Weekly Roundup 45: A Curated Linkfest For The Smartest People On The Web

Readers,

Hope you’re enjoying the weekend.

Miguel Barbosa
-Founder of SimoleonSense

SimoleonSense Weekly Favorite :How to Find Value Stocks and Ideas – Via Old School Value – To find the best value stock ideas, you need a competitive advantage over the next person when it comes to stock picking. I’ve been asked many times how I’m able to come up with the obscure totally ignored, low risk high return stocks. It isn’t difficult and I’m hear to let you in on how I do it. Considering that value investing has been in existence for decades with the likes of Benjamin Graham and Warren Buffett introducing the world to value investing, the value investment technique still remains effective because a majority of investors shy away from the hard work involved. I previously wrote about how to find stock ideas but I hope these additional few techniques will make it easier and give you an added advantage.

SimoleonSense Weekly Favorite: Getting the Story Right The True Origin of the Financial Crisis Via AEI – In a new Economic Outlook, Makin discusses three important lessons of the financial crisis that should be understood in order to enable a faster, more effective policy response to future crises.Determining the true causes of the financial crisis has significant impact on America’s response to it. Distorted explanations of the financial crisis are pervasive and destructive. Government policies, not market failure, were the main causes of the financial crisis.

Exclusive Feature: You can’t handle the truth about stocks – Via CNN & Finance Professor – Conventional financial planning has it all wrong, argues economist Zvi Bodie. If you need the high return of stocks to reach your goals, he says, then you can’t afford to invest in them.

Exclusive Feature: Documentary Fractals – Hunting The Hidden Dimension -They’re odd-looking shapes you may never have heard of, but they’re everywhere around you—the jagged repeating forms called fractals. If you know what to look for, you can find them in the clouds, in mountains, even inside the human body.In 1958, Benoit Mandelbrot begins using computers to explore vexing problems in math. They help him to understand repeating patterns in nature in an entirely new way. He coins the term fractal to describe them and develops the Mandelbrot set in 1980.

Exclusive Feature: Time vs. Money: Analyzing Which One Rules Consumer Choices – Via Wharton -A new paper by Mogilner and Jennifer Aaker, professor of marketing at Stanford University’s Graduate School of Business, argues that when companies weigh whether to go for an ad campaign with a time or a money theme, they should be aware that each evokes strong reactions from consumers. “One thing that was surprising,” she says, “was to see how consumers’ attitudes and behaviors toward products and brands can be shifted by something as subtle and as pervasive as mere mentions of time or money.”The concept of time, for example, evokes a personal connection with a product in terms of the experience the consumer gains while using it, she says. To illustrate her point, Mogilner cites a well-known phrase in beer marketing — “It’s Miller Time.” The ads are still remembered by many consumers from the 1980s because consumers associated the beer with the routine, end-of-day transition from work to leisure.

Exclusive Feature: How concentrated should you be? – Via Guru Focus – I have been planning an article on portfolio composition and concentration for some time. My portfolio composition to date has been quite simple. It consists of 25 to 30 positions, all more or less equally sized accept for cases where I bought more at a lower price. In spite of studies showing that 15 positions eliminate 80% of company specific risk in a portfolio I arbitrarily chose 25 to 30 positions as I knew my selections were not perfect and I wanted a bit more diversification.I hardly ever have more than 30 positions in my portfolio, as that is the maximum number of companies I can comfortably keep track of.

Exclusive Feature: The Hidden Persuaders: best book I (n)ever read – Via Lucid Thoughts – I’ve written elsewhere on this blog about the influence of Vance Packard’s 1957 book, The Hidden Persuaders, on journalistic accounts and public perceptions of the new “neuromarketing” field. In 2007 there were a number of reviews and appreciations of The Hidden Persuaders written to commemorate  the 50th anniversary of its publication.  I just finished reading a very interesting account by Michelle Nelson, called “The Hidden Persuaders, Then and Now,” published in the Journal of Advertising, Spring 2008.  Diligent googling might find you a copy out there on the interwebs somewhere.

Exclusive Feature: Lack of insurance causes more than 44,000 U.S. deaths annually– Via SA – Going without health insurance can delay when people obtain primary and preventative care, potentially resulting in poorer health. Even more gravely, a lack of private health insurance brings an increased risk of death; uninsurance is to blame for some 44,789 adult deaths across the U.S. every year, according to a new study published online today in the American Journal of Public Health.

Feature: Eight Mental Traps to Avoid While Investing – Via Morningstar- Investing is as much an exercise in controlling emotions as harnessing the intellect. With inherent uncertainty and high stakes, investing is as much an exercise in controlling emotions as it is an intellectual exercise. We’re only human, after all. To make better decisions, it makes perfect sense to try to identify our natural weaknesses and biases to attempt to correct them. As outlined in the August issue of Morningstar StockInvestor, below are some of the common mental anomalies relevant to investing that could inhibit rational decision-making.

Feature Infographic: Awesome How Occupations Have Changed In The Last 150 years – Via Chris Blattman

Feature Video Antonio Damasio: Art and Emotions – Via NeuroAnthropology -Antonio Damasio, the author of Descartes’ Error: Emotion, Reason and the Human Brain, opens this hour-long video featuring three substantive talks. Damasio is the head of the recently founded USC Brain and Creativity Institute.

Feature Video Charles Darwin & The Tree Of life – Via Dr. Schock

Feature: From Behavioural to Emotional Corporate Finance: A New Research Direction by Richard Fairchild – Via SSRN & Finance Professor – “Behavioural finance and behavioural corporate finance analyses the effects of psychological biases, heuristics, and emotions on investors’ and managers’ decision-making and performance. Taffler and Tuckett (2005) have introduced a major paradigm shift by introducing a new field of research, namely Emotional Finance. This ground-breaking approach employs Freud’s theory of phantastic objects to analyse the effect of unconscious, infantile, emotions on investors’ decisions. In this paper, we extend their work by proposing a new development, namely, emotional corporate finance. We argue that, just as investors may view investments as phantastic objects, managers may view their projects similarly.”

Feature: Video The Mind Is Not What The Brain Does – Via UCSF

Feature: Why You Can’t Help Believing Everything You Read Via PsyBlog – You shouldn’t believe everything you read, yet according to a classic psychology study at first we can’t help it.

0. Fed Paying Interest on Reserves: A Primer – Via WSJ – TheFederal Reserve used all the weaponry in its arsenal during the financial crisis, and created some new ones. The Treasury’s decision to pull back one innovation — in which the Treasury sold bonds and put the money on deposit at the Fed — has put the spotlight on another one. Because of an act of Congress, the Fed now has the power to pay interest on the reserves that banks leave on deposit at the Fed. That’ll change the way the Fed manages the economy in the future — but only in ways that credit market geeks can understand.

1. It’s Business as Usual Again for Wall Street’s Casino Capitalists – Via Spiegel – One year after the bankruptcy of US investment bank Lehman Brothers, governments are divided over what lessons should be learned from the crisis. But the more the economy recovers, the less desire there is to implement radical reforms — and many bankers have already returned to their old casino capitalism ways.

2. Last Chance for (Wall St) Justice – Via Newsweek – The new Financial Crisis Inquiry Commission may be the only opportunity to nail Wall Street. As he ushered in a new era in Washington, Franklin D. Roosevelt’s theme song was “Happy Days Are Here Again,” but people tend to forget that along with sunny optimism FDR delivered a strong dose of justice. He left that job to Ferdinand Pecora, a fierce New York prosecutor whom Roosevelt urged to investigate Wall Street’s perniciousness. Pecora delivered big time. He humiliated and forced the resignation of Charles Mitchell, the head of National City Bank (later Citibank), and oversaw a 12,000-page probe into the causes of the Great Depression that gave birth to a new regulatory framework, including the Securities and Exchange Commission (Pecora was later one of the first commissioners). Other Wall Streeters were prosecuted, convicted, and jailed.

3. The Big Question: Does BP’s discovery of a giant new field prove we’re not running out of oil? – Via The Independent – On Wednesday, BP, the UK energy group, announced the discovery of a ” giant oilfield” in the Gulf of Mexico that could open up a huge new frontier in oil exploration. It comes less than a week after Iran announced an even larger discovery of crude oil, and is the latest in a spate of finds over the past few years. Taken together, the discoveries have emboldened sceptics of the notion that oil will soon run out, and reignited the debate on an issue with huge implications for the environment, and geopolitics more broadly.

4. French Banks Amid the Global Financial Crisis – Via IMF – This paper runs the gamut of qualitative and quantitative analyses to examine the performance of French banks during 2006-2008 and the financial support measures taken by the French government. French banks were not immune but proved relatively resilient to the global financial crisis reflecting their business and supervision features. An event study of the impact of government measures on CDS, debt, and equity markets points to the reduction of credit risk and financing cost as well as the redistribution of resources. With the crisis still unfolding, uncertainties remain and challenges lie ahead, calling for continued vigilance and enhanced risk management.

5. How large are returns to schooling? Hint: Money isn’t everything – Via NBER – This paper explores the many avenues by which schooling affects lifetime well-being. Experiences and skills acquired in school reverberate throughout life, not just through higher earnings. Schooling also affects the degree one enjoys work and the likelihood of being unemployed. It leads individuals to make better decisions about health, marriage, and parenting. It also improves patience, making individuals more goal-oriented and less likely to engage in risky behavior. Schooling improves trust and social interaction, and may offer substantial consumption value to some students. We discuss various mechanisms to explain how these relationships may occur independent of wealth effects, and present evidence that non-pecuniary returns to schooling are at least as large as pecuniary ones. Ironically, one explanation why some early school leavers miss out on these high returns is that they lack the very same decision making skills that more schooling would help improve.

6. Video: This Is Your Brain On Politics – Via Science Network – Beatrice Golomb is Associate Professor of Medicine at UC San Diego, best known for her work on Gulf War Illness (she has testified before Congress, her RAND reports have changed US policy, and she served as Scientific Director and Chief Scientist for the Department of Veterans Affairs Research Advisory Committee on Gulf War Veterans Illnesses). She also heads the UC San Diego Statin Study group. Her work has engendered broad media interest, from The New York Times to Jon Stewart’s The Daily Show.

7. Video:How Does Experience Influence the Brain? – Via PsychCentral – Neuroplasticity, neurogenesis, and how life experience affects the structure of the mammalian brain.

8. Video: Ted Talk Oliver Sacks What Hallucination Reveals About our Minds – Via Ted – Neurologist and author Oliver Sacks brings our attention to Charles Bonnett syndrome — when visually impaired people experience lucid hallucinations. He describes the experiences of his patients in heartwarming detail and walks us through the biology of this under-reported phenomenon.

9. Blaming the Brain – Via SSRN – Criminal law scholarship has recently become absorbed with the ideas of neuroscience in the emerging field of neurolaw. This mixture of cognitive neuroscience and law suggests that long established conceptions of human agency and responsibility are fundamentally at odds with the findings of science. Using sophisticated technology, cognitive neuroscience claims to be upon the threshold of unraveling the mysteries of the mind by elucidating the mechanical nature of the brain. Despite the limitations of that technology, neurolaw supporters eagerly suggest that those revelations entail that an inevitable and radical overhaul of our criminal justice system is soon at hand. What that enthusiasm hides, however, is a deeper ambition among those who desire an end to distributive punishment based on desert in favor of a prediction model heavily influenced by the behavioral sciences. That model rests squarely on the presumption that science should craft crime policy at the expense of the authority of common intuitions of justice. But that exchange has profound implications for how the law views criminal conduct and responsibility – and how it should be sanctioned under the law. Neurolaw promises a more humane and just criminal justice system, yet there is ample reason to believe otherwise.

10. Maybe Securitization Didn’t Cause the Crisis Via TNR – Soon forthcoming in the top-ranked Quarterly Journal of Economics is a very well- received paperby four economists with convincing evidence of what many believe was the primary cause of the subprime boom and bust: That securitization took away the incentive for lenders to properly vet borrowers.

11. Optimal Hedging and Scale Invariance: A Taxonomy of Option Pricing Models – Via SSRN -This paper formalizes the class of scale-invariant volatility models and explores its hedging properties. A model is ‘scale-invariant’ if and only if its probability distribution of asset returns is independent of the current level of the asset price. We provide a set of equivalent properties that are useful for classifying new and complex models according as scale invariance or otherwise. We show that scale invariance is a property that is shared by most stochastic volatility and jump-diffusion models and even Levy models, however only some local volatility models are scale-invariant. It is known that all scale-invariant models produce the same ‘model-free’ price sensitivities for vanilla options when calibrated to the implied volatility skew. We show that these model-free hedge ratios are not necessarily optimal and derive optimal hedge ratios in the presence of the skew. An empirical comparison of popular models applied to SP 500 index options shows that optimal hedges are similar in all the smile-consistent models considered and they perform better than the Black-Scholes model on average. The ‘model-free’ deltas and gammas provide the poorest hedges.

12. Video: Rails Are Forecasting A Flat Economy – Via Pragmatic Capitalist

13. As Riches Fade, So Does Finance’s Allure: Stories Of Those Leaving Wall St – Via WSJ

14. Google signs deal to print 2m books on Espresso machines – Via Guardian – Two million out-of-copyright books that have been scanned by Google could come back into limited printed form after the search giant signed a deal with On Demand Books, the company that makes the Espresso Book Machine – a custom book printer able to produce a bound one-off 300-page paperback, with a full-colour cover, in about five minutes.
But if Google wins its case to be able to scan and reuse out-of-print books whose copyright is unclear, and those where publishers have given permission to scan them, a huge range of material that has fallen out of print could become available.

15. Gillian Tet: Watch Barclays in the cellar – Via FT -A couple of years ago, when structured investment vehicles were sowing devastation in the financial world, I frantically searched for a way to explain to non-financiers how these entities worked. The analogy I resorted to was a garage or cellar.For just as a garage or cellar is usually attached to a house – but not truly inside a house – entities such as SIVs and conduits have traditionally had a semi-detached status with banks. That served the banks dangerously well in the years of the credit boom, since they used SIVs as a place to store irritating stuff which they did not want cluttering up their balance sheet – such as a household stuffing rubbish into a cellar, so that it does not mess up the smart front room.

16. What Is Urban Mindfulness? Via Manish  & PT – Mindfulness has been described as “nonjudgmental awareness of the present moment” by Jon Kabat-Zinn. This refers to our ability to notice what we’re experiencing right now without critique or analysis. Thus, mindfulness is different from thinking. It’s the difference between thinking, “Oh, no! I’m late!” vs. noting that “Oh, no! I’m late!” is passing through your mind. The difference is subtle, but it can make a big difference in terms of our resultant emotional reaction and overall stress level. In fact, studies of mindfulness have shown that it is helpful in reducing stress and anxiety, alleviating chronic pain, and preventing relapse of depression.

About Miguel Barbosa

I run this site.

20. September 2003 by Miguel Barbosa
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