Economics & Finance

Risk and Return

by

A recent article in Barron’s magazine was titled ‘Weathering the Storm in Style’ and it discussed what retirees could do if the market tanked in the years while they were living off their retirement savings. The article mentions people who planned to retire just prior to the 2002 market meltdown but whose portfolios went down significantly (25% – 40%) and they had to change their plans and keep working as a result.

Later the article mentions how many “good years” you need in the years following the meltdown in order to make up for the bad times. For example, if the market drops 25% in one year, you will need to gain 46.67% in the following year to recoup the gain plus make 10% more (i.e. if you have a base expectation that the market will make you 10% in a year, you don’t just need to recover the drop, you need to make up for the ‘lost year’.

I covered a similar conceptual issue in a post titled “Percentage Returns… and other Lies” about how the portfolio managers could have a series of good looking years after a debacle like 2002 and yet investors still hadn’t recovered their initial investment (let alone make 10% / year to boot). I used a bit of my own portfolio for color commentary in that post, to “humanize” it, like a good journalist should.

Read more

Health Care and Fixed Costs

by

There are many health care plans being proposed to “fix” the growth in medical costs in the United States. Each of these plans has different elements but I haven’t really seen the particular linked issue addressed that I am going to speak of in this blog post.

I make a point of reviewing my medical bills. When you have surgery, for example, you receive an itemized bill. In that bill you can see services from each provider and also the cost for the room, medicine, etc… Frequently the costs seem far out of line from reality (outside the walls of medicine); a room could cost hundreds or thousands of dollars a night; an aspirin or readily available over-the-counter medicine could cost many dollars per pill.

The real issue is that the medical industry is primarily a “fixed cost” business, with very low “marginal costs”. For example, if you look at the Northwestern Hospital facility downtown, a vast series of interconnected buildings, and asked yourself this question:

“How would costs vary on a given day if the facility was full of patients vs. having NO patients?”

The answer is that the costs for that day would be virtually identical whether or not the hospital had patients. You still need to pay for the facility, the doctors, the electricity, and all the support workers and nurses. Virtually the only “variable” costs that would be avoided are the cost of medicines and food, but the medicines are inventoried and they need to hold stocks in advance and the food must be purchased based on planned demand and the spare food would just be thrown away (the costs would be pretty much the same).

Read more

“And then they ate their pets.”

by

Belmont Club posts on Zimbabwe.

And so the toll that mounted to a hundred million victims in the twentieth century continues to climb in the twenty-first. And, in America, mid-west farmers are described as voting against their interests when they choose candidates who value limited government. The independence that land gives us, the productivity that comes when we till our own fields are lessons we forget over and over, but then are taught again by the harshest of experiences.

Securities Analysis and the Housing Bubble

by

In the general field of securities analysis (predicting stock prices) there are two basic schools of thought, fundamental analysis and technical analysis. Fundamental analysis can be summarized as saying that stocks are worth a price based on their financial statements and that investors can profit by deeply understanding the details of said information. Benjamin Graham with his book “Securities Analysis” is an example of a fundamental approach to stock valuation.

On the other hand, a different school of thought belongs to the technical analysis camp, which states that stock prices have patterns and can be bought or sold for profit based on these patterns. Technical analysts frequently chart stocks and are responsible for the myriad types of charts available at any financial web site (such as Yahoo!) including “Bollinger Bands” and the like.

Without going into the relative validity of both theories (an endless topic in and of itself) I will glibly summarize the two models as “buy it because your detailed financial analysis says it will go up in value” vs. “buy it because it has been going up and other items similar to it are going up in price”.

Read more

Michael Lewis on Disaster-Risk Trading

by

This is an interesting and entertaining article, a bit long but worth reading. I’m not sure that Lewis completely understands some of the concepts here (or maybe I don’t understand them), and I think that he overpersonalizes his discussion by framing it as a narrative about mostly one person, which I suppose comes with the territory in journalism. It’s still quite a good article, however.

Read more