Tuesday, December 06, 2011

Time for us to Count Our Blessings?

December 4, 2011
The Good Old Days?
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."

Tuesday, October 25, 2011

Friday, October 21, 2011

The Struggle to Define What We Truly Need

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.

Sunday, August 14, 2011

Irrational Markets?

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

Friday, July 15, 2011

ZARA · A/W 2011 SYDNEY opening party

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

Thursday, June 30, 2011

Betting on Growth

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

Tuesday, June 21, 2011

Discipline: Your Secret Weapon

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

Friday, June 10, 2011

Thiel Foundation Fellows

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.

Thursday, June 09, 2011

The Economy: When Will Happy Days Be Here Again?

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." ...

Tuesday, June 07, 2011

The Guilt of Trading Too Much

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.
 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.” ...


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

Friday, June 03, 2011

Dragging the Property Anchor

* 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.

Friday, May 20, 2011

Four Things I Want You to Remember Me By

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.

Thursday, April 07, 2011

The Apocalypse Grill

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.

Thursday, March 31, 2011

Planner-blogger draws on fun to deliver advice

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...

Tuesday, March 15, 2011

Thursday, March 10, 2011

"A Glimpse of the Future of Education"

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

Wednesday, March 09, 2011

Carl Richards - Behavior Gap and Prasada Capital

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

...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....


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)

Thursday, March 03, 2011

The Housing Price Conundrum

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!

Thursday, February 24, 2011

Seeking the Perfect Wave

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).

Friday, February 04, 2011

Gordon Murray, Dies at 60: New York Times

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. 

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