Sensible Super - http://al.pn

Hitler Bicycle Rant

2012-02-17T15:13:00.002+11:00

Hitler rants about bicycles and reacts to Shane Warne and Victorian Premier Ted Baillieu's recent remarks that the registration of bicycles is not feasible. From the weekly cycle, http://www.theweeklycycle.com/

Hitler bicycle rant from www.theweeklycycle.com on Vimeo.

Guitar Zero: A Neuroscientist Debunks the Myth of “Music Instinct” and Learns to Play

2012-02-16T14:16:00.000+11:00

by Maria Popova

On nature, nurture, and the neural pathways of possibility.

Are musicians born or made? What is the line between skill and talent in any domain, and can we acquire either later in life? That’s exactly what neuroscientist Gary Marcusexplores in Guitar Zero: The New Musician and the Science of Learning — a fascinating journey into the limits of human reinvention...

...the idea that learning works best when the student tackles something that is just beyond his or her current reach, neither too hard nor too easy. In classroom situations, for example, one team of researchers estimated that its’ best to arrange things so that children succeed roughly 80 percent of the time; more than that, and kids tend to get bored; less, and they tend to get frustrated. The same is surely true of adults, too, which is why video game manufacturers have been known to invest millions in play testing to make sure that the level of challenge always lies in that sweet spot of neither too easy nor too hard.”

READ FULL POST HERE

Year-End Review

2012-01-10T10:31:00.000+11:00

January 9, 2012 , from Down to the Wire Newsletter

by Weston Wellington, Vice President, Dimensional Fund Advisors

Equity investors around the world had a disappointing year in 2011 as thirty-seven out of forty-five markets tracked by MSCI posted negative returns. The US did well on a relative basis and was the only major market to achieve a positive total return, although the margin of victory was slim. Total return for the S&P 500 Index was 2.11%, and the positive result was a function of reinvested dividends—the index itself finished the year slightly below where it started.

Throughout the year, investors seeking clues regarding the strength of business conditions or the prospects for stock prices were confronted with ample reason to rejoice or despair. Optimists could cite the strong recovery in corporate profits and dividends, the substantial levels of cash on corporate balance sheets, low interest rates and inflation, a booming domestic energy sector, continuing strength in auto sales, and record-high share prices for leading multinationals such as Apple, IBM, and McDonald's. Pessimists could point to persistently high unemployment, slumping home prices, tepid growth in retail sales, worrisome levels of government debt at home and abroad, and political gridlock in both Congress and various state legislatures.

Although the broad market indices showed little change for the year, there were opportunities to make a bundle—or lose one. Among the thirty constituents of the Dow Jones Industrial Average, thirteen had double-digit total returns, including McDonald's (34.0%), Pfizer (28.6%), and IBM (27.3%). But losing money was just as easy: The three worst performers in the Dow were Hewlett-Packard (–37.8%), Alcoa (–43.0%), and Bank of America (–58.0%). If nothing else, the substantial spread between these winners and losers discredits the argument we often hear that all stocks are now marching in lockstep and that diversification is ineffective.

Achieving even modest results in the US market required more discipline than many investors could muster, since investor sentiment fluctuated dramatically throughout the year and the temptation to enhance returns through judicious market timing often proved irresistible.

For fans of the "January Indicator," the year got off to a promising start as stock prices jumped higher on the first trading day, pushing the Dow Jones Industrial Average to a twenty-eight-month high. Bank of America shares jumped 6.4% that day, the top performer among Dow constituents. With copper prices setting new records and factory activity worldwide perking up, the biggest worry for some was the potential for rising prices and higher interest rates that might choke off the recovery. "Overheating is the biggest worry," one chief investment strategist observed. By April 30, the S&P 500 was up 8.4%, reaching a new high for the year.

Stocks wobbled through May and June but strengthened again in July. On July 19, the Dow Jones Industrial Average had its sharpest one-day increase of the year, jumping over 200 points, paced by strong performance in technology stocks. Just a few days later, however, stocks began a precipitous decline that took the S&P 500 down nearly 17% in just eleven trading sessions. The century-old Dow Theory—a sentimental favorite among market timers—flashed a "sell" signal on August 3, and on August 5, Standard & Poor's downgraded US government debt from AAA to AA+. As investors sought to assess the implications of sovereign debt problems in both the US and Europe, stock prices fluctuated dramatically, with the S&P 500 rising or falling over 4% on five out of six consecutive trading days in early August. Rattled by the sharp day-to-day price swings, many investors sought the relative safety of US Treasury obligations in spite of the rating downgrade, pushing the yield on ten-year Treasury notes to a record low. Stock prices hit bottom for the year on October 3 as some market participants apparently lost all confidence in equity investing. A Wall Street Journal article cited a number of individual investors as well as professional advisors who had recently sold all their stocks and did not expect to repurchase them anytime soon. "I feel like a deer in the headlights," said one.

As it turned out, the article appeared in print on the second day of a powerful rally that sent the Dow Industrial Average surging over 1,500 points during the next 19 trading days, putting it back into positive territory for the year.

What can we learn from a difficult year like 2011? As Dimensional founder David Booth is fond of saying, the most important thing about an investment philosophy is that you have one. Many investors (as well as some professional advisors) apparently decided to switch from a buy-and-hold philosophy to a market timing strategy in the midst of an unusually stressful period in the financial markets. We suspect few of those adopting the change would have been able to clearly articulate their investing beliefs and why they had shifted.

Legendary investor Benjamin Graham offered the following observation nearly forty years ago: "There is no basis either in logic or in experience for assuming that any typical or average investor can anticipate market movements more successfully than the general public, of which he himself is a part."

Good advice then, good advice now.

Mark Gongloff, "Investors' Forecast: Sunny With a Chance of Overheating," Wall Street Journal, January 3, 2011.

Jonathan Cheng and Sara Murray, "Stock Surge Rings in Year," Wall Street Journal, January 4, 2011.

Matt Phillips and E.S. Browning, "Tech Sends Stocks Soaring," Wall Street Journal, July 20, 2011.

Steven Russsolillo, "'Dow Theory' Confirms It's an Official Swoon," Wall Street Journal, August 4, 2011.

Damian Paletta, "U.S. Loses Triple-A Credit Rating," Wall Street Journal, August 6, 2011.

Tom Petruno, "Investors Stampede to Safety," Los Angeles Times, August 19, 2011.

Kelly Greene and Joe Light, "Tired of Ups and Downs, Investors Say 'Let Me Out'," Wall Street Journal, October 5, 2011.

Benjamin Graham, The Intelligent Investor (New York: HarperCollins 1949).

The S&P data are provided by Standard & Poor's Index Services Group.

Yahoo! Finance, www.yahoo.com, accessed January 3, 2012.

MASSIF – Cycling in France

2011-12-08T12:18:00.000+11:00

Massif from RAPHA on Vimeo.

Time for us to Count Our Blessings?

2011-12-06T10:14:00.000+11:00

December 4, 2011

The Good Old Days?

Jim Parker

, Outside the Flags

Vice President, DFA Australia Limited

"The hardest arithmetic for human beings to master," wrote the great American working man's philosopher Eric Hoffer, "is that which enables us to count our blessings."

It's a piece of wisdom worth recalling after another year that has tested the nerve of many investors and prompted questions about what current generations have done to deserve to live in such a tempestuous stage of history.

As the year winds down (if that's the word for it!), financial markets are gripped by uncertainty over developments in the Eurozone crisis. Each day brings fresh headlines that send investors scrambling from virtual despair to tentative optimism.

While not seeking to downplay the very real anxiety generated by these events, particularly in relation to their effects on investment portfolios, it's worth reflecting critically on our often second-hand memories of the "good old days".

A Brief History of the 20th Century

Nearly 100 years ago, Europe was engulfed by a war that destroyed two centuries-old empires, redrew the map of the continent and left more than 15 million people dead and another 20 million wounded. The economic effects were significant, with widespread rationing in many countries, labour shortages and massive government borrowing.

Just as the Great War was ending, the world was struck by a deadly pandemic — the Spanish flu — that killed some 50 million people on the most conservative estimate. About a third of the world's population was infected over a two-year period.

A little over a decade after the Great War and the pandemic, the Great Depression cut a swathe through the global economy. Industrial production collapsed, international trade broke down, unemployment tripled or quadrupled in some cases and deflation made already groaning debt burdens even larger.

In the meantime, resentment was growing in Germany over its Great War reparations to the Allied powers. Berlin resorted to printing money to pay its debts, which in turn led to hyper-inflation. At one point, one US dollar converted to four trillion marks.

In a new militaristic and nationalist climate, fascist regimes arose in Germany, Italy and Spain. Under Hitler, Germany defied international treaties and began annexing surrounding regions in Austria, Czechoslovakia before finally attacking Poland in 1939.

This led to the Second World War, a conflict that engulfed almost the entire globe as Japan pushed its imperial ambitions in Asia, while Germany sought to conquer Europe. More than 50 million died in the ensuring conflict, including a holocaust of six million Jews. The war ended with the invasion of Berlin by Russian and Western forces, while Japan surrendered only after the US dropped nuclear bombs on two cities, killing a quarter of a million civilians.

In economic terms, the war's impact was profound. Most of Europe's infrastructure was destroyed, millions of people were left homeless, much of the United Kingdom's urban areas were devastated, labour shortages were rife and rationing was prevalent.

While the 35 years after World War II were seen as a golden age in comparison, the geopolitical situation remained fraught as the nuclear armed superpowers, the Soviet Union and the USA, eyed each other. The breakdown of the old European empires and growing east-west tensions led the US and its allies into wars in Korea and Vietnam.

The cost of the Vietnam and Cold Wars created enormous balance of payments and inflation pressures for the US and led in 1971 to the end of the post-WWII Bretton Woods system of international monetary management. The US dollar came off the gold standard and the world gradually moved to a system of floating exchange rates.

In the mid-1970s, the depreciation of the value of the US dollar and the breakdown of the monetary system combined with war in the Middle East to encourage major oil producers to quadruple oil prices. Stock markets collapsed and stagflation — a combination of rising inflation alongside rising unemployment — gripped many countries.

While the 1980s and 1990s were a relative oasis of calm — aided by the end of the Cold War — there still was no shortage of bad news, including the Balkan wars, the Rwandan genocide and recessions in the early part of both decades.

In the past decade, there have been the tragedies of 9/11, the 2004 Asian tsunami, the 2011 Japanese earthquake, tsunami and nuclear crisis and, now, the financial crisis sparked by irresponsible lending, complex derivatives and excessive leverage.

Another Perspective

So from this potted history, it seems fairly clear that tragedy and uncertainty will always be with us. But the important point to take out of it is that previous generations have stared down and overcome far greater obstacles than we face today. And while it is easy to focus on the bad news, we mustn't overlook the good either.

Alongside the wars, depressions and natural disasters of the past century, there were some notable achievements for humanity — like women's suffrage, the development of antibiotics, civil rights, economic liberalisation and the spread of prosperity and democracy, space travel and advances in our understanding of the natural world and enormous advances in telecommunication. (Oh, and the Beatles.)

Today, while the US and Europe are gripped by tough economic times, much of the developing world is thriving. Populous nations such as China and India are emerging as prosperous nations with large middle classes. And smaller, poorer economies are making advances too.

The United Nations in the year 2000 adopted a Millennium Declaration that set specific targets for ending extreme poverty, reducing child mortality and raising education and environmental standards by 2015. In East Asia, the majority of 21 targets have already been met or are expected to be met by the deadline. In Africa, about half the targets are on track, including those for poverty and hunger.

Alongside these gains, new communications technology is improving our understanding of different cultures and increasing tolerance across borders, while providing new avenues for the spread of ideas in education, health care, technology and business.

Through forums such as the G20 and APEC, international cooperation is increasing in the field of trade, addressing climate change and lifting the ability of the developing world to more fully participate in the global economy.

Rising levels of education and health and workforce participation also mean the foundations are being built for a healthier and peaceful global economy, dependent not on debt, fancy derivatives and fast profits but on sustainable, long-term wealth building.

Anxiety over recent market developments is completely understandable and it is quite human to feel concerned at events in Europe. But amid all the bad news, it is also clear that the world is changing in positive ways that provide plenty of cause for hope and, at the very least, gratitude for what we already have. These are ideas to keep in mind when we scan the news and long for the "good old days".

"The hardest arithmetic for human beings to master," wrote the great American working man’s philosopher Eric Hoffer, "is that which enables us to count our blessings."

Rapha Rides the Victorian Alps - Enjoy Your Weekend!

2011-11-18T14:36:00.003+11:00

thanks to http://www.cyclingtipsblog.com for posting this again.

DFA Funds: The Porsche of Index Funds

2011-11-18T14:20:00.000+11:00

DFA Funds: The Porsche of Index Funds

Giro d'Italia 2012 - The promo / Il promo

2011-11-08T09:22:00.000+11:00

Real Insurance Summer Series kicks off this Tuesday, 8 November, 6PM

2011-11-03T11:23:00.000+11:00

Real Insurance Points Score Series powered by CycleNation from CycleNation on Vimeo.

2012 Forecast

2011-10-25T11:00:00.001+11:00

by Zachary Kanin from The New Yorker

The Struggle to Define What We Truly Need

2011-10-21T14:59:00.002+11:00

By CARL RICHARDS from New York Times

Carl Richards

Carl Richards is a certified financial planner in Park City, Utah. His sketches are archived here on the Bucks blog and on his personal Web site,BehaviorGap.com

There seems to be a constant battle between what we have, what we need and what we think we want.

About a year after my wife and I had our first child, we moved into a neighborhood with homes built decades earlier. Each had two or three bedrooms. We soon noticed that when people had a third or fourth child they moved from the neighborhood in search of more space. One day I mentioned this to my next-door neighbor, who was 70 at the time, and he expressed surprise.

He and his wife had raised their five kids in one of the smallest homes on the block.

One of the most challenging personal finance issues we all face is the ever-expanding definition of “need.” Things we once considered clear luxuries have somehow becomes necessities, often without any consideration of how the change in status happened.

Cars that seemed just fine now seem old fashioned. Then there are children and their cellphones. Only a few years ago it would’ve seemed outlandish for 14-year-olds to need one at all, let alone the latest iPhone.

Achieving clarity about the difference between our needs and wants remains one of the biggest challenges in personal finance and a tremendous source of potential conflict within families. While simple in theory, the calculation is much more complex in practice.

READ FULL POST HERE

twel2ve Trailer 2011

2011-09-30T11:47:00.000+10:00

Think Different - 1997 Apple Ad

2011-09-29T14:59:00.000+10:00

Geoff Mulgan: A short intro to the Studio School | Video on TED.com

2011-09-28T09:43:00.000+10:00

Geoff Mulgan: A short intro to the Studio School | Video on TED.com

Cycling UCI Road World Championships 2011 - Mark Cavendish Elite Race Wi...

2011-09-27T10:04:00.000+10:00

Buffett's best tip for personal finance

2011-09-23T14:15:00.000+10:00

John and Joe - a Nice September 11 Story

2011-09-13T09:55:00.000+10:00

Mark Matson's Very Best One-Liners

2011-08-26T14:40:00.000+10:00

Eugene Fama on Market Efficiency in a Volatile Market

2011-08-24T16:21:00.000+10:00

John Maeda - Creativity is core

2011-08-20T21:35:00.000+10:00

An Important Message for Every Investor

2011-08-18T10:19:00.000+10:00

Market Volatility Leads to Big Investor Mistakes

2011-08-18T10:11:00.000+10:00

Irrational Markets?

2011-08-14T16:12:00.002+10:00

Dan Ariely, Behavioral Economist at Duke University, speaks with BBC Business Daily, Thursday 11th August, 2011. Very interesting points to be summarised later...

2011 Tour de France SBS closing credits

2011-08-08T10:10:00.000+10:00

How the Race was Won - Strong Tempo Climbing by Cadel Evans on Col du Galibier (2,645m)

2011-07-25T13:46:00.003+10:00

Tour de France 2011 stage 18

Cadel Evans wins the 2011 Tour de France - Podium - Australian anthem by...

2011-07-25T13:26:00.000+10:00

A Morning With Paul Smith

2011-07-24T17:04:00.001+10:00

Interesting piece on Paul

A Morning with Paul Smith from The Goddess Guide on Vimeo.

1. Why Finance?

2011-07-24T16:49:00.000+10:00

ZARA · A/W 2011 SYDNEY opening party

2011-07-15T14:41:00.001+10:00

Why does it take an overseas visitor, in this case Spanish retailer ZARA, to give us such a great view of Sydney?

STAGE 10 - Image of the day / L'image du jour

2011-07-13T13:52:00.000+10:00

Betting on Growth

2011-06-30T14:46:00.001+10:00

From Outside the Flags, June 30, 2011
by Jim Parker, Vice President, Dimensional Fund Advisors

The world is changing. Economic fortunes appear to be switching from east to west. China and India are transforming into powerhouses as the established economies of the US and Europe struggle. What do investors do about it? The spectacular growth of emerging Asia in recent years, particularly in comparison to the developed economies of the West, has reignited a recurring debate about the relationship between economic growth and stock market returns.

It sounds intuitively right to most people that the best investment returns should be found in those countries with the fastest rates of economic growth. After all, shouldn’t investors receive the highest rewards in the most dynamic environments?

The problem is there is very little evidence that this is the case. In fact, study after study has shown there is little relationship between the speed of a nation’s economy and the performance of its stock market.

The table below plots annual GDP growth in constant prices against annual stock returns, as measured by MSCI indices and adjusted for inflation, in 16 developed economies over nearly four decades. Countries are ranked from the strongest growing over this period to the weakest. GDP and returns are in $US.

As can be seen, while Australia had the best real economic growth rate over this period, it ranked 13th out of 16 in terms of equity market returns. And while Sweden was fourth from the bottom of the table in economic growth terms, its market return was the strongest of the group. Likewise, Denmark – which was the second slowest growing economy over this period – had the second highest stock market returns.

These findings reflect those of my colleague Marlena Lee, who in a more detailed study published last year(1), found no statistical difference in the returns of high-growth countries versus low-growth countries. In fact, Marlena found that low-growth countries had higher average returns than high-growth countries. This applied both to developing and emerging markets.

This seeming contradiction can be explained by the nature of markets to discount new information very quickly when assessing future expected risks. So if there is news that the economy is growing strongly, investors may anticipate higher future profits and lower risks and bid up share prices to reflect that. This means that when prices are high due to lower discount rates, future expected returns are lower. Likewise, if the economy weakens and perceived risks rise, investors may bid down share prices in anticipation of lower profits or higher instability. So when discount rates push down prices, future expected returns are higher.

Another explanation for the economic growth-returns quandary is that individual equity markets, particularly in this age of globalisation, are not necessarily driven exclusively by the economies in which they are based. For instance, the US market represents more than 40 per cent of the MSCI World Investable Market Index. But does that mean a globally diversified market-cap weighted portfolio has a 40 per cent-plus exposure to the US economy? Not necessarily.

According to analysis by Standard & Poor’s (2), foreign sales reported as a percentage of sales of companies in the US S&P 500 index were 46.57 per cent in 2009. Among the fastest growing regions for US companies was Asia, where the proportion of foreign sales increased from 13.21 per cent in 2008 to 17.65 per cent in 2009. This stands to reason when you think of the global presence of US companies like Apple, Exxon Mobil, General Electric, Microsoft and Ford.

Similarly, in the UK market, firms like Pearson, Diageo, Vodafone and Rolls-Royce have a global presence. And in Australia, the market is dominated by large resource companies like BHP Billiton and Rio Tinto with substantial and growing exposures to the emerging economies of Asia.

In age of globalisation, where companies treat the world as their market and seek out buyers for their products and services from many different countries, it is simplistic to say that an exposure to a particular company in the country of its primary market listing equates to an exposure to that country’s economy.

Another theory is that the global investment landscape has fundamentally changed in the sense that we have entered a “new normal”. Features of this alleged new state include stubbornly sluggish economic growth, a general aversion to risk and a climate far less favourable to equity investment.

The problem with this theory is that history shows average returns from equity tend to be higher in bad times. While that might sound illogical, think about how the media and markets treat data surprises when the economy is in a trough.

For instance, the Australian economy recently recorded its worst quarter of economic growth since the recession of the early 1990s. The 1.2 per cent contraction in quarterly GDP was influenced by the run of natural disasters affecting Australia in the March quarter of 2011 and, on the surface, was shocking news.

The problem is the financial markets had been primed to expect a bad result. In other words, it was in the price. That meant when the numbers were released (and turned out slightly better than expectations), the Australian dollar actually bounced and the local equity market strengthened.

This is merely a way of reminding readers that markets are forward looking. We knew the news on the economy had been bad. But what matters for investors is what happens next. Without the powers of prophecy, we can’t ever know that. So we deal with it by diversifying according to our risk appetite and individual needs.

A final point is that a country’s economic footprint and its market footprint are different things. While China is a powerful global economic force, second only to the US in terms of GDP, its equity market – at least the part accessible by foreigners - is relatively small.

The MSCI All Country World Investable Market index, which covers 45 countries in developed and emerging markets, shows China’s weight at 2.34 per cent as of December 31, 2010, compared with 43.12 per cent for the US. By contrast, Australia, a middle-ranked economic power, has the sixth heaviest weighting in the MSCI at 3.45 per cent, equal to that of France(3).

So those who fret about an apparently declining US economy and the implications for their market-cap weighted global market portfolio should know that these changing economic forces are reflected in prices.

Country markets and national economies are different things. And the emergence of new economies and changing patterns of production and consumption will not just energise one country, but will change industries irrespective of borders.

For an investor that is a reminder of some familiar lessons – markets work, risk and return are related, diversification is essential and structure determines performance.

The author would like to thank Marlena Lee and Fiona Murphy for their assistance with this article

1. Lee, Marlena, ‘The Economics of Fiscal Deficits’, Dimensional, October, 2010

2. S&P-500 Global Sales, 2009

3. MSCI All Country World Investable Market Index, Factsheet, MSCI, Dec 2010

Discipline: Your Secret Weapon

2011-06-21T11:05:00.000+10:00

Outside the Flags
June 21, 2011

Jim Parker, Vice President, Dimensional Fund Advisors, Australia

Working with markets, understanding risk and return, diversifying and portfolio structure – we’ve heard the lessons of sound investing over and over. But so often the most important factor between success and failure is ourselves.

The recent rocky period in financial markets has brought to the surface some familiar emotions for many, including a strong urge to try to time the market. The temptation, as always, is to sell into falling markets and buy into rising ones.

What’s more, the most seemingly “well-informed” people – the kind who religiously read the financial press and watch business television – are the ones who feel most compelled to try and finesse their exit and entry points.

This suspicion that “sophisticated” investors are the most prone to try and outwit the market was given validity recently by a study, carried out by London-based Ledbury Research, of more than 2,000 affluent people around the world.1

The survey found 40 per cent of those questioned admitted to practising market timing rather than pursuing a buy-and-hold strategy. Yet the market timers were more than three times more likely to believe they traded too much.

“On the face of it, you might think that those who were trading more actively would be more experienced, sophisticated and able to control themselves,” the authors said. “But that seems not to be the case - trading becomes addictive.”

This perspective has been reinforced recently by one of the world’s most respected policymakers and astute observers of markets – Ian Macfarlane, the former governor of the Reserve Bank of Australia and now a director of ANZ Banking Group.

In a speech in Sydney2 , Macfarlane made the point that the worst investors tend to be those who follow markets and the financial media fanatically, extrapolating from short-term movements big picture narratives that fit their predispositions.

“Most people experience loss aversion,” he said. “They experience more unhappiness from losing $100 than they gain in happiness from acquiring $100. So the more often they are made aware of a loss, the unhappier they become.”

Because of this combination of hyper-activity, lack of self-control and loss-aversion, investors end up making bad investment decisions, Macfarlane noted.

These behavioural issues and how they impact on investors are well documented by financial theorists. Commonly cited traits include lack of diversification, excessive trading, an obstinate reluctance to sell losers and buying on past performance.3

Mostly, these traits stem from over-confidence. Just as we all tend to think we are above-average in terms of driving ability, we also tend to over-rate our capacity for beating the market. What’s more, this ego-driven behaviour has been shown to be more prevalent in men than in women.

A study quoted in The Wall Street Journal4 showed women are less afflicted than men by over-confidence and are more likely to attribute success in investment to factors outside themselves – like luck or fate. As a result, they are more inclined to exercise self-discipline and to avoid trying to time the market.

The virtues of investment discipline and the folly of ‘alpha’-chasing are highlighted year after year in the survey of investor behaviour by research group Dalbar. The latest edition showed in the 20 years to the end of December 2010, the average US stock investor received annualised returns of just 3.8 per cent, well below the 9.1 per cent delivered by the market index, the S&P-500.5

What often stops investors getting returns that are there for the taking are their very own actions – lack of diversification, compulsive trading, buying high, selling low, going by hunches and responding to media and market noise.

So how do we get our egos and emotions out of the investment process? One answer is to distance ourselves from the daily noise by appointing a fee-only financial advisor to help stop us doing things against our own long-term interests.

An advisor begins with the understanding that there are things we can’t control (like the ups and downs in the markets) and things we can. Some of the things we can control including ensuring our investments are properly diversified - both within and across asset classes- ensuring our portfolios are regularly rebalanced to meet our long-term requirements, keeping costs to a minimum and being mindful of taxes.

Most of all, an advisor helps us all by encouraging the exercise of discipline – the secret weapon in building long-term wealth.

1. ‘Risk and Rules: The Role of Control in Financial Decision Making’, Barclays Wealth, June 2011

2. ‘Far Too Much Economic News for Our Own Good’, Ross Gittins, Sydney Morning Herald, June 13, 2011

3. Barberis, Nicholas and Thaler, Richard, ‘A Survey of Behavioral Finance, University of Chicago

4. ‘For Mother’s Day, Give Her the Reins to the Portfolio’, Wall Street Journal, May 9, 2009

5. ‘2011 QAIB’, Dalbar Inc, March 2011

Schumpeter: Tutors to the world

2011-06-16T11:54:00.000+10:00

http://www.economist.com/node/18802722?fsrc=scn/tw/te/ar/tutorstotheworld

Shiller: Housing Could Fall Another 25% But Is Harder to Predict Than the Weather

2011-06-16T10:59:00.002+10:00

Eli Pariser: Beware online "filter bubbles"

2011-06-16T10:48:00.000+10:00

Thiel Foundation Fellows

2011-06-10T09:06:00.002+10:00

from Brian Caufield's SHINY OBJECTS blog at Forbes.com (25 May 2011)

Peter Thiel, the man who founded PayPal, funded Facebook, and mentored many of the entrepreneurs leading Silicon Valley’s post-bust boom may have just stuck a very sharp needle into the fast-inflating higher-education bubble.

On Wednesday, Thiel announced the appointment of twenty-four Thiel Fellows. It’s a diverse group of tinkerers, troublemakers, entrepreneurs, scientists, and idealists. Sorting through the more than 400 applications for the program “made me a lot more optimistic about this country,” Thiel says.

The common denominator: they’re all under 20, and they’re all opting out of the college experience as we know it. Instead of sitting through college lectures, they’ll be exploring on their own. During their two-year tenure, each fellow will get $100,000 from the Thiel Foundation. Perhaps more valuable: they’ll get access to Thiel’s network. This is the guy Facebook founder Mark Zuckerberg calls for advice.

Read some excerpts from an interview with Thiel here

The Economy: When Will Happy Days Be Here Again?

2011-06-09T09:32:00.000+10:00

Published: June 08, 2011 in Knowledge@Wharton

The latest economic reports show the U.S. recovery has faltered. But someday, surely, there will be a real recovery. What forces will drive that upturn? And will the healthy economy of the future look different from those of the past -- establishing a "new normal?"

Two intertwined factors are critical to any rebound, according to many experts: Home prices must stop declining and begin to rise, and consumers must spend more freely. In addition, exports must continue to grow and businesses and consumers must feel the government is making significant progress in resolving its deficit problems and clearing away regulatory uncertainty. Government efforts like stimulus spending and keeping interest rates low are not expected to be key factors in a recovery.

Given the many problems afflicting the economy, a vibrant recovery could be years away. The economy grew at an anemic 1.8% annual rate in the first quarter, down from 3.1% in the fourth quarter of 2010. On Tuesday, Federal Reserve chairman Ben Bernanke offered little optimism for the immediate future, calling the recovery "uneven" and acknowledging that it is unlikely that the central bank can solve the economy's woes by itself.

"It's too soon to be talking about a return to a healthy economy; there is a long mid-range period in our future," says Susan M. Wachter, a Wharton real estate professor, adding: "We are three, four, five years away from being back to what might be considered the 'new normal.'" The key obstacle, she notes, is the real estate market -- commercial and residential. "Construction is a job-intensive industry. It's usually the sector, in terms of employment, that leads the job recovery, and that's missing in action this time around. It makes the overall recovery far more vulnerable to other negatives." ...

READ FULL POST HERE

The Guilt of Trading Too Much

2011-06-07T09:29:00.002+10:00

From The New York Times
By JEFF SOMMER Published: June 4, 2011
FOR nearly all investors, frequent trading is a terrible proposition. Many people know they trade more than they should — but they just can’t stop.

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Weekend Business

The fundamental problem with frequent trading is that very few people can consistently outsmart the market — at least not while playing by the rules. Behavioral biases lead many of us to trade at the wrong times. It can be comforting, for example, to buy when stocks are rising and nearly irresistible to sell when they are plummeting, as they did last week. This means buying high and selling low, a fine recipe for financial misery. Furthermore, when costs mount, as they will when you trade frequently, the odds of beating the market are slim indeed.

It’s been long known that these kinds of mistakes have serious consequences. A study by Dalbar, a mutual fund research firm in Boston, found that in the 20 years through December, the average stock fund investor had annualized returns of 3.8 percent, compared with 9.1 percent for the Standard & Poor’s 500-stock index. The average person, in short, would have been much better off buying an index fund and holding it for 20 years.

Now, a new study of affluent investors shows that many well-heeled and apparently well-informed people feel compelled to trade frequently — believing all the while that their trading is excessive. The existence of this “trading paradox” is a central finding of the study, which was conducted by Barclays Wealth, a division of Barclays, the global bank based in London. The study, “Risk and Rules: The Role of Control in Financial Decision Making,” is to be published on Monday. The company provided a copy to The New York Times.

“This trading paradox exists, to one degree or another, everywhere in the world,” Greg B. Davies, the head of behavioral and quantitative finance at Barclays Wealth, said in a telephone interview. “Not everyone is prone to frequent trading, but among those who feel that they must trade frequently to do well, there is a substantial proportion who are troubled by their behavior. This is a novel finding for me.” ...

READ FULL STORY HERE

PERKINS THE HUMAN MACHINE

2011-06-07T09:25:00.000+10:00

from ABC TV http://hungrybeast.abc.net.au

Dragging the Property Anchor

2011-06-03T11:38:00.001+10:00

* Written by Robin Bowerman, Principal, Corporate Affairs & Market Development at Vanguard Investments Australia.

Dragging an anchor tends to unsettle even a seasoned sailor.
There is a similar sensation when house prices are sliding in the local neighbourhood. The value of our home is usually the foundation of our personal wealth.

But its impact goes far beyond the actual dollar value of a person’s house – it contributes significantly to the overall confidence level about spending and investing and financial security generally.

In the US there has been a national decline in house prices – according to the S&P/Case-Schiller national index, house prices in the US fell a further 4.2 percent in the first three months of this year. That puts US house values back to where they were in 2002.

So it is not surprising there is an increasing focus on the impact that such a dramatic fall in house prices is having on households. Articles and research studies abound on the emerging stress impacts on families of being trapped in houses with negative equity.

Back home, the way we sell houses varies across the country. But if you are a Melbourne resident the auction system is both popular and public. In many ways it is free street theatre. Auctioneers always seems to have voices that would be comfortable on stage – even if the language content could stand some literary improvement – and when prices break through the reserve everyone goes home happy.

Recently, more by chance than design, I found myself an interested spectator at two auctions in different parts of town but with one stunning common factor – not one genuine bid was proffered.

Now that is hardly a representative sample but it prompted further inquiry and the latest quarterly median price survey by the Real Estate Institute of Victoria showed a 6 percent drop in Melbourne’s median value from $601,000 to $565,000.

Nationally the figures are also down but not so much – capital city prices fell by 1.2 percent in the three months to April according to the RP Data Rismark Home Value Index.

Now given the strong growth in Australian house prices and the subsequent decline in affordability particularly for those looking to get their first home, some drop in house prices is almost a welcome breather – unless you are a seller.

The situation in the US is much grimmer in no small part because in the US people fell into the trap of regarding their house as an ATM and lending standards on sub-prime mortgages – we can now see with the benefit of hindsight - fell to unsustainable levels.

While in Australia we have been spared the sub-prime loan excesses the recent downturn in house prices is a useful reminder of two key points: property prices, like every other asset class, move in cycles. And you don’t want to be – as so many in the US are today – a distressed seller.

Four Things I Want You to Remember Me By

2011-05-20T13:09:00.000+10:00

By Clif Reichard (creichar@ball.com) at Harvard Business Review, http://blogs.hbr.org

Everyone knows a business needs profits, customers, and ethics. What not everyone knows is which of those should come first, second, and third. A lot of companies fail because they get the sequence wrong.

The most common mistake is to put profits first. That opens the door for bad things to happen. Numbers become all-important, and almost any behavior is justified in the name of profit. Cheating sets in.

Instead, a company's priority should be to protect and enhance its reputation through ethical behavior. Within the confines of that behavior, its next most important goal should be to attract and keep customers. Third is figuring out how to make money.

READ FULL POST HERE

The Apocalypse Grill

2011-04-07T09:08:00.001+10:00

Jim Parker, Vice President, DFA Australia Limited, April 2011

At a summer barbecue, diners were being assailed by an apparently knowledgeable gentleman who was providing in some detail a grim prognosis for the global economy for the next decades.

Aside from killing the relaxed vibe of the occasion, the prognosticator (we'll call him 'Joe') was keen to give the guests some free financial advice. This largely consisted of buying gold, storing up on food and guns, and heading for the hills.

Asked by one diner where he received this sombre information, Joe said 'they' were all saying it. The next question, of course, was if 'they' were all saying it, where was the evidence that 'they' were acting on the advice? A quick survey of the neighbourhood did not suggest people were packing their SUVs with tinned food and vacating the city. Indeed, life appeared to be going on as normal. Maybe the mysterious 'they' hadn't spread the word here yet.

One astute diner asked the prognosticator that if things were so glum, why he himself was not acting on his own advice, selling up and putting the mattress on top of his pick-up truck, with the cash stacked underneath.

His answer was that it wasn't quite clear when this catastrophe would occur, so he was staying put for now "see how things panned out". He also was keeping one foot in the market "just in case". And he had some cash on hand in a bank deposit.

It turned out Joe had spent a lot of time on chat forums engaging with the sort of people who sit up all night watching overseas market action and news events on their mobile devices, second by second and headline by headline and trade by trade. The world was a scary place, he had decided. And the best way to deal with the resulting anxiety was to plot his escape. All he had to decide was when.

The crowd at the barbecue mulled on his dilemma, until one man wearing the chef's apron and flipping steaks offered Joe some free advice of his own.

"These theories about financial and economic apocalypse—does anyone else know about them and believe them?" the chef asked. Joe nodded.

"Well, wouldn't those fears be reflected in the market prices?" the chef added. Joe nodded again, this time more slowly.

"So presumably the people who agree with you would be getting out of the market or at least thinking about? And if they are selling their holdings, someone else must be buying them, obviously someone with a different view to your own?"

Joe, a little less confident now, looked around the group for support. But all were quiet, apart from some nervous clearing of throats.

"But let's just say you are right," the chef said, now tossing the salad. "If your scenario is as bad as you say it will be, won't the price of our stock holdings be the least of our concerns? I mean you're talking about living on dog food."

Joe at this point was no longer thinking of heading for the hills, but backing out of dinner and just driving home to spare himself any further embarrassment. But the chef wasn't quite finished with him.

"But say you're only half right and things won't be so bad, there'll be some opportunities in the market won't there? And if you're diversified across a range of assets, you've got some protection, haven't you?"

The chef was now piling everybody's plates high and getting ready to add the dressing to top things off.

"You see, those things that keep you up at night, I don't worry about. I let the market do my worrying for me. Chances are all those concerns are already in the price. And with the greatest respect, it's very unlikely that you know anything that someone else hasn't already thought about.

"Me, I only take risks I'm comfortable with. I know the returns aren't going to be there every day or every month or every year. But my focus is 20–30 years from now. Of course, there is a risk that things could be worse than I'm hoping. But there are also risks they might be much better. There's always uncertainty, isn't there?"

Joe couldn't agree with that statement. Indeed, he was fairly certain he wanted to be out of this place right now. But the chef had put a kindly hand on his shoulder.

"Look, Joe, let's eat," he said, handing him a plate piled high. "Then we'll have some dessert and then we'll watch the football game on TV. After that, you can tell me whether you still think the world is about to end."

For the first time that night, Joe smiled.

Re-Imagining Learning in the 21st Century

2011-04-06T09:56:00.000+10:00

Planner-blogger draws on fun to deliver advice

2011-03-31T13:03:00.001+11:00

BY PAUL BEEBE

The Salt Lake Tribune

First published Mar 25 2011 12:03AM
Updated Mar 28, 2011 10:03AM

Park City • In the beginning was the word, written down in droves of books, magazines and fact sheets for anyone aspiring to riches to read.

Then along came Carl Richards.

You may know the Park City financial planner if you’re a fan of Bucks, The New York Times blog that helps readers puzzle out the mysteries of personal finance and make the most from their money.

Richards’ sketch-filled blog posts appear each Monday in the Times’ online business section and often in the Best of Bucks feature that runs in the newspaper on Saturdays. The posts draw large numbers of comments and are consistently picked up by the section’s home page, the most valuable piece of real estate with the biggest viewership.

“He is one of the strongest thinkers on how people handle money that I have ever run across,” said Ron Lieber, who edits the Bucks blog(http://bucks.blogs.nytimes.com) and writes the newspaper’s Your Money column...

READ FULL ARTICLE HERE

Matt Goss - Celebrating - 2011 Milan-San Remo

2011-03-23T09:10:00.002+11:00

Matthew Goss Wins 2011 Milan San Remo - Graham Watson Photo

2011-03-21T12:44:00.000+11:00

Live music by Elbow - Audio highlight - Absolute Radio

2011-03-21T11:08:00.000+11:00

Live music by Elbow - Audio highlight - Absolute Radio

Crazy Downhill Biking: Filip Polc Wins 2011 VCA

2011-03-17T13:36:00.004+11:00

Read more about 2011 Valparaiso Cerro Abajo here.

Tirreno-Adriatico 2011 - Stage 6 - Final kms - "Straordinario!"

2011-03-15T08:26:00.002+11:00

Impressive and gutsy win by Cadel Evans last night in Italy:

"A Glimpse of the Future of Education"

2011-03-10T10:09:00.002+11:00

Sal Khan talking at TED2011 about what he has done with Khan Academy. This guy really is changing the world. Please share.

Carl Richards - Behavior Gap and Prasada Capital

2011-03-09T17:03:00.000+11:00

If you do not subscribe to Carl Richards' newsletter then you should! Here is his latest offering:

...I tend to spend a lot of time talking and writing about worse-case scenarios: investors behaving badly, people losing their retirement, and difficult money conversations. However, I think it’s also worth remembering why we’re so focused on our financial security: our desire for a happy life and to provide a good life for our loved ones....

READ THE COMPLETE NEWSLETTER HERE

I also like the way that Carl approaches investment advice:

Let’s be clear: Investment success is not about skill. It is not about having bigger computers, or a huge research staff scouring the planet for the next hot stock.

Investment success is about behaving correctly. Despite knowing better, we make the same mistake of buying high and selling low over and over again. That is a huge problem and we think we’ve found the solution.

Now, because we focus on solving the investment problem that means we don’t have time to sell worthless financial plans, be as entertaining as Jim Cramer, or produce stacks of slick sales material. If you want that stuff this is not the place for you.

If you are in the USA, email or call Carl Richards. If you are in Australia then I might be able to help you.

Paris-Nice 2011 - Stage 3 - Final kms (w/ crash)

2011-03-09T08:52:00.000+11:00

The Housing Price Conundrum

2011-03-03T12:04:00.003+11:00

Salman Khan, of Khan Academy, gives the first part of his answer to the question: "Why did housing prices go up so much from 2000-2006 [in America] even though classical supply/demand would not have called for it?"
I would like to see same analysis done for Australian or Sydney house prices. Results will scare some people!

Seeking the Perfect Wave

2011-02-24T16:07:00.000+11:00

Weston Wellington, Vice President, Dimensional Fund Advisors

New York Times columnist Jeff Sommer, acknowledging recently that he found himself in a "buoyant mood" due to the steady rise in stock prices, sought out someone with a gloomier assessment of the financial markets to provide a counterweight to what he feared could be excessive optimism.

He turned to Robert Prechter, a veteran market analyst who has published The Elliott Wave Theorist in Gainesville, Georgia, since 1979. As Mr. Sommer reported last week in the Times, Mr. Prechter's investment outlook is "as bleak as an ice storm." Based on his interpretation of cyclical wave patterns that he discerns in both financial markets and "social moods," Mr. Prechter believes the current rally is only a minor upswing within a much larger, longer, and punishing downtrend that will "lead the unwary to ruin."

Market forecasters are often accused of doubletalk, couching their predictions in such convoluted language that they can later claim success regardless of the outcome. At least there is little doubt where Mr. Prechter stands—he sees disaster ahead and has been saying so for quite a long time.

In an earlier interview with the New York Times in July 2010, Mr. Prechter suggested the US stock market had entered a decline of "staggering proportions" that would likely see the Dow Jones Industrial Average—9686 at the time—fall well below 1000 over the next five or six years. Although the Dow has surged over 27% since that time to close at 12391 on February 18, Mr. Prechter is unperturbed and argues that the outlook is "much more dangerous today than it was last summer."

Perhaps Mr. Prechter will be proven right. But if not, he appears to have ample reserves of both patience and conviction. If his grim vision of deflation and depression sounds familiar, it should—he was making similar arguments in his book At the Crest of the Tidal Wave, first published in 1995.

Mr. Prechter has made some prescient market calls in the past—notably in the 1982–1987 bull market—but success since that time has proved more elusive. If only we could determine when to follow the advice of a market soothsayer and when to ignore it, we could be exponentially wealthier. But timing the market timers appears to be no easier than timing the market itself.

Jeff Sommer. "Writing 'Danger' in Ever-Larger Letters," New York Times, February 20, 2011.
Jeff Sommer. "A Market Forecast That Says 'Take Cover'" New York Times, July 3, 2010.
Robert R. Prechter Jr., At the Crest of the Tidal Wave (Gainesville, GA: New Classics Library, 1995).

The Power of Curiosity and Inspiration - Twitter Founder, Jack Dorsey at Stanford University Entrepreneurship Corner

2011-02-23T16:31:00.001+11:00

Nigel Marsh: How to make work-life balance work

2011-02-17T10:24:00.000+11:00

Marco Pantani Died 14 February 2004, Age 34

2011-02-15T08:47:00.004+11:00

Gordon Murray, Dies at 60: New York Times

2011-02-04T13:14:00.000+11:00

By DENNIS HEVESI Published: January 20, 2011

Gordon S. Murray, a former Wall Street executive who chose not to go quietly into the night, writing and publishing himself a popular paperback guide for ordinary investors while he was struggling with terminal cancer, died Saturday at his home in Burlingame, Calif., days before his book was scheduled to come out in hardcover. He was 60.

READ FULL ARTICLE HERE

Among the book’s suggestions:

Choose funds that invest in broad market indexes and do not try to pick the stocks or bonds in those indexes that might do better than all the others. As many advisers suggest, divide money among stocks and bonds, big and small, but further subdivide between foreign and domestic, since markets outside the United States may grow faster in coming decades.

Book: The Investment Answer.

Ron Lieber's New York Times article “A Dying Banker's Last Instructions”

Tour Down Under In 3 Minutes

2011-01-28T14:18:00.000+11:00

2011 Tour Down Under from Cycling Tips on Vimeo.

Five Ways to be Happier Today

2010-12-16T09:05:00.000+11:00

Investor Behavior More Important Than Investment Performance

2010-11-26T09:31:00.000+11:00

Nick Murray / November 25, 2010 / Originally published on Advisor.ca
... There is no statistical evidence for the persistence of performance. And, at huge market turning points, relative performance – in addition to being unpredictable and uncontrollable – simply doesn’t matter.

What, then, can an investment advisor offer that is manifestly worth multiples of what he charges, again and again over a client’s investing lifetime? Why, of course: it’s behavior modification.

The dominant determinant of long-term, real-life financial outcomes isn’t investment performance. It’s investor behavior. And the most high-value service we can offer is preventing the client from behaviorally blowing himself up...

...the behavioral value proposition. It doesn’t always work that quickly or that dramatically. But, human nature being what it is, it always works.

READ FULL ARTICLE HERE

Outside the Flags: Weather vs Climate

2010-11-19T10:12:00.000+11:00

Jim Parker, Vice President, DFA Australia Limited

Notice how TV stations put finance next to the weather report on the evening news? In each, talking heads point at charts and intone about stuff that in most cases will be quickly forgotten. In the meantime, the long-term story gets lost.

It's an old tradition, but a certain segment of the investing population tends to feel that they aren't sufficiently informed about the financial world unless they have checked daily or hourly on how the Dow, FTSE, Nikkei or All Ordinaries have moved in the intervening period.

It's a pretty harmless activity in most cases. It at least provides a bland conversation starter in fleeting social encounters, just as keeping up to date with tomorrow's weather forecasts can fill an awkward silence.

But our very human focus on the day-to-day and the short term can often encourage us to make bad decisions that affect our long-term interests.

Here's an example: On October 30, 2009, The Australian Financial Review led its markets section with the headline 'Shares Slide on Fears for US Housing'. The Australian equity market had suffered its largest one-day fall in more than four months after unexpected news of a slowdown in the US housing market.

Now, an investor who closely scrutinizes the daily market reports may have taken fright at this story and informed their financial advisor that they were not convinced the global economic recovery had traction and they wanted out.

But the very next day, the story had changed completely. The same newspaper led with the headline 'US Growth Spurt Puts Market Back on Track'. In this case, the US Commerce Department had reported stronger-than-expected economic growth figures which had helped ignite a marked reversal in sentiment.

Our plugged-in investor might have changed his mind at this news and told his advisor to ignore what he had said the day before.

But wait! There's more. Another day passed and this time The Australian Financial Review splashed with 'More Bad News on the Way'. A renewed fall on Wall Street on the back of news of a decline in consumer spending had local markets primed for another bad day.

And on it goes. From day to day to day, market sentiment shifts in reaction to news—news about the economy, news about companies, news about governments and politics and the wider world. Prices rise and prices fall in response to this news, which by definition is unpredictable.

Think of it like the weather. One day it's sunny. The next day it rains. It's unseasonably warm one day and uncharacteristically cool the next.

*ASX-500 Accumulation Index, Jan 1980-Oct 2010; Source: Returns Program
What can you do about it? Well, in the case of unpredictable weather, you can ensure you're equipped for all conditions—an umbrella, a raincoat and some sunscreen in your bag just in case.

Likewise, in the case of investment, you can stay diversified. That means you don't have all your money in one type of asset—like just property for instance or just shares or everything in cash. You need a mix in your portfolio so it can withstand a range of outcomes and keep you in line to meet your goals.

The nightly news is interesting, undoubtedly. But it's like the difference between the weather and the climate. One changes constantly; the other more gradually and imperceptibly. With investment, it's the climate you need to think about.

*ASX-500 Accumulation Index, Jan 1980-Oct 2010; Source: Returns Program*ASX-500 Accumulation Index, Jan 1980-Oct 2010; Source: Returns Program

Cycles of Life - A Cycling Documentary

2010-11-12T15:15:00.000+11:00

Sweet short film by 16-year-old Johannes Bay from Christchurch, New Zealand.

2010 Nobel Prize in Economics

2010-11-12T15:03:00.000+11:00

..or its correct title: The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel

Press Release

11 October 2010

The Royal Swedish Academy of Sciences has decided to award The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for 2010 to

Peter A. Diamond
Massachusetts Institute of Technology, Cambridge, MA, USA,

Dale T. Mortensen
Northwestern University, Evanston, IL, USA

and

Christopher A. Pissarides
London School of Economics and Political Science, UK

"for their analysis of markets with search frictions"

Markets with search costs

Why are so many people unemployed at the same time that there are a large number of job openings? How can economic policy affect unemployment? This year's Laureates have developed a theory which can be used to answer these questions. This theory is also applicable to markets other than the labor market.

On many markets, buyers and sellers do not always make contact with one another immediately. This concerns, for example, employers who are looking for employees and workers who are trying to find jobs. Since the search process requires time and resources, it creates frictions in the market. On such search markets, the demands of some buyers will not be met, while some sellers cannot sell as much as they would wish. Simultaneously, there are both job vacancies and unemployment on the labor market.

This year's three Laureates have formulated a theoretical framework for search markets. Peter Diamond has analyzed the foundations of search markets. Dale Mortensen and Christopher Pissarides have expanded the theory and have applied it to the labor market. The Laureates' models help us understand the ways in which unemployment, job vacancies, and wages are affected by regulation and economic policy. This may refer to benefit levels in unemployment insurance or rules in regard to hiring and firing. One conclusion is that more generous unemployment benefits give rise to higher unemployment and longer search times.

Search theory has been applied to many other areas in addition to the labor market. This includes, in particular, the housing market. The number of homes for sale varies over time, as does the time it takes for a house to find a buyer and the parties to agree on the price. Search theory has also been used to study questions related to monetary theory, public economics, financial economics, regional economics, and family economics.

Peter A. Diamond, US citizen. Born 1940 in New York City, NY, USA. Ph.D. 1963, Institute Professor and Professor of Economics, all at Massachusetts Institute of Technology (MIT), Cambridge, MA, USA.
http://econ-www.mit.edu/faculty/pdiamond

Dale T. Mortensen, US citizen. Born 1939 in Enterprise, OR, USA. Ph.D. 1967 from Carnegie Mellon University, Pittsburgh, PA, USA. Ida C. Cook Professor of Economics at Northwestern University, Evanston, IL, USA.
http://faculty.wcas.northwestern.edu/~dtmort

Christopher A. Pissarides, British and Cypriot citizen. Born 1948 in Nicosia, Cyprus. Ph.D. 1973, Professor of Economics and Norman Sosnow Chair in Economics, all at London School of Economics and Political Science, UK.
http://personal.lse.ac.uk/pissarid

The Economics of Fiscal Deficits

2010-11-06T15:40:00.000+11:00

I attended this presentation, by Marlena Lee, at Dimensional's office in Sydney in October. She uses historical data to make some really good points that are often missed by mainstream financial media, with there short-term focus and constant search for a narrative to explain recent events and market movements:

Many investors are concerned that rising government debt will stunt economic growth and hamper market returns. Marlena Lee examines historical data to test the relationships between fiscal deficits, interest rates, business activity, investment returns, and exchange rates. Her conclusions may surprise investors who are pessimistic about future market performance.

VIEW MARLENA'S PRESENTATION HERE (approx. 15 minutes.)

The Money Merry-Go-Round

2010-11-05T14:36:00.000+11:00

by Carl Richards at BehaviorGap.com

Think about the most recent discussion you had about money. How closely did it match the next most recent money conversation? Without realizing it, we engage in conversation after conversation about money that ends up talking around it....
Like religion and politics, money sits in a place that makes us squirm when discussed...
Access to information and the ability to share it easily has made discussing money in our families, in our communities, and in society at large more acceptable. There is also a growing recognition among real financial professionals that great discussions about money are really great discussions about life. In order to make good financial decisions we have to make them in the context of our lives...
READ FULL POST HERE AT BEHAVIORGAP.COM

Seduced By Complexity

2010-10-29T09:10:00.001+11:00

From Behavior Gap Newsletter, Thursday 28 October:

Why do we say we want simplicity and then chose complexity? It often starts when we get caught in the trap of two competing stories. In the first one, we tell ourselves we want to simplify, simplify, simplify. In the second story, we tell ourselves that the solution to an important problem has to be complex. The reality is that getting something simplified is the ultimate form of sophistication, so why don’t we choose simplicity when it comes to financial planning? ...
... I’ve seen people disappointed when I’ve proposed a simple solution to their investment or financial planning problems. Often the solution can be reduced to a simple calculation on the back of a napkin, but clients somehow take comfort from a 100-page paperweight packed with a thousand calculations. Logically they know that complexity isn’t a guarantee, but it seems to make people happy.
READ FULL POST HERE AT BEHAVIORGAP.COM
Behavior Gap is a registered trademark of Carl Richards.

Outside the Flags: The Rate Show

2010-10-26T14:09:00.001+11:00

Jim Parker, Vice President, DFA Australia Limited

Any financial editor knows interest rate forecasts always make popular articles. After all, so many people are sensitive to rates either as lenders or borrowers. If only they knew they don’t need a forecast to invest wisely.

With forecasting economists seeking publicity and the media wanting easy cut-and-paste coverage that keeps readers clicking through to see the ads, it’s easy to understand the demand for stories speculating on rate movements.

But what’s not often appreciated by the general public is that the wholesale bond market is usually two to three steps ahead of the official forecasters in pricing in expectations for what the central bank might do.

In viewing this phenomenon in action, Australia is a good example because the Reserve Bank here has moved ahead of the rest of the world in slowly moving up official cash rates from crisis levels closer to long-term averages.

The chart below compares benchmark short-term lending rates in Australia, the UK, Canada, the Euro area, Japan and the US over the last six years. As you can see, while rates in the other major developed economies have remained at 1 percent or lower, Australia’s cash rates have moved up from 3 to above 4 percent since late 2009 due to the relative strength of its economy.

While the RBA kept its cash rate on hold throughout the June quarter after the last move in May, newspapers at time of writing were full of speculation about a possible resumption in this policy tightening program in November.

This speculation is good for circulation as it gives people the perception that by closely tracking the views of the market experts, they can manage their portfolios in a way to avoid the impact of the rate increases when they come.

The problem for the general audience is that all that information and commentary and analysis from the bank economists tends to be already reflected in prices. In other words, by the time you read about it, it’s old news for the market.

And even if you did get the “inside word” on anticipated interest rate moves, there is no guarantee that new events will not occur in the meantime to change the outlook yet again and leave your timing strategy in tatters.

Take, for instance, what happened in Australia in early October. The RBA took the market “by surprise” in not announcing a rate increase after its monthly policy meeting. The move had been seen as such a sure thing that one major national newspaper had the story pre-written and published on its website that the rate rise had, in fact, happened when it, in fact, hadn’t.¹

The story quickly disappeared when an alert editor noticed the central bank’s website actually said rates had not changed, but some astute blogger was clever enough to take a screenshot before the evidence could be removed.

In late October, the Reserve Bank published minutes of that meeting, revealing that the decision had been “finely balanced”, but that the sudden surge in the Australian dollar in early October had been one consideration in waiting.²

Financial markets then began to speculate again on the likely next move. This chart of implied yields on 30-interbank cash rate futures – a proxy for official cash rate expectations – shows that as of late October the market was already priced for at least two further quarter percentage point rate rises over the coming year.

This is not to suggest these priced-in increases are a done deal. But it serves to highlight that markets move very quickly in anticipating interest rate changes. Naturally, as new information comes to light, that pricing may change.

But the important point for the small investor is that the noise around interest rates in the media usually reflects expectations that are already in the price. It is incredibly difficult, without inside information, to second guess the market and forecast interest rate movements with any sustained accuracy.

This is why Dimensional does not try to play the forecasting game. Instead, it works with the opportunities in the yield curve as they present themselves day to day. When there is an opportunity for taking on more term risk (longer-dated bonds), the portfolio managers will do so. But when the yield curve is inverted (short-term interest rates are higher than longer term), they will move the strategies closer toward cash.

This is not a market timing approach. It is about taking on more term risk when there is an acceptable reward for doing so and winding back on term risk when expected returns from that risk factor are not so great.

In Dimensional’s newer US fixed interest strategies, it takes a similarly variable approach to credit risk, adopting greater risk when expected returns from lower-rated investment credits are high and winding back when anticipated rewards are low. As always, risk is controlled by very broad diversification.

So the bad news about interest rates and fixed interest investing is that there is no such thing as a crystal ball that works. The good news is that you don’t need one to invest successfully in this asset class.

1. Reserve Bank Lifts Interest Rates to 4.75pc, The Australian, Oct 5, 2010

2. Minutes of the Monetary Policy Meeting of the Reserve Bank of Australia Board, Oct 5, 2010

Golden Opportunity in Stocks? - CNBC.com

2010-10-21T12:55:00.001+11:00

As investors make the flight to safety, are they missing a golden opportunity in stocks? Jeremy Siegel, a professor of finance at Wharton, shares his view:

Golden Opportunity in Stocks? - CNBC.com

2010 Cycling Photos

2010-10-15T15:15:00.003+11:00

What Makes Us Tick? Hugh Mackay

2010-10-15T13:39:00.001+11:00

http://www.abc.net.au/rn/bigideas/stories/2010/3038586.htm

Requiem for a Species by Clive Hamilton

2010-10-15T13:33:00.001+11:00

Things You Should Focus On

2010-10-12T14:23:00.002+11:00

Overconfidence is a huge problem when it comes to making investment decisions. In fact, it’s a huge problem when we’re dealing with any issue that has an unknown outcome. It’s clear that we’re very bad at dealing with unknown outcomes...

READ FULL POST HERE

Thank you Carl Richards. See more and purchase prints at BEHAVIORGAP.COM

Professional Help*

2010-10-08T16:06:00.001+11:00

Not surprisingly, the percentage of self-managed super funds seeking investment advice fell in the immediate wake of the global financial crisis.

When investors are disappointed with their returns, many typically think they can do a better job by themselves – although logic would suggest that when returns are suffering, quality professional advice is even more needed.

Now with stronger investment markets, more SMSF trustees are beginning to turn back to financial planners.

The 2010 SMSF Investor Report, released this week by specialist investment researcher Investment Trends, reports that more than 65% oSMSFs gained investment advice over the past 12 months – up rather modestly at this point from 61% i2009.

This advice was from a range of specialist financial planners, accountants, full-service brokers, specialist super consultants and private bankers – all with the appropriate ASIC qualification to provide investment advice. And by far, specialist financial planners gave the largest proportion of the advice.

The particularly interesting percentages provided by Investment Trends are that back in 2007, before the GFC, 71% oSMSFs gained professional investment advice, and this percentage had fallen sharply to 61% blast year. So there is still quite a bit of ground for advisers to recover.

According to the report, just 10% oSMSFs seek investment advice because the trustees are “uncomfortable making their own investment decisions”. Many more seek advice to get a second opinion, gain access to a wider range of investments and to gain access to an adviser’s technical skills.

Clearly, a challenge for advisers in the future is to convince SMSF trustees, and other investors for that matter, that their services are needed throughout all market conditions – good and bad.

* Written by Robin Bowerman, Head of Retail at Vanguard Investments Australia.
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"It is the same stupid old normal we've always had."

2010-09-28T16:06:00.000+10:00

From AAP in smh.com.au September 28, 2010 - 11:41AM

Crisis on repeat: We're chimps with no memory

Fisher Investments chief executive Ken Fisher says the economic conditions facing the world today are not dissimilar to previous downturns, like that seen in the early 1990s.

"If you read the media from 1991 it sounds just like it does today," he told the Forbes CEO Conference today.

"We're chimpanzees with no memory.

"Our problems in this environment, that we think are so unique, so abnormal.

"It is the same stupid old normal we've always had."

"We keep chewing the cud. We go over the same stupid wrong pessimistic stories... ruminating on them again and again."

Mr Fisher said unlike five out of six US investors, who "believe we are going sideways or going down", he was bullish about the future.

"I believe the next 10 years will be just as good as the 1990s," he said.

"In my mind, I think the period we have ahead of us is as good as we have ever had ahead of us, at a time when people believe we have a lackluster world ahead at best."

READ THE FULL ARTICLE HERE

Jens Voight expands on the “Shutup Legs” theory

2010-09-23T13:52:00.000+10:00

Smart thinking trumps crystal ball

2010-09-22T15:21:00.000+10:00

Good piece by Tim Blue in today's Australian:

IT is track record through time that can be most telling with fund managers.

Watch them ride out market cycles through smart thinking and investment processes robust enough to withstand the roller-coasters of financial crises.

Texas-based Dimensional Fund Advisors focuses on value and small capitalisation stocks, and deals with them in a way that eschews both index-style and traditionally active trading.

Its Australian Value Trust boasts a 10-year track record of 11.5 per cent annualised to August this year, net of fees, well ahead of the S&P/ASX 200 accumulation index of 7.3 per cent for the same period...

READ THE FULL ARTICLE HERE

Classic YouTube

2010-09-21T13:59:00.002+10:00

From Matthew Price's Broom Wagon at SBS Cycling Central

Before Mark Cavendish's win at Salamanca on Thursday there was Adriano Baffi, who won the same stage of the 1994 Vuelta at the considerable expense of Mercatone Uno team-mate Mario Cipollini. Despite not wearing a helmet, the future Lion King somehow escaped serious injury.

See the faces of the Pakistan floods: An unforgettable video

2010-09-15T09:16:00.004+10:00

TED’s curator, Chris Anderson, was born in Pakistan, and feels an enduring tie to the country — which has recently experienced the worst floods in living memory, killing thousands and displacing tens of millions of people. Chris and his wife, Jacqueline Novogratz of the Acumen Fund, traveled the country, visiting camps and flooded cities — and gathering personal stories from this massive disaster (read them on Chris’ personal blog).

The Investment Answer

2010-09-14T14:02:00.005+10:00

Excellent new book by Dan Goldie and Gordon Murray is available to buy or download for free in pdf format at:

http://www.theinvestmentanswerbook.com/buy.html

About the Book (from www.theinvestmentanswerbook.com)

This unique book is written in clear and understandable language. Whether you are new to finance or an experienced investor, this book is essential reading. It cuts through the Wall Street hype to give you just what you need to know. You will learn to take advantage of how markets really work and how to benefit from the wisdom that Nobel Prize winners have acquired over the last 60 years. This book will change the way you think about investing.

About Daniel C. Goldie, CFA, CFP

Mr. Goldie is President of Dan Goldie Financial Services LLC, a registered investment advisory firm that helps individual investors and families manage their money and make smart financial decisions. He has been recognized by the San Francisco Business Times as one of the top 25 Bay Area independent advisors, and by Barron's as one of the top 100 independent financial advisors in the United States.

Should we Still be Worried? ... I Say No

2010-09-07T10:31:00.000+10:00

I am optimistic about markets going forward. I went to a good presentation last week on sovereign debt issues and impacts on global markets.

The fact is that, so long as we assume that markets are relatively efficient, all of the issues that may give cause for alarm are already factored into prices today. When you buy a share in a company today you are buying an entitlement to a share in all of the future earnings of that company and the price that you pay is the best estimate of those future earnings, discounted back to today's value. If company earnings are likely to be lower in the future then today's price of the company's shares is lower.

The expected return, even from US shares, going forward from today is very similar to that you should expect from Australian shares. At first this may seem counter-intuitive but with the free-flow of capital and efficient markets then if higher returns could reasonably be expected from say Australian markets than US markets then global hedge-fund managers would be selling US shares today and buying Australian shares. Prices would immediately adjust until the expected future returns were similar (ie. Australian shares prices move up and US share prices move down.) The flow of capital and price movements should happen immediately upon the release of new information about the respective economies.

All of this translates to the fact that our current strategy is sound. The last financial year, whilst not being outstanding, was almost exactly what you should expect over the long term from this type of investment portfolio. Return for growth portfolios was around 14% with small companies doing better than large companies, emerging markets doing better than developed etc. There was a slight negative effect due to Australian dollar movement.

I hope that this all makes sense.

Feedback welcome!

J.K. Rowling Speaks at Harvard Commencement

2010-09-02T14:20:00.000+10:00

J.K. Rowling Speaks at Harvard Commencement from Harvard Magazine on Vimeo.

Elif Batuman in conversation with Richard Fidler

2010-09-01T09:30:00.002+10:00

US writer and academic Elif Batuman fell in love with the great Russian writers after reading 'Anna Karenina' some years ago.

Broadcast date: Tuesday 31 August 2010 (612 ABC Brisbane)

Elif has discovered that when you read a truly great novel, it can work as a kind of vortex - drawing you into its world and its passions, and if you're not careful you can end up making important decisions about your own life as a result.

She wanted to explore the link between real life and books, and when she decided to chase up the lives and stories of the likes of Tolstoy and Dostoyevsky, she had no idea of the extraordinary places it would lead her.

Some of the many things she discovered on her bizarrre journey include the discovery that Isaac Babel once met and probably interrogated the creator of the original King Kong movie on a Polish battlefield - and that in the old Uzbek language they have 70 words for duck.

The Possessed: Adventures with Russian Books and the People Who Read Them published by Text

Brisbane Writers' Festival: Thurs 2 Sept GoMA Cinema A 2.30 pm/Sat 4 Sept The Edge 1.30 pm

LISTEN TO CONVERSATION HERE (ABC LOCAL RADIO)

Building Resilience

2010-09-01T09:25:00.000+10:00

Jim Parker, Vice President, DFA Australia Limited
August 2010

'Risk' means different things to different people, but a common definition is as 'uncertainty'. Now, an entire science is being built around the idea of how we can cope better with the unknowable. And it has interesting parallels with investment.

What's known as 'Resilience Science' was the subject of a recent fascinating documentary on public radio in Australia, as an array of scientists revealed how new techniques are being developed to help society cope with rapid and unexpected economic, environmental and social change.¹

"People are beginning to realise more and more that systems don't actually behave like we think they do," says Dr Brian Walker, a researcher with Australia's Commonwealth Scientific and Industrial Research Organisation.

The mistaken supposition, Dr Walker says, is that self-organising systems behave predictably and uniformly with small changes accumulating over time.

"But ... there are limits to the degree to which a system can cope with a shock and reorganise to keep functioning the same way," he says. "And once it goes past that limit, which we call a threshold or tipping point, it still keeps self-organising, but in a different direction, and often one that we don't like."

The role of resilience scientists, then, is to find and identify safe operating techniques within this system so that they can continue to cope when the unknowable and totally unexpected occurs.

Environmental journalist and author Mark Scheilstein provided an interesting analogy in citing the recent disastrous oil spill in the Gulf of Mexico or the flooding that followed Hurricane Katrina in 2005.

"When engineers look at major projects—whether levees in New Orleans or an oil rig in the Gulf of Mexico—not only do they have to plan for things they know about, but they have to plan for things they don't know about," he says.

"What happened in both of these instances is a very similar failing, in my mind on the part of the engineers" in that they failed to account for residual risk beyond the realms of their traditional expectations, Scheilstein says.

In environmental science, resilience is developed through building of reserve capacity, developing what's known as "modularity", diversifying food and energy sources, incorporating the idea of sustainability and increasing efficiency so that large exogenous shocks can be managed without the system falling apart.

Interestingly, similar ideas were explored in a financial market context in Sydney recently when Reserve Bank of Australia deputy governor Guy Debelle spoke to a conference on the concepts of risk and uncertainty.²

Debelle made the point that before the global financial crisis, many market participants had fallen victim to a form of hubris, believing that risk was totally quantifiable when in fact there would always be a degree of persistent uncertainty in the system that no model could account for.

"I don't want to get too 'Rumsfeldian' here, but an important element of risk management is to know what you don't know," the central banker said.

Because it was impossible to measure what we don’t know, policymakers and market participants needed to find ways of making the financial system as robust as possible in the face of this inherent and irreducible uncertainty.

So international policymakers in Basel are considering new requirements such as limiting the leverage of financial institutions, delivering a more robust funding structure to banks and enhancing their capital buffers.

Even then, the Reserve Bank deputy governor warned that no single model or combination of models can totally eliminate uncertainty.

"Risk measurement based on historical models can only take you so far. Judgement must play an important role," Debelle said. "Ultimately, the future is uncertain, in the sense that it cannot be quantified. The goal should be to design systems that are as robust as possible to this uncertainty."

The science of resilience is not unlike the approach to investment risk that Dimensional employs. That is, we must not only prepare for risky events that are within the confines of a neat model, but also must take account in our processes of what we don't know—outcomes beyond our conception.

This is achieved by building flexible, resilient, robust and dynamically integrated investment processes that can withstand rapid and unexpected change while maintaining the desired strategies.

Uncertainty in investment outcomes is dealt with through broad diversification, both across and within asset classes. The emphasis is on reducing the impact of idiosyncratic risk in a portfolio and focusing instead on risks that bear a long-term relationship to return.

Substitution is another technique. Traders are given discretion by being able to execute with a wide set of available orders. Not being wedded to an index or having strong convictions about particular securities also gives the investment team the sort of flexibility not available to other managers.

"Modularity" in science means the existence of modules within a network that can communicate and cooperate with each other, but which can operate independently if required. So it is with Dimensional's global investment process—with trading desks in Austin, Santa Monica, Sydney and London dynamically integrated but able to be self-sufficient if needed.

Finally, resilience science incorporates the idea that there are multiple ways of knowing and that our understanding of nature is always evolving. Creative solutions often emerge out of this process.

Dimensional takes a similar approach to investment, always testing its assumptions and encouraging a continuing dialogue between those who pursue theoretical research, those who do the practical implementation and the clients who keep us aware of their changing needs.

Ultimately, building resilience amid uncertainty is what our business is about.

1. Resilience Science, ‘Future Tense’, Australian Broadcasting Corporation, August 26, 2010

2. Guy Debelle, ‘On Risk and Uncertainty’, Risk Australia Conference, Reserve Bank of Australia, August 31, 2010

Sparking creativity at work: Michael Rennie

2010-08-31T10:53:00.000+10:00

From Life Matters on ABC Radio National

The modern business environment is anti-creative, says Michael Rennie, but every business wants to be more innovative, more creative.

And creativity makes us feel happy and productive. So why are so many workplaces the antithesis of buzzing, creative environments?

Why is creativity generally associated with the arts, not with business?

A conference in Melbourne next month called Creative Innovation will try to bridge these worlds, by bringing poets, musicians and thinkers together with business leaders.

One of the speakers has already crossed that bridge. He's Michael Rennie, Managing Partner of McKinsey and Company in Australia and New Zealand.

LISTEN TO AUDIO OF INTERVIEW HERE (ABC RADIO NATIONAL)

Taking Out the Middle Man

2010-08-31T09:48:00.000+10:00

Jim Parker, Vice President, DFA Australia Limited

One of the great benefits of the global internet is the scope it gives investors to test the veracity of media coverage by going straight to the source. Now, one canny consumer is taking this disintermediation a step further.

The structural crisis in commercial media has been cited before in this column, but boils down to the death of its traditional business model as advertisers and readers migrate to the web. The upshot is the media is left with fewer journalists to fill ever expanding amounts of white space and empty air time.

Some in the media are responding to this crisis by heading down-market. Essentially this means they are seeking to make a virtue of their lack of imagination and resources by sacrificing good information and context for public relations spin, circus-style entertainment and unadulterated opinion.

This is why TV business programs regularly feature people shouting over the top of one another and making a mountain over issues that really have little bearing on investors’ long-term returns. Overlooked amid all the sound and fury is the need for solid, independent reporting that adds value for readers and viewers.

One possible response to this noise is to go straight to the source. You can do that in the internet age. Instead of relying on second-hand and often inaccurate reports of, say, the International Monetary Fund’s global economic forecasts, investors can read the institution’s own summary on its website.

Smart consumers of media can also, using modern technology like RSS feeds and Twitter, follow the writers, bloggers and commentators they trust. Google Alerts provide another way to filter news of interest from the flotsam and jetsam.

In many ways, what is happening to the mainstream media is analogous to the crisis that started hitting the recorded music industry a decade ago. The old distribution model has been made redundant and consumers are empowered to access and customize the information they need directly.

One noted UK blogger and comedian, Tom Scott, has taken this trend of disintermediation a step further by designing amusing “journalism warning labels” that are attached to newspapers to alert consumers about the content therein.

Among the individual labels are “Warning: Statistics, survey results and/or equations in this article were sponsored by a PR company.” This is not surprising, given that one 2008 UK university study, based on 2,000 articles in five major British newspapers, found 80 percent of the content was second-hand. Most of it came either from public relations material or agency copy.

Taking note of this trend, Mr Scott has another warning label for newspapers that reads: “This article is basically just a press release copied and pasted.”

The growing dependency of journalists on media and publicity agents for softball interviews is highlighted by a fourth warning: “To ensure future interviews with subject, important questions were not asked.”

But probably the most salient warning label for investors is the one that reads: “Journalist does not understand the subject they are writing about.”

The fact is so much of what vexes investors comes from media content generated by journalists so pressured by deadlines and so desperate for content to fill the gaps between the ads that they really have little grasp of the often complex issues they are called to cover.

That’s the bad news. The good news is the very idea of the “media” – the thing that stands between consumers and events – is becoming rather quaint. The unadulterated information is there if you know where to look.

Broke and Broker

2010-08-13T09:32:00.000+10:00

Jim Parker, Vice President, DFA Australia Limited

Each day, terabytes of broker research clogs the email inboxes of money managers. But how reliable are these multitudes of forecasts? New research in the Australian and the US markets helps answer that question.

Ploughing through broker calls is a professional hazard for those money managers who base their value proposition on the notion that they can make consistent returns for their clients by exploiting perceived market mispricing.

The hope is that among the volumes of forecasts will be the gem that will earn investors big money. But it seems there is growing disillusionment among forecasting-based fund managers about the quality of the broker calls.

Australian financial markets research specialist East Coles regularly surveys fund managers about the research they receive. Results of its most recent Best Broker poll featured in The Melbourne Age.¹

The overwhelming impression left by the findings was that managers’ reliance on analyst recommendations has diminished over the years, in part because of concern over inaccurate forecasts and in part due to the perception of potential conflicts of interest between analysts and the investment banking and brokerage businesses of their employers.

"We rely on it [research] a bit,” one fund manager is quoted as saying, “which is unfortunate because it has been wrong throughout 2009."

Fuelling the cynicism was an absence of warnings over a number of high profile corporate collapses in Australia during the financial crisis, including the failures of Allco Finance, Babcock & Brown and ABC Learning Centres.

For instance, in September 2007, an analyst at a major investment bank reaffirmed his ‘buy’ rating on ABC Learning Centres after the company announced plans for further global expansion and said it would lift fees.²

ABC Learning at that time was one of the world’s biggest listed operators of child care centres, with more than two thousand centres operating in Australia, New Zealand and the United States.

Within a few months of that ‘buy’ rating being issued, ABC’s shares had collapsed from above $5 to zero and the company went into administration by September 2007 under the weight of $1.5 billion in debt.

In January 2008, an analyst from a high-profile Australian investment bank issued a report with an “outperform” recommendation on the Queensland property development group MFS and a 12-month price target of $7.15 from the then price of just under $4. A week later, the shares had collapsed by 75 per cent to $1.³ MFS subsequently went into liquidation.

For sure, there are good broker calls as well. But the East Coles survey found these are few and far between, which leaves fund managers wondering whether they would be better off with a dart board.

Further evidence of persistent inaccuracy in broker forecasts came in another recent survey, this time on the US market and carried out by management consulting firm McKinsey, updating a similar survey almost a decade ago.⁴

Analysing earnings forecasts for S&P-500 companies over a quarter century to the end of 2009, McKinsey found that with few exceptions aggregate earnings forecasts tended to exceed realised earnings per share.

Actual growth surpassed forecasts only twice in 25 years, the consultancy found, and both times during the recovery following a recession.

Instead, the survey found the most accurate expectations were actually those built into prices on capital markets themselves.

“This pattern confirms our earlier findings that analysts typically lag behind events in revising their forecasts to reflect new economic conditions,” McKinsey said. “Executives…ought to base their strategic decisions on what they see happening in their industries rather than respond to the pressures of forecasts, since even the market doesn’t expect them to do so.”

Good advice – and yet another reason to see market pricing as the best unbiased estimate of expected returns on capital markets.

1. ‘The Broking Analysts Who Make the Really Big Calls are Few and Far Between’, Michael Evans, July 17, 2010

2. ‘Childcare Giant ABC Tipped to Lift Fees’, The Courier Mail, Sept 15, 2007

3. ‘Debacle at MFS a Lesson to Others’, The Australian, Jan 21, 2008

4. ‘Equity Analysts: Still too Bullish’, McKinsey on Finance, Number 35, Spring 2010, McKinsey & Company

Missed it by that Much!

2010-08-03T11:43:00.000+10:00

Jim Parker, Vice President, DFA Australia Limited

Market timing is hard; so hard that even the most experienced and respected market professionals struggle to finesse their exit and entry points. Just ask the famed hedge fund manager Barton Biggs.

Biggs made his name as chief global strategist with Wall Street investment bank Morgan Stanley. These days, he runs his own hedge fund and remains a regular media commentator on market trends.

In early July 2010, when market sentiment was the worst it had been since the crisis, Biggs announced he had sold half his equity holdings. Stocks had fallen nine times in 10 days and all the talk was of a double-dip recession.

“I’m not putting my money into anything,” Biggs said at the time. “I’ve taken basically all of it out in the US, and we had a broader exposure to consumer stocks and just, in general, I’ve reduced my net long position by about 30 or 40 percentage points.”¹

That was a shame, as that point in early July marked the beginning of a turnaround in stocks that took the S&P-500 up more than 8 per cent in the intervening four weeks. Bolstering sentiment were solid earnings reports and more encouraging signs on the US and global economies.

In a radio interview with Bloomberg at the end of July, Biggs said he had now changed his mind and was rebuilding his positions in stocks.

“Economic data around the world in the last 10 days to two weeks has turned more positive,” he said. “It has exceeded forecasts almost without exception. The odds of the world slumping into a significant slowdown have diminished.”

None of this is intended to reflect poorly on Biggs’ skills as an investor. He clearly has a large market following and there appear to be plenty of people willing to back his judgment on perceived turning points.

But it does show the great difficulty facing even the most experienced and well informed investors in perfectly judging when to get into or out of the market. For everyday investors, then, the challenge must be even harder.

Research group Dalbar has charted this challenge for many years in its quantitative analysis of investor behaviour, a survey that shows investors almost ritually make the mistake of buying high and selling low.

In a recent interview with Barron’s, Dalbar founder Lou Harvey pointed out that many investors missed the boat yet again in 2009 by moving into safe investments like cash and missing the upturn when it came.²

The best protected investors, Dalbar found, were those who worked with advisors that put their clients first. By contrast, do-it-yourself investors tended to underperform those advised by a fiduciary.

“We found that people working with fiduciaries, advisors with a legal obligation to put the client first, and whose personal assets were on the line, tended to be among the winners - these clients were well protected,” Harvey said.

So it’s a familiar story. Investment advice is not about making predictions about the market. It’s about education and diversification and designing strategies that meet the specific needs of each individual. Ultimately it’s about saving investors from their own, very human, mistakes.

And, as we’ve seen, even the best of us make those.

1. ‘Biggs Buys Stocks Three Weeks After Cutting Holdings’, Bloomberg, July 26, 2010

2. ‘Did Investors Learn Anything From 2008’s Crash?’, Barron’s, July 24, 2010

"Rates Can Only Go Higher"

2010-07-21T15:58:00.000+10:00

Weston J. Wellington, Vice President, Dimensional Fund Advisors

It seemed so obvious. With the economy slowly recovering last year from the worst recession in decades and the federal government seeking to tap the credit markets for over $2 trillion to fund an ambitious spending program, both laymen and experts alike seemed to agree that interest rates had nowhere to go but up. The yield on the ten-year U.S. Treasury note as of June 30, 2009 was 3.52%, down from 5.25% in June 2007 but well above the 2.09% level registered amidst the depths of the credit crisis the previous December. With retail sales and housing activity showing signs of gradual improvement, the only question appeared to be how much higher interest rates would go.

Among fifty economic forecasters surveyed by the Wall Street Journal in June 2009, forty-three expected the ten-year U.S. Treasury note yield to move higher over the year ahead, with an average estimate of 4.13%. Seven expected a rate of 5.00% or higher while only two predicted rates to fall below 3.00%. The result? The ten-year Treasury yield slumped to 2.95% on June 30, 2010 and rates on 30-year mortgages fell to their lowest level since Fannie Mae began tracking them in 1971. How many of us would have expected this during a period when gold prices soared over 33% to a record high?

Some observers may be tempted to poke fun at these hapless “experts”, implying they are incompetent or poorly informed. This interpretation is flawed since it suggests that a better team of experts would achieve a more accurate result. A more useful explanation is that even the most talented analysts are unlikely to make reliable predictions and the poor showing by this particular group is simply what we would expect to see, just as often as not, if markets are working freely and fairly. Today’s bond prices already reflect expectations for tomorrow’s business conditions and inflation and these expectations can change quickly in response to new information. However tempting it may be to believe that we can predict the future better than other market participants through careful study, the results of the Wall Street Journal survey as well as numerous other efforts suggest this confidence is misplaced.

What is the message for investors? Predicting interest rates and bond prices is no easier than predicting stock prices, and making decisions based on what appear to be certain outcomes at the time can often prove costly. Many investors reconfigured their portfolios in anticipation of higher interest rates and have penalized their results while they are waiting.

Instead of seeking to predict the unpredictable, investors are much more likely to enhance their results by focusing on the elements they can control – risk exposure, diversification and minimizing costs and taxes.

Yahoo! Finance www.yahoo.com accessed July 7, 2010. Wall Street Journal Forecasting Survey www.wsj.com accessed July 7, 2010. Prabha Natarajan and Matt Phillips. “Stocks Drop; So Do Mortgage Rates” Wall Street Journal, June 25, 2010.
Mark Gongloff. “Two Treasury Forecasts: a Grand Canyon-Sized Gap” Wall Street Journal, April 10, 2010.
Tom Petruno. “Gold Hits Record as Investors Seek Haven” Los Angeles Times, June 9, 2010.

Sugar: The Bitter Truth

2010-06-29T13:28:00.000+10:00

Robert H. Lustig, MD, UCSF Professor of Pediatrics in the Division of Endocrinology, explores the damage caused by sugary foods. He argues that fructose (too much) and fiber (not enough) appear to be cornerstones of the obesity epidemic through their effects on insulin. Series: UCSF Mini Medical School for the Public [7/2009] [Health and Medicine] [Show ID: 16717]

Jim Parker's New Book

2010-05-28T15:30:00.004+10:00

Jim Parker, VP at Dimensional, has just published his new book, Outside the Flags 3: Discovering the Value of Good Advice.

In this book, the third collection of articles from his web column Outside the Flags, Jim Parker uses these topical issues to highlight the value of good advice:

Crises come and crises go, but lunches are still not free, return rarely comes without risk and patience remains an under-rated virtue.
If you are worried about bad news, chances are it is already in the price. Investing is about what comes next. We don’t know that so we diversify.
You don’t need luck to be a good investor. More useful are patience, discipline, a focus on costs, a willingness to diversify and a decision to take only those risks that come with a long-term reward.
The media builds neat narratives from messy reality. While often interesting, these are not something to base an investment strategy on.
Investors grappling with market turmoil often question the value of financial advice. Better to ponder the cost of bad advice.

Please contact me directly if you would like a copy of Jim's new book.

Marco Pantani - 'Il Pirata' (the pirate)

2010-05-26T16:01:00.002+10:00

Marco Pantani Jan 13, 1970–Feb 14, 2004 (died at age 34)
Italian road racing cyclist, one of the best climbers in professional road bicycle racing. He won the Tour de France and the Giro d'Italia in 1998... His career was beset by drug abuse allegations after a failed blood test in the 1999 Giro d'Italia. He died after a cocaine overdose in 2004...
Miguel Indurain, five-times Tour de France winner, paid tribute by saying:
"He got people hooked on the sport. There may be riders who have achieved more than him, but they never succeeded in drawing in the fans like he did."^[13]

http://en.wikipedia.org/wiki/Marco_Pantani

Fausto Coppi - "Campionissimo"

2010-05-14T18:33:00.003+10:00

Angelo Fausto Coppi, 15 September 1919 - 2 January 1960 (died at age 40)
Comparing riders from different eras is a risky business subject to the prejudices of the judge. But if Coppi isn't the greatest rider of all time, then he is second only to Eddy Merckx. One can't judge his accomplishments by his list of wins because world war two interrupted his career just as world war one interrupted that of Philippe Thys. Coppi won it all: the world hour record, the world championships, the grands tours, classics as well as time trials. The great French cycling journalist, Pierre Chany says that between 1946 and 1954, once Coppi had broken away from the peloton, the peloton never saw him again. Can this be said of any other racer? Informed observers who saw both ride agree that Coppi was the more elegant rider who won by dint of his physical gifts as opposed to Merckx who drove himself and hammered his competition relentlessly by being the very embodiment of pure will.^[14]
Coppi broke the world hour record on the track in Milan on 7 November 1942. He rode a 93.6 inch (2.43 metre) gear and pedaled with an average cadence of 103.3rpm.^[15]
The record stood until it was beaten by Jacques Anquetil in 1956.^[9]
http://en.wikipedia.org/wiki/Fausto_Coppi

Working in a Coal Mine

2010-05-13T10:48:00.000+10:00

Jim Parker, Vice President, DFA Australia Limited

A recent media article hyped resource stocks, just a day before the Australian government slapped a big new tax on mining. Chalk it up as another reason not to stake your investment strategy on a single sector.

The illustration in The Australian Financial Review¹ showed a miner's pickaxe breaking the dirt, showering sparks and diamonds. The accompanying text proclaimed that investors couldn't afford to ignore mining stocks.

Citing the extraordinary demand from China for raw materials, the newspaper said its own analysis showed the 100 best performing materials shares over the past five years had posted a median annual gain of 33 per cent.

The upshot, said the paper, was that investors needed to improve their knowledge of mining stocks to sort the speculative commodity plays in the equity market from the tried and trusted resource houses.

This all sounded very sensible…at least until the federal government the very next day unveiled a major tax reform package that had as its centrepiece a 40 per cent tax on the profits of mining companies.

Shares in global miners BHP Billiton and Rio Tinto lost 5.5 per cent and 7.5 per cent of their market value respectively over a couple of days. One broker estimated the tax, which takes effect in 2012, could reduce the companies' earnings by 17 and 21 per cent respectively in the first year.²

Of course, such companies as BHP and Rio are influenced by more than a single government's tax regime. Their market performance also came at a time of mounting concerns over Europe's debt crisis and its impact on global growth, a major determinant of commodity prices.

But this episode is yet another demonstration of why people should not seek to build their investment
strategies around a single idea or industry sector. There may well be a "commodity super cycle" underway, as some economists say, but investing this way introduces sector-specific and stock-specific risks that can be diversified away.

Dimensional breaks down equity portfolios not into mining stocks and banking stocks and healthcare stocks, but into broad asset class categories where the risk is related to an expected return.

This means a properly diversified portfolio will include large stocks and small stocks, growth and value stocks, domestic and international stocks and emerging market stocks. The exact mix will be determined by the needs and risk appetites of the individual investor.

It should be said that some of these portfolios may well include BHP and RIO, particularly if the investor chooses a dollop of large cap stocks. But the important point is that the portfolio is not built around a view about the mining industry or its prospects.

Ultimately, successful investing is not only about successfully capturing risks that offer an expected return, but reducing risks that do not. That means limiting one's exposure to random forces and not falling into the temptation of basing an investment strategy on an economic forecast.

Otherwise, it is like working in a coal mine—dark, dirty and dangerous.

¹'Your Guide to Mining Stocks', The Australian Financial Review, May 1-2, 2010

²'Rudd Tells Australian Miners He'll Pursue Tax Plan', Bloomberg News, May 5, 2010

Esther Duflo’s TED talk

2010-05-05T21:16:00.001+10:00

Esther Duflo - Short Bio

http://www.povertyactionlab.org/

Facebook and Twitter

2010-05-05T10:31:00.002+10:00

from @SocialMedia411 ...

Facebook is for people you went to school with. Twitter is for people you wished you went to school with.

Follow me on Twitter: @matthews24

Talking About a Revolution

2010-05-04T09:51:00.000+10:00

Jim Parker, Vice President, DFA Australia Limited

Australia's financial advice and retirement savings industries are about to undergo a revolution aimed at protecting investors, curbing conflicts of interest, lowering costs and improving transparency.

At the centre of reforms, unveiled by the federal government recently, is a ban on commissions paid by fund managers to financial advisors and on any other conflicted remuneration structures. The ban applies from July 1, 2012.

The reforms came out of an inquiry called by the government after a series of scandals in which investors were shoehorned into inappropriate investments by advisors compromised by sales incentives.

Alongside the ban on commissions, the government plans to introduce a statutory fiduciary duty requiring advisors to act in the best interests of their clients and to put their clients' interests ahead of their own.

The reforms have received almost universal approval from industry bodies, including the Investment and Financial Services Association, the Association of Superannuation Funds of Australia and, in a more qualified way, by the Financial Planning Association.

A separate inquiry, meanwhile, is seeking to simplify and make more efficient Australia's system of compulsory superannuation, or retirement savings. A preliminary proposal is for the creation of a single, low-cost, simplified and diversified investment strategy for the vast bulk of Australians who do not want to exercise choice in superannuation.
Taken together, the reforms are seen likely to strengthen advisory businesses that already employ fee-for-service models and which are not compromised by compensation provided by fund managers.

This is close to the new model of advice long promoted by Dimensional — one in which the interests of the client are paramount. In the old model, a product manufacturer paid commissions to an advisor (in reality, a facilitator), who in turn sold proprietary products to a customer. In the new model, the pyramid is reversed so the advisor's interests are aligned with those of the client.

In this view of the world, clients are much more inclined to stay the course and meet their financial goals. They get what they really want — help in making wise financial decisions. Advisors become true fee-based professionals, focusing on the needs of their clients and freed from having to "sell product".

The other aspect of the reforms — creating a more efficient retirement savings system — also ties in with Dimensional's long-established message. That message says that investors should focus more on things within their control, like keeping costs down and reducing taxes, and less about factors outside their control, like market volatility and media noise.

It truly is a revolution. And it has been a long time coming.

Hard Sells, Harder Lessons

2010-04-27T10:28:00.002+10:00

Jim Parker, Vice President, DFA Australia Limited

Sometimes you need to see the worst practices of the financial services industry to understand why it is worth paying for good advice. Take, for instance, what's been happening in New Zealand.

Huljich Wealth Management is an accredited distributor of KiwiSaver, a voluntary work-based savings initiative set up by the New Zealand government to encourage Kiwis to grow wealth for their retirement.

The Securities Commission launched an investigation into Huljich after the company's founder, principal shareholder and managing director Peter Huljich admitted he propped up the fund with his own money in 2008.

Huljich later admitted his wrongdoing and resigned as managing director and chief investment officer. While the firm insists no member lost money as a result of his actions, the controversy has hurt the company's reputation.

At the same time, the Securities Commission has expressed concern over aggressive marketing techniques by distributors of KiwiSaver, including high pressure door-to-door selling and inducements to sign up right away. Huljich is alleged to have been one such aggressive marketer.

"The commission has become aware of a number of circumstances where KiwiSaver membership has been solicited in an unusual or confusing manner. This type of behaviour is completely unacceptable and damaging to investor confidence," commission chairwoman Jane Diplock said.¹

According to one newspaper, Huljich sold the superannuation scheme to two intellectually disabled students who had little idea what they were signing. One was under the legal age and the other had a reading age of 8.

In some cases, investors did not know they were committing to KiwiSaver. Some thought they were purchasing household products. In other cases, inducements were offered for long-term membership. Some people were even offered the chance to win a $100 shopping voucher if they signed up.

The controversy over KiwiSaver is not what the New Zealand financial services industry needs, as it struggles to restore its collective reputation after a series of scandals in recent years involving finance companies.
A total of $1.5 billion of investors' hard-earned savings were lost in those collapses in 2007-08, a blight on the New Zealand securities industry that the commission's chairwoman blames on a patchwork regulatory framework.²

A common theme in the scandals is a lack of understanding among the general public about the difference between an independent financial planner and a sales person for a product distributor. The latter receives incentives to sell product, while the former is paid by their clients to build a customised financial plan — including a diversified investment portfolio - designed around their individual needs, aspirations and risk appetites.

The government is now attempting to address this by putting up for discussion a draft code of conduct for authorised financial advisors, which sets minimum standards of competence, knowledge and skills, ethical behaviour and client care which advisors would have to meet.

At the core of the code of conduct is a requirement that when providing advisory services, authorised advisors must place the interests of their clients first and must act with integrity.

Advisors would not be able to characterise their advice as "independent" when they are being paid by a person other than the client or are under a contractual obligation to recommend a particular product.

Dimensional has long argued that financial advice is best left to independent and professional advisors who are directly familiar with their clients' financial experience, risk tolerances and individual goals.

The relationship between Dimensional and advisors is not tainted by commissions or other incentives. Rather, it is founded on shared ideas about how markets work, a joint commitment to education and a common goal in ensuring clients have a good investment experience.

The investment philosophy is also a sound one. No market timing or forecasting or speculation is involved. It is not about fickle fashion or ego-driven claims by individuals about being able to "beat" the market.

Instead, it is about working with the market to build diversified portfolios around risks that rigorous research shows are related to return. It is about keeping costs as low as possible and about being mindful of taxes. And it is about staying disciplined.

There are no hard sells in this view of the world - just an unchanging commitment to the welfare of the individual investor.

¹'NZ Commission Warns KiwiSaver Funds', NZPA, March 24, 2010

²'The System is Broken: We Need to Fix It', Jane Diplock, NZ Herald, March 26, 2010

Mission Impossible

2010-04-14T12:33:00.001+10:00

Jim Parker, Vice President, DFA Australia Limited

It's a Hollywood staple. A group of ragtag desperados is assembled to embark on a suicidal mission — think 'The Dirty Dozen' and 'The Magnificent Seven'. It makes for exciting viewing, but applying this approach to investment isn't recommended.

At the height of the bear market in early 2009, Australia's BRW magazine, a popular weekly business title, asked 50 market experts to draw up a roadmap for the anticipated recovery, including the best sectors and stocks to buy.¹

The panel of 50 participants comprised fund managers, equity strategists, economists, analysts and other tipsters. From their recommendations, the magazine put together 18 "expert ideas" for the recovery.

The dozen and a half individual stock tips were split broadly between big, well-known, blue-chip companies such as QBE Insurance, BHP Billiton, Woolworths, Westfield, CSL and Boral — alongside some mid-caps, smaller stocks and outright speculative plays.

While couching its stock tips with a host of qualifications — nothing was certain, markets rarely followed a neat script and blindly relying on history was dangerous — the magazine said these were the pick of the bunch.

For the reader wanting to position themselves for the recovery, it might have seemed a reasonable assumption that assembling a concentrated portfolio comprising these 18 super stocks would be a good strategy.

But while parts of the magazine panel's ideal portfolio did do well — mostly the very small, speculative companies — only seven of the 18 stocks overall outperformed the wider market's near 40 per cent gain in 2009.

Indeed, many of the tried and true blue chips in the list underperformed the market. QBE Insurance gained just 5.3 per cent over the year, Woolworths rose 9.1 per cent and CSL actually went backwards, down 1.5 per cent.

If investors had assembled the BRW's 'rebound' portfolio at the start of 2009 and held each stock at its market cap weight, they would have seen a return of 26.8 per cent over the ensuing 12 months.

While that may sound great, it's worth pointing out that just by owning the broad market, as defined by the S&P/ASX 300 accumulation index, investors would have enjoyed a return of 37.6 per cent, a 40 per cent improvement on the magazine's ideal portfolio.

Holding a highly diverse portfolio of value stocks would have delivered an event better result. For instance, Dimensional's Australian Value Trust, with 187 stocks, posted a return in 2009, net of fees, of 43.6 per cent.

Holding such a broad range of companies in a portfolio is called diversification. It allows the investor to capture broad market and economic forces, while reducing the uncompensated risk arising from individual stocks.

This isn't to say you can't beat the market by assembling a focused portfolio. But these successes are usually more down to good luck than good judgement and they are very hard to repeat. It's like taking a punt on a horse.

In any case, as we've seen in the above example, even a portfolio assembled by the best and brightest can come up short of the mark. What chance, then, has the ordinary investor of generating consistent market-beating returns by relying on a handful of securities?

At the end of the day, gambling on a band of hand-picked individuals might work for Yul Brynner and Lee Marvin in the movies, but trying to build long-term wealth with a handful of stocks looks like mission impossible.

¹'Waiting for the Rebound', Tony Featherstone, BRW magazine, Jan 8, 2009

Birthday of Thomas Jefferson (b. 13 April 1743)

2010-04-13T16:38:00.001+10:00

From The Writer's Almanac with Garrison Keillor

It's the birthday of the man who said: "Determine never to be idle. No person will have occasion to complain of the want of time who never loses any. It is wonderful how much can be done if we are always doing." That's Thomas Jefferson, (books by this author) born in Albemarle County, Virginia (1743). And he certainly lived by those words. He wrote the Declaration of Independence for the fledging United States and then served as its minister of France, secretary of state, vice president, and president. But he was also — among other things — an inventor, philosopher, farmer, naturalist, astronomer, food and wine connoisseur, and musician...

He loved to read ... he said, "I cannot live without books." He wrote to John Adams, "I have given up newspapers in exchange for Tacitus and Thucydides, for Newton and Euclid; and I find myself much the happier."...

He said: "In matters of style, swim with the current; in matters of principle, stand like a rock."

READ THE FULL POST HERE AT THE WRITER'S ALMANAC

http://writersalmanac.publicradio.org/index.php?date=2010/04/13