Monthly Archives: January 2010

What the NFL gets right

The NFL understands that despite what fans say on talk radio about a season’s purpose being to determine the “best” team, that what actually keeps fan watching is the large role that randomness plays in the NFL versus other professional sports.  By having the entire playoffs be sudden death, it virtually guarantees there will be scenarios where the “better” team loses.  Contrast this with MLB where seemingly every season the winner of the AL Central will get lucky and take game 1 of a series against the Yankees/Red Sox only to be eventually overwhelmed by the superior talent of the favorite.  This scenario does not exist in the NFL and for good reason.  Would anyone remember  the Giant’s David Tyree’s amazing catch against the Patriots in the Super Bowl if they’d been playing best of 5 or 7?  Does anyone think the Giants could have defeated that Patriot’s team in a best of 7?  Whenever you watch an NBA or MLB game 7, the announcers always talk about the magic of a game 7 due to it’s finality and how every play’s impact is magnified, with the NFL, every playoff game is a game 7.

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Greed is Good – Why Punitive Taxes don’t Work

New column of mine on  HuffingtonPost –  Greed is Good – Why Punitive Taxes don’t Work

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Fallacies of “no cost is too high” model for fighting terrorism

Love this blurb by Nate Silver on how our over reaction to these botched terrorist attempts increase their value to those who commit them –

no cost is too high, they say, to prevent the next 9/11. But if history is any guide, the next attack will probably not be like 9/11—it will be like NWA 253, something which threatens the lives of dozens or hundreds of people, not thousands. To the extent we overreact to these incidents—allowing them to disrupt our economy and our way of life—we do little but increase the value to terrorists of committing them.

Full article here, Nate’s website here.

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Book Review – The Ivy Portfolio

Read Mebane Faber‘s The Ivy Portfolio yesterday and found it to be very well written.  For a book dealing with asset allocation and some statistics, it is a very easy read and avoids ever droning on like a college textbook.  The premise of the book is twofold . First is that the majority of the incredible outperformance of the “super-endowments” (Harvard and Yale are the two examples in the book) over the past 23 years (over 15% / year compounded) is due more to their asset allocation than outperformance in any specific asset (though they have achieved this as well).  The second is that individual investors would be well served to follow a similar asset allocation model and can enhance their performance using a simple market timing method outlined in Faber’s 2007 paper.

I found the approach to be well thought out and refreshing.  Faber makes a very strong case for the significant inclusion of foreign equities (already common on most allocation models but in smaller percentages) as well as REITs (less common) and commodities (rare).  The most illustrative chart on including all 5 of the suggested asset classes (US equities, foreign equities, bonds, commodities and reits) is on page 137 which along with the accompanying table shows how surprisingly close the total returns for each of those classes have been over the previous 25 years.

The second premise and the one that has gotten more attention on the web via Faber’s blog is the timing portion where an investor moves to cash when the price of the asset class crosses below its 10 month moving average and buys back in when it crosses above.  Based on the data provided in the book and updated on the accompanying website, this method provides a safeguard against scenarios like 2008 where the correlation of the major asset classes went to 1 as the entire global financial markets melted down.  This meltdown resulted in losses to the Harvard and Yale endowments of 25-40% while Faber’s timing model had a positive return of ~1%.  Impressive performance for model that was public as of 2007 and can be duplicated for a fraction of the cost of the average mutual fund.

This book should be read by anyone who still believes the common axiom that the key to asset allocation is adjusting the % of stocks versus bonds based on your age.

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