• Who Are the Unbanked?

    According to the World Bank:

    About 2.5 billion adults lack access to formal financial services, limiting their ability to benefit from economic opportunities, improve their health and education, and raise their income levels. The Bank’s Global Financial Inclusion Database (Global Findex) reported that three-quarters of the world’s poor lack a bank account because of poverty, costs, travel distances and the often-burdensome requirements involved in opening an account. Less than 25% of adults earning less than $2 a day have access to an account at a formal financial institution. Being “unbanked” is linked to income inequality: The richest 20% of adults in developing countries are more than twice as likely to have a formal account.

    Financial inclusion is an important driver of economic growth and policy alleviation. Access to finance can boost job creation, raise income, reduce vulnerability and increase investments in human capital. When MSMEs have limited access to finance, the economy suffers a series of negative consequences: Economic and social opportunities are restricted, enterprise creation and growth are restrained, households and enterprises are more vulnerable to threats, and payments are more costly and less safe.

    This World Bank infographic describes the unbanked:

  • Market Efficiency: A Relatively New Concept

    This interview with Harry Markowitz describes what he experienced when he first introduced the concept of market efficiency when he earned his Ph.D.

    What we take for granted as common sense today was explained for the first time by Markowitz. The idea is that if an investment is risky, then you can eliminate some of the risk by diversifying the portfolio. However, if the returns of the different investments you choose are correlated (i.e. have high covariance), then the risk does not go away.

    For discussion:

    How do we estimate expected returns, risk, and covariance?

  • Blackberry Still At It

    Seems like every few months we talk about Blackberry. Apparently not everyone has made the transition to the iPhone or Android phone, so Blackberry is still making money. The story is mixed: though Blackberry did report a surprise increase in profit, the profit was gained on fewer revenues.

    For discussion

    What does the interviewee mean by the "top line" versus the "bottom line?" What does it mean to an analyst if a company does a good job with either the top line or the bottom line?

    How do the financial statements for Blackberry compare with those of Apple?

  • Are House Prices Shutting Out First Time Buyers?

    This CNN Money article (26 Mar 2015) reports that house prices are rising faster than wages are rising. While that's good news for the homeowners whose homes were underwater after the credit crisis, it's not such good news for first time home buyers who can't afford to buy a home.

    From the article:

    "The bounce back has taken home prices in some markets out of reach of the ever-important first-time homebuyer we need to continue the momentum," said Daren Blomquist, vice president at RealtyTrac.


    Home prices climbed faster than wages in 76% of the 184 markets analyzed. While wages aren't keeping pace with home prices in many markets, low interest rates have helped keep buying a viable option, according to Blomquist. "It is a concerning trend, but the good news is we are at the juncture where it hasn't become a housing bubble yet. If the trend continues, we will be in a bubble in the next year or two."


    For discussion:


    In your opinion, is it important that people be able to buy houses rather than rent? Why?



  • Cocoa Futures

    All you need is love. But a little chocolate now and then doesn't hurt. ~Charles M. Schulz

    Chocolate makers need to ensure that they will have a steady supply of cocoa during different seasons, and they use futures contracts to do this. Cocoa futures have been traded since 1928 in British pounds and more recently in U.S. dollars. But the CME group is introducing a new contract for physical delivery in euro.

    For discussion:

    Why are cocoa futures important?  How is this new contract by the CME Group likely to impact the market?

  • Crazy Valuations of Start-Ups

    Photo of Evan Sharp and Ben Silberman, cofounders of Pinterest. Image courtesy of Pinterest.


    Start-ups like SnapChat, Dropbox, and Uber have no historical performance on which to base a value of the firm. And yet, venture capitalists and investors assign values to these firms that seem to be crazy high.

    According to this Bloomberg article (Frier and Newcomer, 17 Mar 2015):

    Here's the secret to how Silicon Valley calculates the value of its hottest companies: The numbers are sort of made-up. For the most mature startups, investors agree to grant higher valuations, which help the companies with recruitment and building credibility, in exchange for guarantees that they'll get their money back first if the company goes public or sells. They can also negotiate to receive additional free shares if a subsequent round's valuation is less favorable. Interviews with more than a dozen founders, venture capitalists, and the attorneys who draw up investment contracts reveal the most common financial provisions used in private-market technology deals today.

    The backroom agreements are becoming more common as tech companies stay private longer, according to the interviews and financial documents obtained by Bloomberg Business. The practice obfuscates the meaning of a valuation, which can become dangerous down the road because private investors aren't taking the same risks a public-market shareholder would. By the time a company does go public, the valuation it got from VCs may not align with its balance sheet. Just ask Box.

    These high valuations encourage start-ups to postpone going public. After all, why go public when they can get such high numbers and remain privately held?

    From a recent MarketWatch article (Poletti, 20 Mar 2015):

    Welcome to the latest trend in Silicon Valley, where late-stage privately held technology companies are continuing to get billion-dollar plus valuations from venture capitalists and other investors. This week, Pinterest said in a regulatory filing that it raised an additional $367 million in funding, bringing the total amount of financing since its 2009 launch to $764 million.

    For discussion:

    According to the articles cited above, how do venture capitalists defend the practice of high valuations?

  • Investing in Maritime Assets

    Investing in maritime assets is something we don't hear about very often. Shipping delivers revenues, which in turn delivers yields. 

    For discussion: 

    What are the big risks associated with the shipping industry? 

    What factors can change the industry?

  • Behavioral Finance May Explain Why You Don't Have Renter's Insurance

    Are you among the 60 percent of renters who don't have renter's insurance? Did you know that if your roommate has renter's insurance, you're still not covered unless you're related? And did you know that renter's insurance is relatively inexpensive, with costs of $100-200 per year in premiums?

    Oddly enough, more people have insurance on their iPhones than have life insurance, as a percent. This is the subject of the article by Allianz who teamed up TED.

    From the article:

    A recurring theme was our penchant for procrastination which, in tandem with our desire for immediate gratification, results in us putting off decisions that would deliver long-term gain.

    David Laibson, Professor of Economics at Harvard University, in his talk The Failure of Self Control explained our inability to fulfil good intentions—to exercise, diet, or save for retirement—with a mathematical theory: present bias.

    “We give full weight to rewards and costs that happen right now, and we give half weight to rewards and costs that happen in the future,” he observed, which leads to a cycle of procrastination.

    [Read more here]

    For discussion:

    Why is it irrational to have insurance on relatively low cost items like phones and cameras but avoid more important insurance like renter's insurance or life insurance? 

    Do you feel you suffer from the "present bias" discussed in the article cited above?

  • Fast Food Sales Down, But Pizza Sales Up

    Despite the recent decline in fast food sales, pizza continues to grow in popularity...and sales.

    For discussion:

    What are some reasons for the continued pizza sales?

  • Creating A Wise Financial Plan at Age 67

    This Washington Post article (Marte, 13 March 2015) presents the case of Mr. English Brent Taylor, age 67, who would like to retire. Here are the facts of his case:

    • Annual salary $45,000
    • Additional social security income $30,000
    • Total debt $90,000
    • Monthly expenses $4,000
    • Retirement savings $130,000

    From the article:

    His goal: to pay [his debt] off within six years, just around the time he hopes to stop working full time.

    Reaching that milestone would go a long way to improving his retirement readiness. It would drastically reduce his monthly bills and limit how quickly he needs to draw down on the $130,000 stashed in his retirement account. Taylor says it would also free up cash to for him to travel with his wife, take some Phd-level courses that interest him or invest in his new hobby of remodeling old cars. “By the time things are paid off, if there is a little money in the bank I might be able to go do something nice,” he says.

    For discussion:

    How would you advise Mr. Taylor to prepare for retirement?

    If you had met him 10 years prior, what advice would you have shared then?

    Photo by Ken Teegardin at SeniorLiving

  • What's Up With the U.S. Dollar?

    Americans on vacation overseas are enjoying their added purchasing power. The U.S. dollar is at its highest value in 12 years, but it wasn't that long ago when naysayers were claiming that America's currency was no longer the currency to hold.

    For discussion:

    What factors drive the appreciation or depreciation of a currency?

    What are some reasons for the current strength of the U.S. dollar? Who benefits from a strong dollar? Who gets hurt by a strong dollar?

  • The Question of Active Management Lingers

    Photo of Nobel Laureate James Tobin (1918-2002) courtesy of the Official Site of the Nobel Prize


    The mutual fund industry was born in 1958 upon the publication of "Liquidity Preference as Behaviour Towards Risk" by James Tobin. In his article, Tobin introduced the famous Mutual Fund Separation Theorem, also known as Tobin's Separation Theorem.

    From a 2003 tribute to Tobin's contributions by William Buiter:

    Tobin received the 1981 Nobel Memorial Prize “for his analysis of financial markets and their relations to expenditure decisions, employment, production and prices”. With Harry Markowitz he developed what became the foundations of modern portfolio theory. The key ‘separation theorem’ proven by Tobin is that in a world with one safe asset and a large number of risky assets, portfolio choice by any risk-averse portfolio holder can be described as a choice between the safe asset and the same portfolio of risky assets. The ratio of the shares in the total portfolio accounted for by any pair of risky assets is the same for all risk-averse portfolio holders. The degree of risk aversion only determines the shares in the total portfolio accounted for by the safe asset and by the common portfolio of risky assets. This is an important and beautiful result, which is not done justice by Tobin’s own summary: “Don’t put all your eggs in one basket” Indeed, Tobin’s remarkable result is better summarised as ‘regardless of your degree of risk aversion and caution, you will only need two baskets for all your eggs’.

    Tobin went on to win the Nobel Prize in Economics in 1981, but the question remains open whether a wise investor should actively seek mispriced securities rather than invest in a passive "market index" fund.

    A recent article in the Economist points to a study that found that investment consultants that claim to help investors find value are not tremendously successful.

    From the article (5 Mar 2015):

    Many pension funds and endowments hire investment consultants to help them choose fund managers (one estimate is that 82% of US pension plans use such services, and consultants advise on $25 trillion of assets). The consultants employ highly-educated workforces, have decades of experience and charge hefty fees. But an award (the 2015 Commonfund prize) has just been granted to an academic paper that concludes

    “we find no evidence that these (the consultants') recommendations add value, suggesting that the search for winners, encouraged and guided by investment consultants, is fruitless”

    For discussion:

    What is the mutual fund theorem?

    Based on the articles cited here, why do investment consultants have poor track records in terms of adding value to their clients' portfolios?


  • The Upside and Downside of Zero Interest Rates

    The idea that the Fed may raise rates has many talking. Some in favor--some, not so much.

    From the NY Post (Trugman, 7 Mar 2015):

    Needless to say, zero has been very good for asset prices, especially in the earliest days, when it was coupled with massive stimulus spending and the different iterations of quantitative easing.

    But now, with Fed governors talking about raising rates sooner rather than later, we are at a crossroads where the zero cushion is history.

    This economy will now be dealing with something we haven’t seen in almost seven years: non-zero rates, while the rest of the world cuts rates to almost zero.

    For discussion:

    According to the article cited above, what are some of the reasons to welcome higher interest rates?

    Not everyone at the Fed is in agreement. According to the articles listed below, what are some arguments for and against raising rates?


    Photo: courtesy of Federal Reserve Bank of NY

  • History of Money

    The US dollar hasn't always been the currency of choice. This video from the Fed explains the history of money and the establishment of the Federal Reserve system.

    For discussion:

    Do you think that paper currency will come to an end? Why or why not?

  • Etsy: The Newest Tech IPO

    It's been around for 10 years, and now it's being noticed. It's Etsy--the online marketplace where artisans go to sell their handmade or vintage items.

    This video explains why Etsy is so promising.

    For discussion:

    What are the factors that make Etsy sound promising to investors? Would you buy shares in an Etsy IPO yourself? Why or why not?

  • The Annual Berkshire Hathaway Letter: Betting On America

    Warren Buffet's much read annual letter to shareholders came out this week, and it doesn't disappoint. In it, he summarizes the results from 2014 and where he sees value going forward.

    Here's an excerpt:


    Late in 2009, amidst the gloom of the Great Recession, we agreed to buy BNSF, the largest purchase in Berkshire’s history. At the time, I called the transaction an “all-in wager on the economic future of the United States.”


    That kind of commitment was nothing new for us. We’ve been making similar wagers ever since Buffett Partnership Ltd. acquired control of Berkshire in 1965. For good reason, too: Charlie and I have always considered a “bet” on ever-rising U.S. prosperity to be very close to a sure thing.


    Indeed, who has ever benefited during the past 238 years by betting against America? If you compare our country’s present condition to that existing in 1776, you have to rub your eyes in wonder. In my lifetime alone, real per-capita U.S. output has sextupled. My parents could not have dreamed in 1930 of the world their son would see. Though the preachers of pessimism prattle endlessly about America’s problems, I’ve never seen one who wishes to emigrate (though I can think of a few for whom I would happily buy a one-way ticket).


    The dynamism embedded in our market economy will continue to work its magic. Gains won’t come in a smooth or uninterrupted manner; they never have. And we will regularly grumble about our government. But, most assuredly, America’s best days lie ahead.


    With this tailwind working for us, Charlie and I hope to build Berkshire’s per-share intrinsic value by (1) constantly improving the basic earning power of our many subsidiaries; (2) further increasing their earnings through bolt-on acquisitions; (3) benefiting from the growth of our investees; (4) repurchasing Berkshire shares when they are available at a meaningful discount from intrinsic value; and (5) making an occasional large
    acquisition. We will also try to maximize results for you by rarely, if ever, issuing Berkshire shares.


    Those building blocks rest on a rock-solid foundation. A century hence, BNSF and Berkshire Hathaway Energy will still be playing vital roles in our economy. Homes and autos will remain central to the lives of most families. Insurance will continue to be essential for both businesses and individuals. Looking ahead, Charlie and I see a world made to order for Berkshire. We feel fortunate to be entrusted with its management. 


    Read the full 2014 letter here and find all past letters here


  • Do We Need Cash?

    In economies where citizens don't trust banks, cold hard cash is the answer. Cash is a convenient way to pay for consumption, but it has its downsides as well. This video explains several reasons why we should get rid of cash altogether.

    For discussion:

    Do you agree that governments should ban cash and go to electronic payment systems entirely? Why or why not?

    What are the arguments for and against the use of cash?