Investment commentary numbers: How to get them right

UntitledInvestment commentary calls for lots of numbers: benchmark and portfolio returns, economic data, and more. When you get those numbers wrong, you undercut your credibility and embarrass yourself.

I have some ideas about how you can avoid mistakes by proofreading and checking your facts.

My expensive mistake

A bad experience impressed me with the importance of checking numbers. Reading the professionally printed copy of my employer’s third-quarter commentary, I noticed a goof. It referred to the second quarter, instead of the third quarter, in one spot. This happened even though four of us had read the piece before it went to the printer. However, the eye tends to read what it expects to see. We all glossed over my error. Oops!

That was an expensive mistake because we had to get the piece reprinted. However, at least we avoided the embarrassment of clients seeing our mistake. Also, it spurred me to develop techniques for catching numerical errors. 

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Water Megatrend Creates Compelling Backdrop for Investors

Despite water covering 70.0% of the earth’s surface, only 3.0% is fresh, and just 0.5% accessible to humanity. Presently, 2.5 billion people, almost 40.0% of the world’s grain production, and approximately 25.0% of global GDP are at risk because of non‐sustainable water use1. The problems of water scarcity, contamination, and uneven distribution of the resource are becoming increasing prevalent around the world, as water use has grown at more than twice the rate of last century’s rise in population2. Consequently, pressure is mounting on the demand side as the global population increases while the availability of potable water dwindles and lessens supply. The supply and demand imbalance also increases pressure on food and energy security around the globe. As a result, according to Ladenburg Thalmann Senior Water Equity Research Analyst, Richard Verdi, water will be the resource to define the next several decades via a substantial increase in its value.

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Not game over for China

If popularity has its price, then major investors in China are now paying those consequences. Chinese stock markets have taken a plunge and continue to face a roller-coaster path of sorts. There’s no telling how long the ride is or what turns lie ahead, which means investors have been increasingly concerned over the uncertainty.

But it’s not the time to panic. It never really is. The foundation of investing isn’t and never was based on making flash gains. It’s always been about making strategic decisions for a potential haul in the long term.

We still believe in China’s potential because many companies still have attractive long-term growth prospects, in our opinion. The challenge for us as stock pickers, of course, is what to buy.

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Avoid Turning your Investment Firm into a Technology Company

As information technology’s development accelerated, the investment industry took notice and began developing systems that would automate formerly manual tasks. Over time these systems have evolved into something more. While their benefits are continually vaunted by vendors and end users alike, the processes of ensuring that these systems are properly implemented and maintained belong, first and foremost, to the firm.

It is easy to become seduced by the technological attraction
that systems offer but if an investment firm does not clearly
and thoroughly understand the purpose of a system, the
technological dream will quickly turn into a nightmare. In
general, systems are there to facilitate tasks, such as data
management, analysis and reporting. Once that is known, a
system must be properly “placed” within a firm. That is, it is to be maintained by the operations team, supported by IT, managed by specialists (performance, risk, etc.), used as a feedback tool by the front office and fund sponsors, and as a means of communications to the clients.

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Don’t Overlook Benchmarks

ChartInvestors are presented with a barrage of marketing material from funds and
 managers trying to raise capital, and
 what all these reports have in common is 
that they all focus on performance. That
 is not surprising considering the 
relatively large number of funds available with the few strategies being 
used, managers feel they can only
differentiate themselves through performance. Attend enough sales presentations and you will have heard how “my long-short equity strategy has consistently outperformed the market and that is why you need to invest with us.” By the way, the “Past performance is no indication of future results” is usually said with much less gusto.

This is not to disparage managers and funds alike but rather to help investors identify the good managers whose past performance is more than likely a good indication of their future performance. Although a thorough performance evaluation requires the skill set of a performance specialist, any investor can begin such an evaluation by questioning one simple and important component of the performance marketing material, which is the benchmark.

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Are financial predictions too risky for investment commentary writers?

CrystalballIs it a bad idea to make predictions in your investment commentary because clients will slam you when you’re wrong? Whenever you make predictions, you run the risk of being wrong. But being wrong isn’t a problem, in my mind, if your prediction reflects good thinking.

Lesson from my winning prediction

Accurate predictions alone don’t make you seem smart. I remember the time I participated in a betting pool with members of an investment policy committee. I had to predict where a certain number—probably the 10-year Treasury rate—would be one quarter later. 

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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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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.


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 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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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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Recent Research: Highlights from February 2015

"On the Holy Grail of “Upside Participation and Downside Protection"
The Journal of Portfolio Management (Winter 2015)
Edward Qian

Upside participation and downside protection” is a popular motto for many investors. It has taken on much more significance in recent years, in the wake of the global financial crisis. But how do we define and evaluate strategies from the perspective of “upside participation and downside protection”? In this article, the authors present an analytic framework in which they provide a quantitative definition of upside and downside participation ratio, define participation ratio difference as a goodness measure for defensive strategies, and prove a relationship between the participation ratio difference and traditional alpha. As an illustration, they apply this new analysis to the S&P 500 Index and its 10 sectors and show that defensive, low-beta sectors tend to have positive participation ratio differences, while cyclical, high-beta sectors tend to have negative participation ratio differences. This finding is consistent with the low-beta/volatility anomaly and provides another explanation for the popularity of low-beta/volatility strategies.

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Book Review: Dead Companies Walking

Dead-companies-walkingScott Fearon's Dead Companies Walking: How A Hedge Fund Manager Finds Opportunity in Unexpected Places opens with an excellent summarization of his book. He begins, "My specialty is identifying what I call 'dead companies walking' which is what I call businesses on their way to bankruptcy and a zero-out share price." Fearon is no stranger to the task, having been doing this since he started his hedge fund in 1991. Since its founding, the fund has had only one down year.

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The Human Element in Investment Decisions



Making strategic investment decisions is not a task that should be taken haphazardly. Managers and MBA students spend time studying appropriate decision criteria such as net present value (NPV) to aid in making profit-maximizing decisions. However, in discussing investment decisions with practicing managers over the years, we sensed that managers often systematically deviated from profit maximization. In particular, we noticed that managers often equate changes in scaled profit measures (e.g., changes in return on investment [ROI]) with changes in total profits (i.e., marginal profits). This causes them to deviate systematically from profit maximization with respect to strategic investment decisions (e.g., research and development [R&D] investments, capital investments, acquisitions) by avoiding investments that increase total profits yet are less profitable than their average current investment. In other words, current levels of average profit create an anchor by which investments are assessed. This decision-making behavior, subtle but critical, was recently demonstrated by NYU Stern Management Professor Zur Shapira.

Professor Shapira, along with Carlson School of Management Professor J. Myles Shaver, devised studies that teased out this counter-productive pattern and described it in “Confounding Changes in Averages With Marginal Effects: How Anchoring Can Destroy Economic Value In Strategic Investment Assessments.”

Read the full paper here.



Book Review: Bonds Are Not Forever


This book is recommended for anyone interested in the contemporary role of bonds in investment portfolios. The author explores the history of debt from ancient to modern times and discusses the growth of derivatives, developments in risk management, inflation in the modern era, the political backdrop of today’s debt standoffs, and why “bonds are not forever.”

Bonds Are Not Forever: The Crisis Facing Fixed Income Investors explores the history of debt from ancient to modern times. It discusses the growth of derivatives, developments in risk management, inflation in the modern era, the political backdrop of today’s debt standoffs, and why “bonds are not forever.”

Author Simon Lack is well qualified to present such a wide-ranging and timely discussion, having spent his entire career in bond trading, derivatives, hedge funds, and investment management, including 23 years at J.P. Morgan overseeing some 50 professionals in a highly profitable group and sitting on the firm’s investment committee. In 2009, he founded SL Advisors, LLC (a registered investment adviser), and he is involved in a number of community volunteer boards. Often quoted in the business press, Lack is the author of the international bestseller The Hedge Fund Mirage and frequently speaks on financial subjects.

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Recent Research: Highlights from November 2014

"Let’s Save Retirement: Repairing America’s Broken System of Funding Workers’ Retirement"
The Journal of Retirement 
Russell L. Olson and Douglas W. Phillip

Far too few American workers can look forward to financial independence as they age. Many will be obliged to extend their working lives, some into their seventies. A patchwork of defined contribution (DC) retirement plans now serve as the primary retirement saving vehicle in the private sector, but they are complex, costly, and challenging for employers and employees to manage. This article presents a comprehensive set of recommendations for a unified private DC pension system to cover all working Americans, with a single set of rules and without cost to the government. A key part is the creation of broadly diversified trusteed retirement funds (TRFs), whose sponsors are trustees, with fiduciary responsibilities. Employee contributions will automatically go into a broadly diversified TRF unless the employee either opts out or selects a preferred TRF or the employer already sponsors a defined benefit (DB) pension plan. TRFs will relieve employers from fiduciary responsibility for all future DC contributions. To protect retirees from inflation, longevity, and asset price volatility risk, retirees will be encouraged to use their TRF savings to buy either an immediate or deferred indexed annuity. A new government agency, the Federal Longevity Insurance Administration, will enable private insurance companies to provide low-cost annuities.

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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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Recent Research: Highlights from Summer 2014

"Return Predictability and Dynamic Asset Allocation: How Often Should Investors Rebalance?"
The Journal of Portfolio Management (Summer 2014
Himanshu Almadi, David E. Rapach, and Anil Suri

To exploit return predictability via dynamic asset allocation, investors face the important practical issue of how often to rebalance their portfolios. More frequent rebalancing uses statistically and economically significant short-horizon return predictability to aggressively pursue the dynamic investment opportunities afforded by changes in expected returns. However, the degree of return predictability typically appears stronger at longer horizons, which, along with lower transaction costs, favors less frequent rebalancing. The authors analyze the performance effects of rebalancing frequency in the context of dynamic portfolios constructed from monthly, quarterly, semi-annual, and annual return forecasts for US stocks, bonds, and bills, where the dynamic portfolios rebalance at the same frequency as the forecast horizon. Along the transaction-cost/rebalancing frontier, monthly (annual) rebalancing provides the greatest outperformance when unit transaction costs are below (above) approximately 50 basis points, and dynamic portfolios based on annual rebalancing typically outperform the benchmarks for unit transaction costs well in excess of 400 basis points.

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The Evolution of Value Investing: Past, Present, and Beyond

Considering the popularity of value investing, it is somewhat surprising that a paper recently published by Joseph Calandro in the Journal of Investing was the first formal attempt to categorize the development of this highly-effective and influential school of thought over time. The following article summarizes this categorization of value investing’s past and present and offers suggestions on what its future may hold.

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Investment Management: Getting Your Foot in the Door

If you are contemplating career in investment management, you should know the winning formula to gain entrance – as well as what you can do if your skills and experiences aren’t exactly on point. I spoke with a number of hiring managers who, not surprisingly, told me that ideal formula is: 

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Recent Research: Highlights from June 2014

"Go Big or Go Home: The Case for an Evolution in Risk Taking"
The Journal of Investing (Summer 2014
Mike Sebastian

This article argues that alternative investments—private equity, real estate, and hedge funds—have natural advantages in risk and return over traditional stock and bond investments. A large allocation to alternatives relative to current institutional practice is needed for a material contribution to an institutional investor’s bottom line. Investors should consider whether moving toward an “efficiency” portfolio with an emphasis on low-cost passive management or an “opportunity” portfolio with heavy reliance on value added through active management—especially alternative investments—is most appropriate for them. Investors who can tolerate the cost, complexity, and illiquidity should consider opportunity-type allocations of 40% of their return-seeking assets to private equity, non-core real estate, and hedge funds. Over time, institutional investors will likely choose alternative investments and indexing as their primary investment options, and traditional active management will likely transform to take on qualities currently associated with alternative investments.

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Recent Research: Highlights from May 2014

"Constraints and Innovations for Pension Investment: The Cases of Risk Parity and Risk Premia Investing"
The Journal of Portfolio Management (Spring 2014
Wai Lee

In the current low real-yield environment, institutional investors are challenged as they try to achieve their often-fixed targeted returns within the confines of their investment policy guidelines. If much-discussed solutions, such as risk parity and risk premia investing, are the new answers, they must improve portfolio efficiency and flexibility in taking risks. This article explores the ways these proposed solutions may be successful. The author argues that the solutions neither introduce new assets that offer non-replicable, non-redundant return and risk characteristics, nor do they offer new asset-pricing theories that improve forecasts of asset returns or risks. Instead, their value proposition is more in the category of improved portfolio construction. They primarily benefit practitioners by providing more-efficient risk allocations, which they do by relaxing constraints to which pension investors are often subject, including restrictions on using leverage and short selling.

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Practical Ethics: Introducing a New Framework for Ethical Decision Making

More than any other factor, investors look for individuals and firms they can trust when hiring investment professionals to safeguard and grow their financial assets. Earning trust goes beyond compliance with applicable laws and regulations. Developing trust can only be earned by engaging in ethical conduct.

Recognizing and understanding the relevant ethical principles is the first step. The CFA Institute Code of Ethics and Standards of Professional Conduct embodies the fundamental ethical principles applicable to the investment profession. These include fair dealing, full disclosure, loyalty, and diligence, among others.   

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Equity Opportunities in Canadian Capital Markets

Toronto Stock Exchange (TSX) and TSX Venture Exchange (TSXV) – Canada’s major equities markets – are home to more oil and gas and energy services companies than any other global exchange group. Ranked first in the world by the number of listings in the energy sector, TSX and TSXV are the world’s leading marketplaces for oil and gas companies to list and go public.

More than 360 oil and gas companies are listed on TSX and TSXV, with a total market capitalization of over $407 billion. About 10% of these companies are headquartered outside of Canada. Supported by reliable access to North American and global capital, these companies have operations on several continents and maintain strong ties to key markets globally.

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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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Book Review: The Little Book

The-little-bookGrowth and Investment Portfolios (Little Books. Big Profits)

The title of the book may be The Little Book of Venture Capital Investing: Empowering Economic, but Louis Gerken delivered quite a large amount of venture capital (VC) coverage. The dramatic success companies like Google, Facebook, and Apple have given venture capital an aura of glamour and huge profits. The reality of VC and business start-ups is more complex and challenging. The role of companies coming out of this process has been transforming our lives. It fits in with the increasing popularity of entrepreneurship, which is now an important alternative career path. Entrepreneurship and business start-ups have moved from the creative fringes into the mainstream of what financial professionals need to learn about.

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Recent Research: Highlights from February 2014

"Contribution of Pension and Retirement Savings to Retirement Income Security: More Than Meets the Eye"
The Journal of Retirement (Winter 2014)
Billie Jean Miller and Sylvester J. Schieber

Recently, much concern has been expressed about the U.S. retirement system. Social Security is underfunded, while supplemental plans reportedly provide benefits half only that of Social Security and have gained little ground over the last 40 years. The shift to defined contribution plans is often seen as problematic. Some analysts suggest scrapping tax preferences for retirement plans and expanding Social Security. Much evidence that supplemental plans are coming up short on enhancing retirement security comes from the Current Population Survey (CPS). The analysis here shows that most income from retirement plans is not captured by the CPS or the Social Security reports developed using it. Ignoring retirees’ growing private retirement savings and income distorts the role played by private pensions, resulting in inaccurate assessments of retirees’ economic status. This error may bias policymakers’ judgment as to the right policies for an aging population and underfunded pensions.

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Recent Research: Highlights from January 2014

"Hedge Funds versus Hedged Mutual Funds: An Examination of Equity Long/Short Funds"
The Journal of Alternative Investments (Winter 2014)
David McCarthy

This article offers comparative analyses of equity long/short mutual funds and equity long/short hedge funds and indices. It first identifies a universe of liquid alternative mutual funds employing an equity long/short investment strategy similar to most equity long/short private hedge funds. It then provides a general profile of these mutual funds (e.g., size, start dates, sponsorship) before comparing their equity exposure and investment performance to that of private placement equity long/short hedge funds and indices. Based on the data analyzed, the article concludes that, as a group, diversified single-manager equity long/short mutual funds offer similar equity exposures and do not perform materially differently from comparable private placement hedge funds, at least as represented by leading hedge fund indices.

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The Quality Dimension of Value Investing

Buying high quality assets without paying premium prices is just as much value investing as buying average quality assets at discount prices. Strategies that exploit the quality dimension of value are profitable on their own, and accounting for both dimensions of value by trading on combined quality and price signals yields dramatic performance improvements over traditional value strategies. Accounting for quality also yields significant performance improvements for investors trading momentum as well as value.

Benjamin Graham will always be remembered as the father of value investing. Today he is primarily associated with selecting stocks on the basis of valuation metrics like price-to-earnings or market-to-book ratios. But Graham never advocated just buying cheap stocks. He believed in buying undervalued firms, which means buying high quality firms cheaply.

–Robert Novy-Marx is assistant professor of finance at the Simon Graduate School of Business at the University of Rochester, New York, and a faculty research fellow of the National Bureau of Economic Research.

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Book Review: The Effective Investor


Although certain passages of The Effective Investor are specific to South Africa’s economy and markets, the book has broad applicability beyond that country’s borders. A true renaissance man, author Franco Busetti renders the arcana of markets and modern portfolio theory accessible to both the novice investor and the experienced practitioner.

Franco Busetti, the author of The Effective Investor: The Definitive Guide for All South Africans, is a seasoned investment specialist. Trained as a chemical engineer, he also holds degrees in artificial intelligence and economics and is a CFA charterholder. In the 25 years that Busetti has worked in investment management, his “tours of duty” have included research director at Absa Securities and strategist and head of quantitative research at JPMorgan and Credit Suisse Standard Securities. The Effective Investor serves as a handy compendium on stock selection, portfolio management, and modern portfolio theory, with an emphasis on their practical application. Written in a tongue-in-cheek style, Busetti’s book not only informs but also entertains.

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Recent Research: Highlights from November 2013

"Are Risk-Parity Managers at Risk Parity?"
The Journal of Portfolio Management (Fall 2013)
Edward Qian

Risk parity has become an accepted investment strategy, to some degree. Its main advantage is its use of risk allocation, as opposed to the capital allocation used by the traditional asset allocation approach. A balanced risk allocation provides true diversification; therefore risk parity should deliver better risk-adjusted return over time. Despite the acceptance and the fact that the term “risk parity” has been in use for almost ten years, the investment community seems confused about risk parity’s true definition. Is it just a quantitative risk-budgeting technique? Is it about operational leverage? Or is it about high exposures to fixed income and low exposures to equities? In this paper, the author aims to define the principle of risk parity investing. He then examines a sample of risk parity managers, using the return-based style analysis pioneered by William Sharpe. The results show that, according to the defined principle, a number of risk parity managers in our sample are not using true risk parity.

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Recent Research: Highlights from July 2013

"Framing Lifetime Income"
The Journal of Retirement (Summer 2013)
Jeffrey R. Brown, Jeffrey R. Kling, Sendhil Mullainathan, and Marian V. Wrobel

We provide evidence that individuals optimize imperfectly when making annuity decisions, and that this result is not driven by loss aversion. Annuities are more attractive when presented in a consumption frame rather than in an investment frame. Highlighting the purchase price in the consumption frame does not alter this result. The level of habitual spending has little interaction with preferences for annuities in the consumption frame. In an investment frame, consumers prefer annuities with principal guarantees; this result is similar for guarantee amounts below, at, and above the purchase price. We discuss implications for the retirement services industry and its regulators.

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Book Review: What Every Angel Investor Wants You to Know


The term "angel investors" originally was used for wealthy individuals who financed Broadway plays. Today it describes those who finance business startups. With the growth of entrepreneur activity in New York, it has gained new prominence for both those involved and startups, and for those who may help finance them. Most angel investors don't make any money. Most business startups fail. Many business startups have no informed idea on how to get funding. Angel investors can provide the initial capital before the business is ready to seek venture capital funding, making What Every Angel Investor Wants You to Know: An Insider Reveals How to Get Smart Funding for Your Billion Dollar Idea a significant asset. The book, by New York Angels Chairman Brian Cohen, is a systematic step-by-step guide with "Takeaways " at the end of each chapter and real-life examples—which are essential.

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Book Review: Hungry Start-Up Strategy


Entrepreneurship has become an increasingly recognized career path. Many business schools now offer courses on entrepreneurship, and have become business start-up networks. College students have created successful businesses. College graduates have gone the start-up route, instead of working for an existing organization. Business executives and academics have chosen the start-up route as a new career path. In the financial services industry, the consolidation and constant layoffs have prompted some to explore starting a business.

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Recent Research: Highlights from March 2013

"Derivatives in Islamic Finance: There is No Right Way to Do the Wrong Thing – Opportunities for Investors"
The Journal of Investing (Spring 2013)
Andreas A. Jobst

Derivatives are few and far between in countries where the compatibility of financial transactions with Islamic law requires the development of shari’ah-compliant structures. However, as Islamic finance continues to develop rapidly, the rising opportunity cost of limited shari’ah-compliant risk transfer mechanisms has raised questions about the scope of religious restrictions on the use of derivatives, and the scope for efficient risk management techniques for investors. Islamic finance is governed by the shari’ah, which bans speculation and gambling, and stipulates that income must be derived as profits from the shared generation of goods and services between counterparties rather than interest or a guaranteed return. The article explains the fundamental legal principles underpinning Islamic derivatives by reviewing accepted contracts and the scholastic debate surrounding existing financial innovation in this area, in order to generate an axiomatic perspective on a principle-based permissibility of derivatives under Islamic law. An overview of recent standardization efforts also is provided.

"Pricing American Options in the Heston Model: A Close Look at Incorporating Correlation"
The Journal of Derivatives (Spring 2013)
Peter Ruckdeschel, Tilman Sayer, and Alexanger Szimayer

The Binomial model and similar lattice methods are workhorses of practical derivatives valuation. But returns processes more realistic than lognormal diffusions with constant parameters easily create difficulties for them. One of the most important extensions of the Black-Scholes paradigm is to allow stochastic volatility, but even nonstochastic timevarying volatility destroys the important property that the tree recombines, which limits the growth in the number of nodes as time advances. Stochastic volatility introduces a second random variable, which then requires adding another dimension to the tree, under the constraint that the return and volatility changes must maintain the same degree of correlation as in the data. The Heston model features correlation in return and volatility shocks, but building it into a lattice is tricky. In this article, Ruckdeschel, Sayer, and Szimayer develop a lattice method that begins with a binomial tree for the volatility and a trinomial tree for stock price, and then connects them in such a way that the empirical degree of correlation between return and volatility is maintained. Efficiency relative to existing methods is increased, and in some cases it is possible to improve performance further by matching higher moments as well.

"Key Drivers of Private Equity Firm Certification at Initial Public Offering"
The Journal of Private Equity (Spring 2013)
Mike Hopkins and Donald G. Ross

Private equity firms have been shown to add considerable value to investee companies. This article examines buy-side financial analyst perceptions of the determinants of private equity firm value added. The findings reveal significant relationships between the attractiveness of private equity firms’ IPOs and 1) their reputations, 2) their level of retained ownership, 3) the duration of their involvement prior to the IPO, and 4) the interaction between duration and intensity of involvement. The research reveals certification effects are best explained by theories of resource exchange and reduced informational asymmetries with reduced agency risk being a much lesser influence.

"An Investor’s Low Volatility Strategy"
The Journal of Index Investing (Spring 2013)
Li-Lan Kuo and Feifei Li

Investors are displaying a fast-rising appetite for low volatility strategies, given growing academic and empirical evidence of consistent outperformance over the markets from which they are drawn. However, many existing low volatile strategies are optimized, creating biases toward smaller cap stocks and over-concentration in a small number of sectors and/or countries. Instead, we develop a heuristic-based design that leads to a practical portfolio with a superior Sharpe ratio as well as more investor-friendly attributes, including a lower turnover rate, higher investment capacity, relative transparency, and broader market representativeness.

NYSSA Discount on Journals


Recent Research: Highlights from February 2013

"Volatility, Correlation, and Diversification in a Multi-Factor World"
The Journal of Portfolio Management (Winter 2013)
Richard Roll

In a multi-factor world, diversification benefits do not generally depend on correlation. Investors can restructure portfolios to align factor sensitivities. This implies that diversification benefits depend only on the idiosyncratic volatility that remains after restructuring. Similarly, the risk reduction that follows adding an asset to an existing portfolio does not depend on the asset’s correlation with the portfolio. These implications evince the fundamental importance of measuring the underlying factors and estimating factor sensitivities for every asset. Other researchers have investigated several methods for measuring factors. An easy-to-implement general method involves specifying a group of heterogeneous indexes or traded portfolios. Exchange-traded funds (ETFs) could be well suited to this purpose.

Continue reading "Recent Research: Highlights from February 2013" »


Recent Research: Highlights from December 2012

"Framework for Hedge Fund Return and Risk Attribution"
The Journal of Investing (Winter 2012)
Rob Brown

This article provides a framework for hedge fund return and risk attribution through the construction of a relevant benchmark. It is shown that volatility is a source of systematic risk, volatility measures based on equity market returns are more robust, fees have averaged between one-half and one-third of total gross returns, and high explanatory power can be achieved without the use of exotic systematic risk factors. Finally, the article suggests that alpha and systematic risk loadings are best estimated when regressed on gross returns and that systematic risk exposures are multi-dimensional and effectively modeled using a four-factor model. Hedge fund performance is determined by exposure, skill, and cost. The framework presented here provides robust attribution to exposure, skill, and cost.

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Book Review: The Crisis of Crowding


One of the most striking and important books on investing and risk management appears to be something it is not. Upon first glance of The Crisis of Crowding: Quant Copycats, Ugly Models, and the New Crash Normal (Bloomberg) (and not being acquainted with Prof. Ludwig Chincarini’s work), I wondered how a bunch of paper flowers on the wall was related to investing. After closer examination, I quickly learned that these were not paper flowers, but a pile of darts all stacked together on the dart board. At that point, I realized that Prof. Chincarini’s book would be essential reading for me. I wanted to learn how investors would pile into—and out of—the next big thing after the mortgage securities debacle of 2008. This informative narrative was an investigative and methodical look into major financial crises and the demise of Wall Street.

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Investment Beliefs

What are your investment beliefs?

Such a simple question—and so hard for most market participants to answer. Go ahead, take a shot at making a list of your beliefs and see what you end up with.

Continue reading "Investment Beliefs" »


Recent Research: Highlights from October 2012

"Integration of Structured Finance Exposures in Basel II Model: Analytical Results"
The Journal of Fixed Income (Fall 2012)
Kilian Plank

For efficiency reasons or because of a lack of detailed data, financial institutions frequently treat structured finance securities similar to conventional fixed-income products such as bonds or loans, which are characterized by rating, correlation, and loss-given default. Structured finance securities, however, have a specific risk profile. They tend to concentrate losses in adverse states of the systematic risk factor. This fact implies that simply adopting risk parameters of conventional bonds or loans is an inappropriate technique. The author shows that, under the Basel II framework, tranches have to be modeled with an increased factor loading. They derive an analytical calibration procedure for the Basel II model that appropriately captures the risk profile of tranches. This finding not only allows for seamless integration of structured and conventional exposures in a portfolio model, but also offers insights into the concentration effects of tranches.

Continue reading "Recent Research: Highlights from October 2012" »


Social Feedback

Last month, Robert Frank began his column in the New York Times with this sentence: “There may be no topic that more reliably divides liberals and conservatives than the relationship between success and luck.” The first few paragraphs of the piece—and the last few—had a political flavor to them. Like an Oreo cookie, the good stuff was in between.

I suppose you might find it hard to believe that the “good stuff” was academic research by three sociologists. The researchers had participants in their study rate the quality of songs that they previously had not heard. The bottom line: Their judgments were distinctly different depending on whether they received information about how others had already rated a particular song.

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Recent Research: Highlights from September 2012

"The Most Successful Theory of Economics "
The Journal of Derivatives (Fall 2012)
Mark Kritzman

Ross has called options pricing theory “the most successful theory in all of economics.” Kritzman expands on Ross’s comment to justify this assertion and notes the role of The Journal of Derivatives in disseminating the benefits of this most successful of theories to the world at large.

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Video: Major Changes in the Metals and Mining Industry

NYSSA's 12th Annual Metals and Mining Industry Conference featured a number of speakers from top business leaders. Raymond Goldie, PhD, VP, and senior mining analyst at Salman Partners, opened the conference with an industry overview.


Continue reading "Video: Major Changes in the Metals and Mining Industry" »


Sailing South: Investment in North African Emerging Markets


The North African states of Morocco, Algeria, and Tunisia lie just beyond the borders of Southern Europe. As investors look around for undiscovered emerging markets, how do these countries look?

Following the Arab Spring of 2011, the entire Arab world has received more attention in terms of the possibilities for democratization, economic revitalization, and also in terms of risks and opportunities for investment. The three western-most countries in the Arab landscape are all relatively small markets and exhibit differences both in their economies and the political risk factors they face.

Morocco is a liberalizing constitutional monarchy with a well-liked king devolving power in a more decentralized manner. Algeria is technically structured as a republic, but with tightly controlled political parties and little rotation of power-holders over time. It is effectively an authoritarian regime. Tunisia is an early transitional democracy in the process of consolidation, having ousted a regime not unlike Algeria’s. Although there is hope for meaningful change and advancement in Tunisia, the range of possible outcomes is currently quite wide. Although many people picture North Africa as a land of desert, the coastlines along the Mediterranean and the Atlantic Ocean are actually fertile, meaning that agriculture is still an important contributor to both the economy and employment in these countries. The entire region was known as a breadbasket as far back as Roman times. However, agriculture is an industry sensitive to drought, and so changing climate and rainfall patterns can wreak havoc with both economic and political stability in this region.

Continue reading "Sailing South: Investment in North African Emerging Markets" »


Investing in High-Tech in Russia, Part II: Challenges and Opportunities

In Part I of this article, I dealt with misconceptions about Russian high tech and Russian markets in general. I now explore investment opportunities outside of the familiar defense, oil, gas, and commodities sectors. I also examine financial and cultural barriers to investing, and macroeconomic considerations.


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Video: Family Offices in the US, Europe, and Asia

NYSSA recently held its 4th Annual Family Offices Conference, focusing on the latest trends in private weath management for  ultra-high-net-worth clientele. Based on her work as the executive director of the Institute for Private Investors, Mindy F. Rosenthal gave a comparative analysis of family offices in the US, Europe, and Asia.
  • US
    1. Offices typically have about 4 to 6 employees.
    2. Fully integrated wealth management shops are becoming increasingly rare, with small targeted offices becoming more prevalent.
    3. Larger, (usually) older family offices are looking to sustain infrastructure and keep younger generations engaged by partnering and sharing services with other offices for noncore services.
    1. Offices are relatively large with an average of 13 employees.
    2. Europeans are more likely than Americans to use concierge services that provide everything in one shop, but are looking to outsource more specialized services.
  • ASIA
    1. Family offices in Asia are smaller than those in the US and Europe.
    2. Over 80% of families' wealth is tied into their primary operating company. They will often use people in their business for personal financial dealings.
    3. Because family offices in Asia are still in the beginning stages, the focus should be on hiring quality staff and building.

In both the US and Europe, wealth is often tied to a business that is not necessarily the primary source of wealth. A major focus for wealth managers should be educating and engaging the next generation, along with finding the best resources.


Podcast: How Your Memories Cost You Money

Speaker Series: How Memories Cost You Money

If history repeats itself, why not change our actions? Surely this would prevent us from making the same mistakes over and over again—right?

Ken Fisher, author of Markets Never Forget (But People Do) and the "Portfolio Strategy" column in Forbes, says that our bad memories are to blame. Citing events and patterns from the not-so-distant past, Fisher believes the answer to America's latest financial woes can be found if we just look at our history.

What we forget:

  • Our memories fail to recognize the repetitive patterns of events we live through.
  • The 1990 recession, which strongly compares to the 2008 financial crisis, is rarely analyzed in public commentary.
  • In Republican presidential election years, returns are great; but in inaugural years, they are negative. Returns are negative in Democratic election years, but great in inaugural years.
  • Republicans and Democrats never look at their own weaknesses in terms of cycle history.



Investing in High-Tech in Russia, Part I: From Italy with Love...for Russia

In June 2011, I attended the 18th annual conference of the Multinational Finance Society. My hotel, located in a prosperous section of Rome, did not have hot water running, and the air conditioning didn’t work—conditions that seemed incongruous with the surroundings. But I was pleased to discover that the TV had 20 international channels, including five Russian ones, two Chinese, and several Arabic. I found the most interesting channel to be Bloomberg Europe, where I caught a conversation about investment in Russia.

Discussions about investment in Russia usually center on oil and gas, but the leader of the Bloomberg panel shifted the subject to high tech. While “Russian high tech” seems like an oxymoron thanks to our mainstream media, the perceptions of Russian high tech, and of Russian markets in general, are very different from reality.

Continue reading "Investing in High-Tech in Russia, Part I: From Italy with Love...for Russia" »


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NYSSA Market Forecast™: Investing In Turbulent Times
January 7, 2016

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Thursday November 12, 2015
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Monday January 11, 2016
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