Leverage

LEVERAGE
Nobel Lecture, December 7, 1990
by
MERTON H. MILLER
Graduate School of Business, University of Chicago, Chicago, Illinois, USA

Foundations of Portfolio Theory

FOUNDATIONS OF PORTFOLIO THEORY
Nobel Lecture, December 7, 1990
by
HARRY M. MARKOWITZ
Baruch College, The City University of New York, New York, USA

The Crisis of 2008: Lessons learned, unlearned and reinforced

In an article, posted on his blog, Aswath Damodaran, a famous name in modern corporate finance and valuation and author of many books, comments on how his perception of various market views has evolved after Lehman Brothers filed for bankruptcy protection.

To me #1 is his observation: There is no risk-free asset. Pick up yours.

The Crisis of 2008: Lessons learned, unlearned and reinforced

The Capital Asset Pricing Model

CAPITAL ASSET PRICES WITH AND WITHOUT NEGATIVE HOLDINGS
Nobel Lecture, December 7, 1990
by
WILLIAM F. SHARPE
Stanford University Graduate School of Business, Stanford, California,
USA

Nobel Economists Offer First Aid for Global Economy

Five winners of the Nobel Prize for economics share their views on what the
future global finance order should look like in exclusive essays for
SPIEGEL.

Contributors To The Crisis

The British Guardian and their City editor Julia Finch have made a list of twenty-five individuals who, according to them, have led us into the current crisis. Twenty-five people at the heart of the meltdown...

Global Financial Crisis Video Webcast with Gillian Tett

In this video webcast (01:05:09), dated 4th of Dec, 2008, Gillian Tett, an assistant editor of the Financial Times responsible for their global coverage of financial markets, explains the market’s collective reaction to the global financial crisis using the Kubler-Ross model of the stages of grief. Ms. Tett draws on her experience witnessing the Japanese banking system collapse in the 1990s and makes comparisons to the financial markets’ current troubles.

The webcast is available at the CFA Institute sub-site CFA Webcasts. The interview with Tett is part of a Global Financial Crisis Roundtable with one more webcast. The event archive is avalable here.

IMF:Fiscal Policy During Financial Crisis

The International Monetary Fund published December 29th, 2008 a staff position note named Fiscal Policy for the Crisis. The document, among other things, reviews five case studies of fiscal policy during financial crisis featuring the Great Depression, the Banking Crisis in Japan in 1997, the Economic Crisis in Korea in 1997, the Savings and Loan (S&L) Crisis in the US (1980s–1990s) and the Nordic Banking and Economic Crises.

Lessons from history are thought usually helpful for assessing market situations. Take your time to review.

Antonio Spilimbergo, Steve Symansky, Olivier Blanchard,and Carlo Cottarelli
806K PDF, 38 pages

Financial Crisis Timeline II

BBC, like REUTERS, have their own extensive crisis timeline which provides text coverage since April 2007. The timeline starts with a quick guide to the origins of the global financial crisis.

April, 2007, New Century Financial, which specialises in sub-prime mortgages, filed for Chapter 11 bankruptcy protection and announced cuts of half of its workforce.

The timeline is named Global credit crunch.

Financial Crisis Timeline I

REUTERS have made an extensive crisis timeline which covers in details the current financial crisis around the globe. The timeline provides video and text coverage since September 14th, 2008 and is updated daily.

September 14th, 2008 investment bank Lehman Brothers filed for bankruptcy protection.

The timeline is named Global Financial Crisis and is in the middle of the page, just below the leading news for the day.

Risk Assessment Quiz

Recently I have come upon a worksheet that some might find a handy tool for their risk assessment process. This worksheet tries to asses your overall risk-taking capacity and to give a numerical score on your risk tolerance along with suggesting sample asset allocations. Not very sophisticated but at the same time neat and insightful.

Risk Assessment Quiz (doc file, 43KB)

This quiz is designed as a starting point for financial discussions. It should not be used to make final decisions.

One of The Best Explanations of The Financial Crisis

THE LAST LAUGH

How to Invest Now

In light of the recent market turmoil, experts from Zacks Investment Research give guidance on how to construct your portfolio whether you are aggressive, conservative or somewhere in between.

Business Plan for a Startup Business

Looking for a neat way to write your business plan? Well, look no more.

The Service Corps of Retired Executives (SCORE®) have provided on their web site an extensive guide how to construct your business plan under the name Business Plan for a Startup Business.

A good proof that the guide is popular and with potentially high value is the fact that the document has been downloaded more than 1 million times from the Templates section of Microsoft Office Online, one more place where the plan is also available.

SCORE "Counselors to America's Small Business" is a nonprofit association dedicated to educating entrepreneurs and the formation, growth and success of small business nationwide. SCORE is a resource partner with the U.S. Small Business Administration (SBA). They boast to have helped nearly 8 million small businesses.

Asset Allocation

Asset allocation is an effective method of diversification. It refers to the strategy of dividing your total investment portfolio among various asset classes. Here are five basic models, portrayed in an article of Shauna Carther (Biography) for http://www.investopedia.com/.

The Future of Life-Cycle Saving and Investing

The Future of Life-Cycle Saving and Investing

Life-cycle finance is the branch of finance that affects everybody. The Research Foundation of CFA Institute teamed with Boston University and the Federal Reserve Bank of Boston to present a conference exploring the frontiers of life-cycle finance. Insights from such leading thinkers as Paul Samuelson, Robert Merton, and Zvi Bodie are captured in these proceedings of the conference.

The Second Edition (February 2008), with additional comment, is now available (online only) on the web site of CFA Institute.

The Future of Life-Cycle Saving and Investing, Second Edition (Full PDF)
Zvi Bodie, Dennis McLeavey, CFA, and Laurence B. Siegel
Research Foundation Publications, The Future of Life-Cycle Saving and Investing, Second Edition(February 2008): 1-183.
Abstract Full Text PDF(1975K) Linked PDF(2000K)

Investment Strategies Against Inflation

Inflation and especialy elevated inflation could seriously undermine investment returns. Therefore efficient tactics against it need to be developed in order to prevent or at least dampen the defects of inflation. Here I will name several broad strategies that could be of help:

1. Avoid broad portfolio diversification
2. Stay long energy, materials and industrials against shorts in all other sectors
3. Stay liquid to buy depressed financial assets
   
4. Own actual and/or implied interest rate and equity volatility
5. Short bonds with fixed rate against stock
   
6. Own some floating-rate bonds
   
7. Own some gold
8. Own inflation protected bonds if available

It might be surprising for some but inflation at a small pace is usually much preferred over deflation. Why? Well, the best reason I could come up with is that in a deflation environment people start losing their jobs. With product and services getting cheaper, investment and expansion is much tougher.

Benjamin Graham's Investment Screening

Ever wondered how Benjamin Graham used to screen for investment picks?

Here is his list:

1. PE of the stock has to be less than the inverse of the yield on AAA corporate bonds.
2. PE of the stock has to be less than 40% of the average PE over the last 5 years.
3. Dividend yield has to be more than two-thirds of the AAA corporate bond yield.
4. Price has to be less than two-thirds of book value.
5. Price has to be less than two-thirds of net current assets.
6. Debt-Equity Ratio (Book Value) has to be less than one.
7. Current assets have to be more than twice current liabilities.
8. Debt to be less than twice current assets.
9. Historical growth in EPS (over last 10 years) has to be over 7%.
10. No more than two years of negative earnings over the previous ten years.

Although Modern Portfolio Theory teaches that it is generally impossible for any individual to outwit the market, Graham's approach retains a widespread and dedicated following. Graham’s best claim to fame comes from the success of the students who took his classes at Columbia University. Among them were investors like

Charlie Munger and Warren Buffett.

Have in mind though that Graham's criteria can lead you to stocks that are value traps, meaning the shares are cheap for good reason and unlikely to appreciate. Screens are a good place to start, but it is common sense not to buy without doing your own research.

Managing Your Own Portfolio

Need a piece of advice on personal portfolio management?

Here is an insightful memo from Arthur Zeikel
to his daughter on Managing Your Own Portfolio.

Arthur is a 20-Year Veteran of Merrill Lynch Asset Management, now retired. He is father of three and grandfather of four and one of the most respected US leaders in asset management. Arthur is also member of the Editorial Board of the Financial Analysts Journal where the memo has been published in the March-April edition in 1994. Now this piece of advice is available on the web site of CFA Institute in their Private Wealth Corner.

Here is an excerpt to let you sense the style of Arthur:

Act.
Make decisions. No amount of informafion can remove all
uncertainty. Have confidence in your moves. Better to be approximately right
than precisely wrong.
Take the long view.
Don't panic under short-term transitory developments. Stick to your plan. Prevent emotion from overtaking reason. Market timing generally doesn't work. Recognize the rhythm of events.
Remember the value of common sense.
No system works all of the time. History is a guide, not atemplate.

Download the letter here.

Creating Your Investment Policy Statement II

Part II – Practice

Although each Investment Policy Statement (IPS) is very personal, it bears certain features which are nicely summed up in the Morningstar’s Investment Policy Worksheet (pdf). This document is only two pages long but full of vital questions that each investor should address.

The worksheet’s leading section is called Executive Summary and serves as an overview of your current situation and what you expect from your portfolio. Oncce filled in, it is advisable to update it whenever you rebalance your portfolio.

The next two sections ask you to state your objectives and put in plain language your investment philosophy. The last two sections refer to your investment selection criteria and monitoring procedures.

The worksheet is an excellent start for constructing your IPS although it does not address critical issues like liquidity and reconciliation of your ability and willingness to take risk. See Part I for more clues on that. Another feature that also could be elaborated is the list of available asset classes briefed into the Executive Summary. The lack of commodities and no split of bonds into government and corporate strike at first glance but here the illustrative nature of the Worksheet seems much more important.