Topics

Asset Pricing

Impossibly Efficient – Recognising the limits of the Efficient Market Hypothesis is crucial to understanding how investing works in the real world.

Growth and the Market – The link between corporate profits and economic growth should be clear but it isn’t quite as clear-cut as one might hope.

Three Short Points – Shorting increases notional number of shares, should cause you to lose money and is often banned for emotional reasons above anything else.

Discounting the Fed Model – The relationship between bond yields and earnings yields is more nuanced and complicated than the flawed Fed Model would let you believe.

Investments that Really Work – Could workers sell equity in themselves to finance activities they would otherwise fund with debt?

Non-Fundamental Stuff – Monetary policy is fundamental to asset pricing, and traders try to outsmart the economists by using non-fundamental factors to predict the next move.

Lemon Cake Investing – Not everything that has a price that changes has a positive expected return.

Not Supporting Gold – For most (useful) commodities the marginal cost of production is a good guide to the price, this is not the case for gold for two very good reasons.

Risk-free is Fantasy – The anchor in most asset pricing models, the risk-free rate, does not exist unless we pretend that some real-world risks don’t exist.

Wheeling and Dealing – Partial equilibrium arguments abound in finance chatter, but few are more pervasive than the idea that buyers and sellers operate in isolation

Portfolio Theory

On Risk Parity – Risk Parity is an approach to portfolio construction worth discussing but not worth using in a real way because it lacks a sound theoretical framework.

Correlated Errors – Many of portfolio theory’s models rely on the assumption of stable correlation between assets in order to set weights, but correlations change in dramatic ways that reduce the power of empirical applications of such models.

Winning a Loser’s Game – Portfolio theory has given rise to a benchmark mentality, which in turn creates more winners than losers among investment mangers. But the capital allocation process also loses.

Utterly Styleless – Populations dividing themselves into opposing factions on the say-so of a flawed ideology is not that uncommon in the real world, nor is it uncommon in the world of investments (featured on FT Alphaville)

Investor Behaviour

Speculator’s Option: “Told you so” – Noisy feedback and biased sampling mean that Mr Speculator can work his way into dangerous situations. Beware.

Why Good Luck is a Bad Look – Process matters more than outcome. A good process will result in good outcomes, but good outcomes do not necessarily indicate a good process.

What’s a Quarter Worth – Investors can get hung up on what happened in the most recent 3 months. This post shows graphically how much that really matters.

High on Highs – Breaking even on a nominal basis does not mean that you haven’t lost anything; gambling is very different from investing.

Corporate Finance

Buybacks are a Capital Structure Decision not an Investment Decision – Companies routinely change their capital structure as a result of paying dividends to shareholders, the same happens when they buy their own shares – why is that not as easy to understand as it should be?

What Investors Don’t Get About Buybacks – Companies aren’t investing when they buy back their own shares but they can make some investors better or worse off depending on how they time the buybacks.

Policy

Farming Out Risk – This article challenges an argument put forward that governments should play a greater role in managing the risks in financial markets.

Probability & Statistics

Uncertainty-takers – There is a well known distinction between risk and uncertainty, but there is still a great deal of confusion over what uncertainty means and how you can think about it in the context of financial analysis.

Miscellaneous

Bitcoin’s Marginal Cost Fallacy – The price of Bitcoin, much like gold, does not have a relationship with marginal cost in the way that productive commodities do.

A Bit of a Con – The speculative nature of Bitcoin weakens its attractiveness as a credible alternative to official currencies.

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