Category: Investing Insight

Investing insight to make you a better investor.

Financialization of People

Mike Konczal has a thought provoking article in TheNewInquiry that connects the dots on futures trading and comes a full circle:

Futures allow people to buy and sell a specific quantity of a product now for cash, with the product delivered at some point in the future.
For example, contracts for the future delivery of cattle have existed since at least the 1850s, when farmers met in Chicago agreed to buy and sell corn. But how do you know that you aren’t going to get screwed on delivery? If you agree to buy new cattle years from now, what’s to say that you won’t get the weakest, malnourished cattle available?
The CME’s rulebook for a Live Cattle Future specifies what qualifies as a “deliverable” cattle. First off, “No individual animal weighing less than 1,050 pounds or more than 1,500 pounds” shall be deliverable as a cattle. “Unmerchantable” cattle, such as those that are “crippled, sick, obviously damaged or bruised,” are not acceptable.
Cattle that don’t fit the relatively wide characteristics aren’t tossed aside. They are “discounted” — sold at a loss for a smaller percentage of the contract. This discount is meant to penalize the grower while reducing immediate waste of unsellable merchandise.

And now comes the scary part:

Can “human capital” be traded?

The most likely route for human-capital futures is standardizing through funding for individual education. One can imagine contracts that would mark using your degree for certain kinds of low-paying social work as “undeliverable” on the promise of your human capital, with your debt burden being adjusted accordingly.

Read the whole thing: Buying the Future

Reel Life vs. Real Life

Jim Jubak, beginning in 1997 and continuing for twelve years, wrote one of the first and ultimately the best-read stock picking column on the Internet, “Jubak’s Journal,” for Microsoft’s MSN Money. His initial boss, a hotshot software guy, said: “If you’re so good as a stock picker why don’t you do what no one else does and issue clear buys and sells and then track the results.” That resulted in what we believe was the first online, daily-priced stock portfolio on the Internet, Jubak’s Picks.Jim Jubak

In 2010, Jubak apparently decided that investment management looked awfully easy and so launched his own fund.

Which stunk. Over the three years of its existence, it’s trailed 99% of its peers. And so the Board of Trustees of the Trust has approved a Plan of Liquidation which authorizes the termination, liquidation and dissolution of the Jubak Global Equity Fund (JUBAX).

Ben Carlson over @awealthofcs notes:

There is a constant barrage of people they throw at you in the financial media, each one a seeming expert in their field. The majority of these people spend their time making endless predictions about stocks, the economy, interest rates, company earnings, etc.

Because these are all intelligent-sounding people, it’s very easy to get sucked into believing every single forecast they put out there. Some will be right some of the time. Most are wrong most of the time.

What’s surprising is not that Jubak setup his own mutual fund, but the fact that it still has $16 million in assets. Go figure…



Growth for Poorer Groups Outpaces Middle Class

EM Middle Class

Alliance Bernstein’s research shows that poorer people were generally more hopeful than the middle class about new opportunities and keen to seek better education in order to pull their families out of poverty.

Forty-something, middle income professionals frequently expressed concern about the employment market. And poorer people were typically much more upbeat about their prospects for growth. The optimism tends to reflect the scale of improvement in their lives in recent years—which has often been more pronounced for lower income households.

Is reaching lower income consumers — who have demanding tastes for quality goods at a fair price — the key to success?

Source: Beyond the Emerging Middle Class

HFT: The debate goes mainstream


Michael Lewis’ new book “Flash Boys” is all about High Frequency Trading (HFT.) High Frequency Traders, he says, with advanced computers make tens of billions of dollars by jumping in front of investors. ”

The United States stock market, the most iconic market in global capitalism, is rigged.

I am not sure “rigged” is the right word. Traders have been trying to get ahead of the “flow” for ages. Its just that technology finally caught up recently and now allows firms to do what they used to do more efficiently. Barry Ritholtz of TBP points out that trading has always been a zero-sum game.

One trader’s gain is another trader’s loss. Only in the case of HFT, the losers are the investors — by way of their pension funds, retirement accounts and institutional funds. The HFT’s take — the “skim” — comes out of these large institution’s trade executions.

The defense came hard and fast. William O’Brien, president of BATs Global Markets: Its like GM writing a book saying it’s unfair for the automotive industry that Elon Musk created a new car.

We welcome anyone that is building a better mouse trap for our nation’s investors but I don’t think blind accusation is the right way. I know he has a business model that says everybody but him rips you off.

High-frequency traders account for 40 to 70% of all trading on every stock market in the US. The numbers for India are said to be similar. And since HFTs only intermediate trades, it is hard for them to lose money. Tradebot, one of the biggest high-frequency traders around, had not had a losing day in four years.

How can individual/retail investors protect themselves from getting skimmed by HFTs? First, understand that you can’t avoid them. So stop trying to trade intra-day and lengthen your investment horizon to at least a couple of months. Second, know that the “skim” is a few pennies/paisas and affects you in a meaningful way only if you make a lot of trades.

Josh Brown of TRB:

The bottom line is this – there have always been insiders, unscrupulous dealers and some participants with unfair advantages over others. HFT is just the latest in a long line of shenanigans and the moment you outlaw it or modify it or babysit it out of existence, there’ll be a new broad-daylight robbery format waiting right behind it.
The stock market hasn’t become rigged, IT STARTED OUT RIGGED.


Big Data’s Big Blind-spots

big data's big problems

Yesterday, we discussed how theoretical models can be used to draw biased conclusions by using faulty assumptions. If the models then get picked up without an understanding of those assumptions, it leads to expensive mistakes. But are empirical models free from such bias, especially if the data-set is big enough? Absolutely not.

In an article titled “Big data: are we making a big mistake?” in the FT, author Tim Harford points out that by merely finding statistical patterns in the data, data scientists are focusing too much on correlation and giving short shrift to causation.

But a theory-free analysis of mere correlations is inevitably fragile. If you have no idea what is behind a correlation, you have no idea what might cause that correlation to break down.

All the problems that you had in “small” data exist in “big” data, but they are only tougher to find. When it comes to data, size isn’t everything, you still need to deal with sample error and sample bias.

For example, it is in principle possible to record and analyse every message on Twitter and use it to draw conclusions about the public mood. But while we can look at all the tweets, Twitter users are not representative of the population as a whole. According to the Pew Research Internet Project, in 2013, US-based Twitter users were disproportionately young, urban or suburban, and black.

Worse still, as the data set grows, it becomes harder to figure out if a pattern is statistically significant, i.e., can such a pattern have emerged purely by chance.

The whole article is worth read, plan to spend some time on it: Big data: are we making a big mistake?