A Challenge to the Investment Performance Measurement Profession

A short paper of mine that appeared in the Journal of Portfolio Management, Fall 1999.

A modern-day investment professional looking back at accepted doctrine in the early 1900s would rightfully characterize much of it as misguided.  Do you remember when it was not considered appropriate, or even legal, to hold risky securities in a portfolio, even if the portfolio was not risky?

Will investment professionals fifty years from now view our performance measurement regulatory structure, guidelines, theory, and practice as misguided?  Let me try to make the case that they will.  If you agree with part of what I say, then I challenge you to think of how our profession can be changed for the better.

Beating the Market - Ed Thorp - the Master

From Ed Thorp's article in the Journal of Portfolio Management.

 

This is a perspective on quantitative finance from my point of view, a 45-year effort

to build mathematical models for “beating markets”, by which I mean achieving
risk-adjusted excess returns.

I’d like to illustrate with models I’ve developed, starting with a relatively simple
example, the widely played casino game of blackjack or twenty-one. What does
blackjack have to do with finance? A lot more than I first thought, as we’ll see.

Why There Are So Few Mass Shootings In Israel

Why there are so few mass shootings in Israel - and could be here, too.  For example, if school teachers were allowed to carry concealed weapons, there would be far fewer mass shootings in our schools.

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Jokes

If a man speaks in the forest and there is no woman to hear him - - is he still wrong?
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Thought for the day: Men are like fine wine.. They start out as grapes, and it's up to the women to stomp the crap out of them until they turn into something acceptable to have dinner with.
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A girl was visiting her blond friend who had acquired two new dogs, and asked her what their names were. The blonde responded by saying that one was named Rolex and one was named Timex. Her friend said, "Who ever heard of someone naming dogs like that?" "HellOOOOO," answered the blond. "They're watchdogs!"
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A married man should forget his mistakes. There's no use in two people remembering the same thing.
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The AARP Bulletin - Comments From a Pharmeceutical Company Insider

The November 2004 issue of the AARP Bulletin has a lead article titled “The Insiders”. The cover says “Three insiders speak out on how the drug industry really works”.

The first featured Insider is Peter Rost, M.D., Vice President of Marketing for the Endocrinology Division of Pfizer.

Dr. Rost’s comments suggest that a degree in one field does not imply much about knowledge in another field (except for me, of course).

According to AARP, Dr. Rost’s messages include the following. My comments are in italics.

• Drug makers are untruthful when they insist that importing drugs from abroad is unsafe or that lowering U.S. prices would hurt research.

I also think the issue is not safety. However, every MBA program I know of, and probably in the world, teaches that lowering anticipated prices turns some “go” projects into “no go” projects. Moreover every sensible project evaluation method I have seen has this mathematical characteristic.  So, lower drug prices should reduce research.

Be your own judge. Imagine you are an entrepreneur. Will reducing the revenue you expect to get, other things equal, ever lead you to adopt a project you rejected with the original revenue?  Of course not. Will increasing enough the revenue you expect to get, other things equal, lead you to adopt a project you rejected with the original revenue? Of course.

Take the claim to its logical conclusion. Legislate that drugs must be sold at production cost. Do you think that this won’t reduce research, hence the availability of new drugs?

Minimum Wage Laws

Minimum wage laws are touted by some proponents as an easy, reliable way to improve the lot of workers earning below the minimum wage set by the law without hurting anyone else.

For a moment, accept the proponents’ view.  Then it would appear that there is an easy route to paradise.  Simply make the minimum wage, say, $10 million annually. We could all work for a year and then retire rich.

Obviously, there is something wrong with this strategy.  For one thing, if we all retired, there would be nothing produced so our consumption would necessarily drop to zero.  In reality, we would be poor, not rich.

While this example is extreme, it does suggest that the all benefit no cost view of some minimum wage law proponents is wrong.

A Chemistry Midterm Bonus Question and One Student's Answer

The following is supposedly an actual question given on a University of Washington chemistry mid-term. The answer by one student was so "profound" that the professor shared it with colleagues, via the Internet, which is, of course, why we now have the pleasure of enjoying it as well.

Bonus Question: Is Hell exothermic (gives off heat) or endothermic (absorbs heat)?

Most of the students wrote proofs of their beliefs using Boyle's Law (gas cools when it expands and heats when it is compressed) or some variant.

One student, however, wrote the following:

First, we need to know how the mass of Hell is changing in time. So we need to know the rate at which souls are moving into Hell and the rate at which they are leaving. I think that we can safely assume that once a soul gets to Hell, it will not leave. Therefore, no souls are leaving.

Some Rodney Dangerfield Jokes

Some Rodney Dangerfield jokes.

I'm not a sexy guy. I went to a hooker. I dropped my pants. She dropped her price.

I tell you, with my doctor, I don't get no respect. I told him, "I've swallowed a bottle of sleeping pills." He told me to have a few drinks and get some rest.

I tell ya when I was a kid, all I knew was rejection. My yo-yo, it never came back!

Am I a Right Wing Conservative or Not?

Readers of this blog probably assume I am a Right-Wing Conservative, considering some of the blog’s content. Actually, I am closest to being a Libertarian. To put things in perspective, here are some quick “one liners” that will help you understand me (yeah, I know some are longer than one line).

Independence and Freedom

Here is an insightful article by Roger Pilon of the Cato Institute.  Dr Pilon has taught philosophy and law and was a national fellow at Stanford's Hoover Institution.  Pilon holds a B.A. from Columbia University, an M.A. and a Ph.D. from the University of Chicago and a J.D. from the George Washington University School of Law.  Dr. Pilon has it right.

Why High Drug Prices Are Good

Media pundits and politicians often claim that drug prices have risen prodigiously and that we should all be concerned about it because we are worse off as a result.  However, even a cursory examination of the issue suggests that the claim is prodigiously wrong.

The question everyone should address is whether, drug wise, we are better off now than we were, i.e., is the cost benefit ratio greater now or years ago.  The answer to this question is easily illustrated with two more questions.

If we restricted ourselves to drugs that were available ten years ago, would we be paying more now, in real dollars?  It doesn’t take a genius to realize that many of the wonder drugs of yesteryear no longer have active patents and are now available in generic form, hence are much cheaper in real dollars.

Why wouldn’t we enjoy this financial benefit by buying older drugs to save money?  The answer to this question is obvious.  Newer more expensive drugs whose patents haven’t run out do things for us that the older drugs didn’t.  The implication is obvious, too.  We must be getting more value for our money now than we were then or we wouldn’t be buying these new drugs.

Most of the drugs I buy are expensive.  But they provide benefits to me in terms of life and quality of life that I couldn’t buy years ago.  I wish these drugs were cheaper.  I wish everything was cheaper.  I’d like to live like a King.  But I can’t afford to live like a King, only better than before.  To blame the fact that I can’t afford to live like a King on Big Business is ludicrous.

What will be the effect of regulating low drug prices?  Fewer new drugs.  Such regulation is simply a way of forcing you to buy older less effective drugs in lieu of newer ones that were not developed.  Thus such regulations ultimately remove choices, which of necessity reduces satisfaction.

The Gender of Various Objects

You may not know that many non-living things have a gender. For example...

1) Ziploc Bags -- They are Male, because they hold everything in, but you can see right through them.

2) Copiers -- They are Female, because once turned off, it takes a while to warm them up again. It's an effective reproductive device if the right buttons are pushed, but can wreak havoc if the wrong buttons are pushed.

3) Tire -- Male, because it goes bald and it's often over-inflated.

4) Hot Air Balloon -- Male, because, to get it to go anywhere, you have to light a fire under it, and of course, there's the hot air part.

5) Web Page -- Female, because it's always getting hit on.

6) Subway -- Male, because it uses the same old lines to pick people up.

7) Hourglass -- Female, because over time, the weight shifts to the bottom.

8) Hammer -- Male, because it hasn't changed much over the last 5,000 years, but it's handy to have around.

9) Remote Control -- Female...... You may have thought it'd be male. But consider this -- it gives a man pleasure, he'd be lost without it, and while he doesn't always know the right buttons to push, he keeps trying.

Gun Control Rhetoric

Here is a link to a column by John Lott, "Let’s not be so quick to believe gun-control rhetoric".  It is on target (pardon the pun).

Old Warbirds

Here is a link to a nice video about old warbirds.  Use full screen, the photography is excellent.

Obama vs. America

Thomas Sowell has written a thoughtful column with his views about why Obama denigrates the United States.

Measles, Vaccines, and Autism

Here is a column by Thomas Sowell, "Measles, Vaccines, and Autism" that puts the topic in perspective.

Vaccination and Autism

Rebecca Goldin of Stats.org demolishes one study supposedly linking vaccinations to autism.

Here is the link.

Don Boudreaux demolishes James Surowiecki’s wage stagnation article in the New Yorker

Howdy:

Don Boudreaux's letter to the New Yorker demolishes James Surowiecki’s economic analysis of alleged wage stagnation.

See the comments, there is no hope.

Larry Downes on Net Neutrality

Larry Downes has a good article on net neutrality in Forbes.

If Larry is right, the net neutrality issue is another example of Government about to get in the way of consumers at the request of special interests.

Netflix comes off as a key villain in Larry's article.

Matt Ridley on science is being corrupted by political bias

Here is a cogent article by Matt Ridley that illustrates the "Paul Krugman" phenomenon, whereby otherwise smart people fall victim to an agenda or their emotions.

The context of Ridley's piece is corrupt science designed to further an agenda.

Matt Ridley on the Clmate Change Debate

Matt Ridley has written a nice article about the Climate Change Debate.  The focus is on the nature of the debate, not the facts.  It illustrates the dysfunctional behavior of some of the participants.

Matt is on target.