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« Weighing the Week Ahead: The Confusing Effect of Politics | Main | How (not) to Build a Market Indicator: The Hindenburg Omen »

August 24, 2010



Lurker -- Thanks for your observations. Marty (an old friend and former colleague) is well-grounded in reality, but perhaps not from the investment manager perspective. He may expect other investors to be as smart as he is.

Thanks to both you and Marty for sharpening up my use of "investor." There are many types of market participants, many motives, and many ways to win -- or to lose.

I agree about speculators....



Marty -- I should note that Lewis believes the leverage on borrowed money would not have been as great in a partnership structure. I am reading a number of the key books, including those you mentioned, although a review of Hank Paulson's book is next on my schedule.

As to investor motives, I could have been a little more precise. You describe well what an investor time frame should be, but in my experience it often is not. The investors in the book were hedge fund investors -- known to be "hot money."

Sorry not to be sharper on this point, and thanks for your comment on public policy.



I take issue with Marty taking issue with your statement that "Investors think in terms of a few months." And I take issue with your use of the term "investor" in this regard.

First, Marty. Obviously he's completely out of touch with the mainstream reality. There's a disconnect between what people say and what they actually do with their money, and study after study has shown that both retail and institutional money is incredibly short-sighted and reactionary to movements that last only a few months. Study of sentiment indicators should bear this out quickly, if done with an open mind. :-) As you know, Jeff, dealing with retail clients daily, they are emotional and short-sighted and a few months' experience will cause them to pass negative judgment on methods that may underperform for a year or more at a time ("value") but will overperform over multiple years.

Second, Jeff, "investor" really only applies to those who purchase a stream of cash flows for its own sake, hence applicable to people buying businesses or rental real estate. People who buy stocks for the purpose of gaining through selling at appreciated prices(or hire others to do so on their behalf) are more properly labeled "speculators."


> Without this belief, The Big Short would not have been >possible.

that's the perception gap combined with path gap (or jump gap) will help to make sense of some things

You know who!

Journal of Alternative Investments has a good article on how the recovery assumptions in the CDO pricing models basically dictated the % of the tranche that would wind up getting priced as "investment grade." Worth getting a trial script and d/l the paper.

Next time you're in TX ask me about the data the rating agencies use to rate catastrophe bonds ...


Thanks for reviewing The Big Short. Although I have not yet read it - I plan to - I've read a number of his other books (such as Moneyball and the Blind Side). As you point out, Lewis has the great ability to explain complex subjects very clearly and in a most compelling way. He does this through serious story telling that requires much due diligence.

Two points of your review deserve further attention.

1. I'm sure that I would agree with your notion that investment banks as public companies is not the issue. Say more here. It's their proprietary trading based on borrowed money, not their investment banking activities, that turned the big 5 investment banks into the big 0. Readers might be intrigued by the detailed stories told by William Cohan (House of Cards), about the rise and fall of Bear Stearns, and Andrew Ross Sorkin (Too Big to Fail), which traces all the major players and their actions from roughly March 2008 through roughly the end of 2008.

2. I take issue with your statement "Investors think in terms of a few months." How do you distinguish an investor from a speculator or trader? Even the IRS - at least for some forms of asset transations - requires a year before one can obtain capital gains treatment. As a Ph.D. economist, I view an investment as an expenditure that generates a series of returns over at least three years. Until public policy can clearly provide incentives for such, funds for investment will remain at the mercy of speculators and traders. Each has his or her place in stabilizing markets, but as derivatives trading has begun to swamp trades in the underlying assets, in good times, we muddle through. In bad times, ...

John the Cheap

Definitely on my list to read. BTW what are the vertical scales on the Google charts? Seems like there's a scaling factor missing from the first one.

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