The recent scandal has brought a spotlight on the long-term issues of unfair college admissions,. Once you get past the outright criminality of this incident, there remains the backdoor of unfair practices that are just a step or two less flagrant and unjust. Here are five steps that can reduce the clear biases and gaming that are at the disposal of the wealthy. None of these are new or…
Note: This idea became championed by Elon Musk. I wrote this before his work became public. Here is a solution for getting the Thai soccer team out of the underwater cave: Fashion a watertight, flexible cylinder that a boy can lie in prone. It needs to be flexible so that it can be worked around tight curves in the cave. Have an oxygen supply either internally, or fed through an air tube from an…
It is World Cup time, a good time to reintroduce two posts I did one of the last times we had the World Cup capture the imagination. One of them suggests changes to the game that will make soccer less boring. Another expands on this to create a more dynamic version of the game.
What is wrong with passive investing and index hugging? One problem is that these strategies often use ETFs. I wrote about the potential for ETF meltdown last October, with a follow-up shortly thereafter, so I won't belabor that here. Another problem is that most passive portfolios follow a cap-weighted index. Recently I also wrote about the risk from this . So I won't repeat that here, either.…
Matterhorn Disaster by Doré You are in a buy-and-hold, passive investment. So, you will make market returns. Not quite: With the markets, doing nothing doesn't mean you're not doing something. Because while you are sitting on your hands, things are happening around you, and your investment portfolio is changing. The reason is that you are in an index that is market capitalization weighted. The…
I wrote about Facebook in a blog in January, pointing to ominous clouds on the horizon. (And, one looking at the future of Facebook and the world in 2011 .) For an update. Those clouds now are overhead. With the ever-growing realization that Facebook has been a channel for manipulating our life-as-we-know-it (literally so), there is the drumbeat of #deletefacebook (which I joined last week). And…
The following is a brief, contemporary account of our world, which we call, for obvious reasons, the Amazon Dystopia. I leave it undated -- Nadir. The dystopia is most evident in the control of the working class. During work and commuting time all workers are mandated to wear a “health watch”, a wristband that monitors their movement. The wristbands also tell the time and weather. Workers also…
The recent tumble in the market is being attributed to the wage report, a rise in interest rates, and concern about inflation. A reassessment of economic conditions does not lead to such a violent reaction. It might give a push, but then gravity does the rest. For the markets, gravity is the technicals -- how leveraged or overextended investors are, how concentrated, and how much liquidity there…
Investors tend to focus on the most likely outcome. As a risk manager, I spend time focusing on the unlikely, on the bad things that might possibly happen. Where T.S. Eliot writes, "This is the way the world ends, Not with a bang but a whimper" I would write, "This is one possible way the world might end...." So, with that as the starting point, how might the world end for Facebook? And, by…
Whenever I write about the UFC, I should add a standard apology to those who are reading my blog with an eye toward the area of my expertise: finance, and in particular financial risk management. But I have enjoyed mixed martial arts (MMA) since its inception in the mid-1990's, (I also love Brazilian Jiu Jitsu, which I have been active in over the same time period), and find the current missteps…
I'm not going to write anything here about the huge drop in bitcoin over the last few days, so what I am writing cannot be ignored should bitcoin get back up to the 20,000 range. And I'm not going to write about the stupid articles that espouse bitcoin. Though to get a sense of the level of thoughtfulness for the arguments for bitcoin, just to pull one recent one at random, check out this from…
Twitter was not available to the pod people in The Invasion of the Body Snatchers . They had to confront the humans directly, pointing and screeching to muster the mob to attack. But now that we have Twitter, a pod person in our day and age can efficiently and remotely signal a human to the pod-people mob with hashtag HumanToo.(This hashtag is already used in other contexts, but always by humans,…
As I mentioned in an earlier post , working in a pension fund makes me think toward the long term. In that post I spoke about broader long-term risks; here I will give my view about long-term risks at the more specific level -- namely, industries to short if you are looking out a generation or more. That is, how various industries will decline over the next thirty or forty years. That is a long…
I enjoy studying American history of the post-World War II period, and just remembered that earlier this week we passed the anniversary of a milestone for that period: On December 2, 1954, the United States Senate voted 65 to 22 to condemn McCarthy for "conduct that tends to bring the Senate into dishonor and disrepute", signaling the erosion of the crushing anti-communist excesses of the previous…
The baby boomers have changed our society as their demographic wave has washed over one institution and norm after another. Split sessions for public schools, a new level of competition for elite colleges, the free love generation and the rise of student protest, the housing bubble, the creation of the Millennials, (a.k.a. the echo boomers). They have the numbers and the political will to do…
In three years Tesla will be rolling out the fastest production car in the world. And not a "production car" as in, we made ten or so of these so it can be called one. No, a production car that rolls off of an assembly line — though I hope the rate of production is controlled with DeBeers-like style — and that still outperforms any car you can buy at any price. The Tesla Roadster that was unveiled…
...An Actuary is someone who wanted to be an accountant but didn't have the personality for it....An introverted actuary stares at his own feet, and extroverted one stares at the other person's feet....What is the difference between God and an actuary? God doesn't think he is an actuary...."Look at the white horses over there." Actuary: "They're white on this side, anyway." Unfortunately, when it…
I wrote a post a month or so ago on the risks from ETFs, in particular how ETFs on less liquid markets - with high yield bonds being my poster child - could cause problems for the market generally. Basically that there is a fundamental flaw when people think an instrument based on a illiquid market is capable of intraday liquidity. And that if the ETFs in such a market have a severe problem, ETFs…
In case you haven't noticed -- and I haven't -- we apparently are in a world of exceptionally low risk. To see this you need look no further than the volatility of the major markets. The volatility of the U.S. equity market, for one, is at its lowest level in a generation. So, no worries here, right? I wrote a blog post in 2011 titled The Volatility Paradox which explained that when volatility is…
I had a video interview in the U.K. on my recent book, The End of Theory, with Rachel Straus, (Big Money Questions), that just came out with the Daily Mail. You can get to it here .
What will be the longest-term damage of the Trump era? A strong, principled leader will restore some semblance of decency and ethics. Foreign governments might view this period as a bad dream, or an outlier event that veered the U.S. away from a now-returning normal. The anti-scientfiic and pro-industry biases in the various departments and agencies can be rectified just as quickly as they were…
I was the guest for the PBS show WealthTrack for the 30th anniversary of the 1987 stock market crash.
I was at the center of the October 19, 1987 stock market crash, when the U.S. equity market dropped 20% in a single day. The second chapter of my book, A Demon of Our Own Design recounts my experiences during the 1987 Crash, and provides an explanation of what went wrong. The essence of the problem was a programmatic positive-feedback strategy, namely, the dynamic hedging program of portfolio…
What is the magic that allows us to have intraday liquidity through an ETF on a market that itself trades more or less by appointment? Case in point: the high yield bond market. Or emerging markets. Or just about any bond market short of sovereigns and maybe agencies. Suppose there is a sudden rush for the exits in the high yield bond market. Those in the cash bonds know the drill. They will put…
I break risk management into three levels, Versions 1.0, 2.0, and 3.0. Risk Management 1.0 is the standard risk management of VaR and the like, where history is used as a guide, and thus where things work if the future is drawn from the same distribution as the past. Any approach that is looking at risks historically, whether using past prices or variance-covariance relationships or leverage…