes “everything one could want” on his attractive and well-kept wife “Jasmine,” who never asks or wants to know the true source of all that “success.” Easier to shop and party on Park Avenue and in the Hamptons as a socialite dripping platitudes about responsibility for “helping poor people.” Her husband “Hal” is a younger and flashier Bernie Madoff, higher up the Wall Street food chain perhaps, but nothing more than a sociopathic shyster, serially cheating on his complicit wife whom we cannot help but associate with Ruth Madoff.

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The Yield Famine: Discovering Income Opportunities in a Zero Interest Rate Environment


Fed’s response to the financial crisis created winners and losers. Ultimately it produced a massive transfer of wealth from savers and conservative investors to financial intermediaries, corporations, and risk takers. Retirees and others who traditionally relied on modest and reliable interest received to generate cash income or grow their wealth have suffered an extended period of zero returns while the value of cash is eroded by inflation. Moreover, losses experienced during the crisis removed the risk-taking ability of many investors forced to move to safety.

The “yield famine” represents years of lost returns for savers and investors unwilling or unable to take risk. With the economy still operating below potential, and unemployment being reduced only slowly, short-term interest rates are likely to remain exceedingly low well into the future. Add massive government debt comparable to levels after World War II and “financial repression” is virtually guaranteed for decades. Low rates will continue to keep savers hungry while subsidizing the government, the financial system and the corporations. Meanwhile, profits at the largest US banks are now the highest they have been in history.

Institutions and individuals holding assets in banks and low-yielding funds would be wise to invest directly in the same way that banks do. Cutting out the middleman would provide them with a similar level of safety that banks enjoy, yet generate substantially higher returns. However, doing so requires, first and foremost, the knowledge to find the right opportunities coupled with the courage to move out of the comfort zone and take a modest level of risk. Investors with diversified portfolios across the risk spectrum might also find it rewarding to reallocate both ultra low−risk and very high−risk assets into moderate-risk assets with superior risk-adjusted returns.

The Conference, hosted by NYSSA Private Wealth Management Committee on October 1st, 2013, presents a menu of choices available for generating income from various sources. Topics of presentations include: expanding outside the US into the global bond market, using equities for income and growth, a look at the advantages of preferred stocks, visiting synthetic bonds, evaluating the risks and returns of muni bonds, and sampling Master Limited Partnerships and Business Development Companies.


Federal Reserve and its Chairman are often praised for the swift and forceful response to the financial crisis, which helped avoid a repeat of the Great Depression. Both conventional and unconventional monetary policy actions were used to increase liquidity, shore up the financial system, stimulate the economy, and reduce the high level of unemployment. Reducing the overnight borrowing rates is a standard conventional policy response and the Fed, unlike other central banks, took the bold step of reducing this rate to near zero.

The zero interest rate policy (ZIRP), along with infusions of cash, saved the financial system from imminent collapse in 2008. Since then, “too big to fail” institutions along with their thousands of smaller brethren were able to borrow at infinitesimal rates. Such ample liquidity and low rates propagate through the system, and  determine the rates of all other ultra-safe, short-term lending and borrowing such as Treasury bills and commercial paper. In turn, these rates determine the interest paid on so-called Money Market funds and bank accounts as well as interest on short-term Certificates of Deposit or Bank Savings Accounts.


Short-term interest rates are unlikely to rise by any substantial amount in the near future for  a few reasons: continued quantitative easing, massive government debt, and demographics. Quantitative easing (QE) is an extension of the conventional monetary policy using interest rates. Most likely, an increase of the Fed Funds Rate would have to be preceded by the complete stop of Fed’s asset purchases. There should also be a reasonable belief that no further QE would be needed. Since the Fed is just beginning to consider a “taper” from the $85 billion per month in purchases, a lasting and complete QE stop may be a long way off. It is also possible that the Fed may wish to unwind at least a portion of its balance sheet before raising rates. This would push the time to raise rates further into the future.

Government debt has more than doubled since the crisis and now stands at 16.7 trillion or about 100% of GDP. Such high levels of debt-to-GDP have not been seen since the end of the Second World War. Government’s massive borrowing gives it a strong incentive to keep the interest rate it pays as low as possible to avoid piling on even more debt. With most of the government borrowing concentrated in short-term securities, it is in its best interest to have short-term rates close to zero. Fed’s independence would not be a barrier if it acted in the interest of the country and kept rates low. In the 1940’s and 50’s, interest rates well below the rate of inflation amounted to what is now known as Financial Repression. History appears to be repeating.

Lastly, demographic changes in the US, as a result of retiring baby boomers, present serious economic challenges. Lower consumption levels reduce the rate of growth while future promises in entitlements are estimated at a gigantic $200 trillion, according to some . The economy is unlikely to have such hypergrowth to support those levels of spending. Thus, the government debt is likely to start increasing massively by the end of the decade. Larger debt is likely to extend financial repression much further into the future while inflation is likely to rise.


The objective of yield-oriented investors is to generate a steady cash flow from a moderate return with a high degree of safety of the principal capital invested. This applies primarily to retirees who need a relatively fixed income for living expenses. It is well known that a loss of principal account value, especially in the early years of retirement, can have very negative or even devastating consequences in one’s ability to fund future needs. This is because assets get depleted quickly at low valuations and can no longer recover from a low base.

Years of missed returns cause serious setbacks and greatly increase the risk of running out of money during lifetime. Many institutional investors such as endowments, foundations, and pension plans have substantial assets in safe investments. An extended period of near zero returns impairs the ability to meet their objectives and in some cases can even threaten their long-term viability.

Ultra-safe investments caused investors to experience a yield famine. The Great Irish Famine in the mid-nineteenth century caused a massive death toll, disease, and misery because the majority of the population became almost entirely dependent on a single source of food: the Irish Lumper potato. Ironically, even during the famine, the country overall produced enough food to feed its people. Starvation occurred because the food produced within the country did not get to the people,  for various political and economic reasons,. Likewise, there appears to be a sufficient amount of yield in the investment universe today. However, for different reasons, it is not getting to a large category of investors.


While depositors are starved for yield, the financial industry continues to feast. Profits at big banks and financial institutions have recovered quickly after the crisis and are making new highs again. This is in spite of the fact that banks are quite inefficient and have high costs. Running a large bank is an expensive operation that includes rents for headquarters and branches, expensive internal systems, regulatory overhead, and large salaries and bonuses paid to senior staff and executives.

Ironically, after having been one of the principal causes of the crisis, the financial sector is now reaping 30% of all domestic corporate profits while contributing only 8% to GDP. As the chart below shows, on a percent of GDP basis, the Financial Profits are at all-time highs. Clearly, financial institutions are having a profit bonanza and getting more than their fair share from the income pie. Largely because of the Fed policy, their profits are subsidized by depositors who lend money at zero interest.


Source Atayant Capital

Based on these facts one would deduce that investing in banks should produce outstanding results. Nonetheless, experience shows that stocks of the financial companies have not been on par with the expectations. Why the difference? One explanation is that a large part of the profits since 2007 has gone to fight alleged misbehavior. According to Bloomberg, the six largest banks in the US paid $103 billion in legal costs and settlements with the regulators for selling shoddy mortgages, misleading investors, or manipulating the LIBOR rate. By comparison, their total payout in dividends to shareholders of common and preferred stock amounts to $98.6 billion during the same time.


Given the dire state of affairs for savers, one would assume that a large part of them would revolt and vote with their feet. However, paradoxically perhaps, the amount of money on deposit with the banks has increased by 70% from $4 trillion to $6.8 trillion between 2008 and 2012. It appears that businesses, institutions, and individuals are making this voluntary decision because they either too scared, don’t fully understand the consequences, are unaware of other choices, or are simply complacent.

Most people automatically associate investing with the stock market. This is an incorrect view since every held asset type and liability (such as mortgage or credit card debt) should be considered. For example cash in a bank account is an investment losing value because of inflation. Business or personal debt is an investment choice that can earn the interest rate currently being paid to the lender. For example, a business paying 7% interest on a loan can “invest” in its own debt by paying it off. Importantly, this is a risk-free rate of return for that business.

Mental accounting biases are likely responsible for viewing investment accounts separately from cash and from debt. Instead of thinking in terms of managing investments, both advisors and investors should be thinking of managing balance sheets.

Typical balance sheets tend to be suboptimal. Investors holding cash and low-yield assets while simultaneously having debt are subsidizing the financial system.  Some low-yield assets may be hidden in the portfolio inside money-market funds or diversified bond funds. Investors may have much higher allocations than they are aware of in such assets. Well-diversified portfolios also tend to have a portion of assets in high-risk investments or strategies. The high-risk part of the portfolio tends to underperform more conservative investments on a risk-adjusted basis. (Reasons for such underperformance can be the object of another analysis.)

Both low-yield allocations and high-risk allocations can generate a serious drag on the balance sheet performance. As a general rule, investors should avoid extremes and reallocate these types of holdings to value investments with moderate risk and positive expected real rates of return. Investors may be surprised to find that the overall risk of their balance sheet may remain nearly the same, while long-term returns could be substantially higher.

Because of the highly profitable nature of the banking business, investors can learn a great deal from the way these financial institutions are managing their own investment portfolios. Moreover, by understanding that the principal role of the Fed is to deal with financial crises and protect the banking system investors can have a higher degree of confidence in their investment strategy of following the model of financial institutions.

Astute investors are able to find opportunities for attractive yield and returns from different sources:

  • Bypassing banks and investing in similar ways by lending to consumers, governments, municipalities, and businesses.
  • Implementing strategies used by financial institutions, including capturing the spread between short term and long term interest rates, insuring risk, purchasing securities at a discount, and capturing premiums for illiquid investments.
  • Lending to banks by investing in the bonds or preferred stock issued by banks and other financial institutions.
  • Identifying investments with solid collateral and attractive cash flows such as commercial properties and master limited partnerships.

The “great rotation” that many speak about does not have to be from fixed income to equities but rather from a yield famine to real return.

–Robert Andriano, CFA is the Chief Investment Officer of Pure Investment Advisers, Inc., a boutique investment management firm specializing in portfolio management and comprehensive balance-sheet optimization. For more information please visit the company website at

As an impartial, nonprofit forum for the finance and banking industries NYSSA encourages discussion and debate among its member and other professionals. Commentaries, however, should be taken as the sole opinion of the author(s) and not of NYSSA. If you would like to submit a commentary to the Finance Professional's Post, send your article to the editor.


Commodities Are Different (In a “Full World”): Part 3

(This post is the third in an occasional series on why stronger oversight of commodity markets must be a public policy priority.)

JPMorgan has announced that it plans to exit the physical commodities businesses, while remaining committed to its historic roots in commodity financing and risk management, and to the precious metals business.  Is this Jamie Dimon recognizing an unstoppable paradigm shift now taking place in the financial sector as policymakers finally find the political will to reign in the power of too big to fail banks?

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My CFA Experience (Level III): Vy Bui

What better way to close my CFA exam journey than by sharing my Level III study strategies, which helped me pass the June 2013 exam?

My first two articles talked about my CFA Level I exam experience and my third article talked about how my study strategies changed from Level I to Level II. So, this article focus on the changes (in detail) I made to surmount the difficulty of Level III materials and the essay exam format of the morning section. Hopefully, this will inspire current and/or future CFA candidates to pay special attention to their study strategies.

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"You're Fired!" Now What? Survival Strategies

Chances, are, you saw it coming.  You no longer have a job.  Technology, globalization, and fierce competition have created a tough job market. Downsizing. Re-aligning. Right sizing. Regardless of the cold corporate rhetoric, to protect yourself you must have an action plan.

Here are survival strategies to help put you back in charge of your career.

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CFA® Level I Weekly Review - Session A Thursday

Thursday July 23, 2015
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Tuesday July 28, 2015
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Saturday August 8, 2015
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Wednesday September 2, 2015
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Wednesday September 9, 2015
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Sunday September 20, 2015
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CFA® Level I 4-Day Boot Camp

Thursday November 12, 2015
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