Monday, January 31, 2011

Elegant Explanations

I was just deciding what to post this week, when this link showed up in my in-box, sent by a client.  It is a series of napkin drawings by Carl Richards which appear in the New York Times Bucks Blog.  I think they are fabulous, as I always prefer simple, elegant explanations to financial topics.

Here is one I particularly like (click on picture to see the blog post):  

No matter how much we plan, the future will always be filled with surprises.  Good financial planning is about understanding this fact and making plans that can adapt to these inevitable changes.

Monday, January 24, 2011

What's Next?

Here is an article from the Boston Globe which discusses how poorly "experts" do at forecasting the future.  This is a great follow-up to last week's post about efficient markets.  

A common belief is that, while maybe the average person can't predict what will happen next, surely there are experts out there who can.  A look at the actual track record of these "gurus" quickly dispels this notion.  In the above mentioned article, the author discusses Nouriel Roubini, the man who, in 2006, predicted the financial crisis of 2008 and, thus, earned the nickname "Dr. Doom".  This correct prediction earned Dr. Roubini fame and fortune.  Unfortunately, it was also followed by many incorrect predictions, such as excerpted below from the Globe article:

"But here’s another thing about him: For a prophet, he’s wrong an awful lot of the time. In October 2008, he predicted that hundreds of hedge funds were on the verge of failure and that the government would have to close the markets for a week or two in the coming days to cope with the shock. That didn’t happen. In January 2009, he predicted that oil prices would stay below $40 for all of 2009, arguing that car companies should rev up production of gas-guzzling SUVs. By the end of the year, oil was a hair under $80, Hummer was on its way out, and automakers were tripping over themselves to develop electric cars. In March 2009, he predicted the S&P 500 would fall below 600 that year. It closed at over 1,115, up 23.5 percent year over year, the biggest single year gain since 2003."

Now we have nothing personally against Mr. Roubini, but this is an example about why we do not use prediction as a tool in financial planning, because, in the end, the ability to be right about the future, even among well-informed, well-educated experts, looks a lot like luck.  We think planning one's financial future should involve understanding cash flows, risk/return trade-offs, and other mundane financial concepts -- not betting on anyone's predictions.

Tuesday, January 18, 2011

Timeless Advice

Here is a video interview with Burton Malkiel, Princeton economics professor and author of "A Random Walk Down Wall Street", one of the most important books ever written on the topic of investing. 

In the interview, Professor Malkiel defends the efficient market hypothesis (EMH), which has come under much criticism in recent years.  Critics have wrongly claimed that, if the EMH were true, markets would always price securities correctly, and, thus, stock market crashes like that of 2008 would not happen.  

These critics have incorrectly interpreted EMH, because it doesn't assert that market prices are correct, just that no individual can regularly provide "better" prices than the market as a whole, and thus, it is very unlikely for any investor to consistently "beat the market."

It's worth listening to Professor Malkiel's explanation:

Monday, January 10, 2011

This and That

I have been put aside a few web links over the past few weeks to eventually put on this blog, so I figure now is a good time to clean house and then start fresh:

Trade Deficit:  I have discussed before that government statistics, like trade deficits, are inherently flawed, because their methodology doesn't reflect our current globalized economy.  Clicking on the picture below will take you to a Wall Street Journal article which does a great job explaining this issue:

Video games:  Here, Andy Kessler discusses how video games are positively affecting the economy.  Further evidence of how innovation comes from places we often don't expect.

A Trillion Dollars:  US government debts are now denominated in trillions of dollars.  This site does a very cool job of showing just what $1,000,000,000,000 looks like.  

Monday, January 3, 2011

Happy New Year!

Hard to believe that it is already 2011.  I figured I would start the year with a post focused on good news, so here is an article from this morning's Wall Street Journal, which talks about the fact that corporate America is flush with cash and firms have plans to actually use the cash this year for investment and hiring.  This will, most certainly, help the economy continue to grow out of the recession.

My New Year's resolution for this year is to update this blog once a week, hopefully on Mondays.  Let's see if I can keep it up.