Nivine Richie, Ph.D., CFA is an Associate Professor of Finance at the University of North Carolina Wilmington. She teaches courses in corporate financial management, derivatives, fixed income, and commercial bank management. Her research interests include cost of capital, banking, and derivatives. She has published studies in the Journal of Economics and Finance, Journal of Futures Markets, Review of Futures Markets, and Journal of Trading, among others.
Herding: the behavioral finance concept that investors like to buy what others are buying and sell what others are selling. It's the tendency to rely on conventional wisdom and invest with the herd. After all, it feels safer. Everyone can't be wrong, can they?
This video from Franklin Templeton explains a classic case of herding in 17th century Holland when tulips were all the craze.
What is behavioral finance, and how does it differ from traditional finance?
College is an investment. Using some of the numbers in the infographic below, can you apply the decision rules used in capital budgeting to the college funding decision? If so, is college a positive NPV proposition? What if you consider the earning potential of different college majors?
This Mad Money segment explains how investing in "well-run companies with a history of strong execution and great brand equity" makes good sense. Companies like Snap-On Tools, for example. This company creates innovative products to support the automotive, aerospace, agriculture industries and more.
What are some of the features an investor should seek in a well-run company with strong execution and great brand equity?
Technical traders look for patterns in stock prices or trading volumes to find opportunities to buy and sell stocks. This new high in the Nasdaq must be giving traders something to chew on.
What is the difference between fundamental analysis and technical analysis?
How might a fundamental analyst explain the recent movement in the Nasdaq? How might a technical analyst explain it?
Image of Deutsche Bank, Frankfurt available at Wikimedia
In an April 23rd press release, Deutsche Bank announced that it has agreed to a joint settlement with regulators regarding the manipulation of interbank offered rates (IBOR):
From the press release:
[read the full press release here]
Why does it matter?
According to this BBC article, "Libor and Euribor are benchmark interest rates, influencing the setting of other rates. They are used as a barometer to measure the health of the banking system and as a guage of market expectation for future central bank interest rates."
So by manipulating these benchmark rates, Deutsche Bank was effectively manipulating the full financial system.
How are Libor and Euribor set? What kinds of financial instruments rely on Libor or Euribor rates?
Is the $4 billion acquisition of Lucas Films a wise investment for Disney? The business of Star Wars continues 40 years after the first film was released.
According to Disney Chairman and CEO Bob Iger, the movie-going audience world wide is bigger than ever, so the company is optimistic that the investment will pay off.
What factors would an acquirer like Disney consider when determining the purchase price for such a large project like the Star Wars franchise?
In your opinion, will this investment pay off for Disney?
Regulatory dialectic describes the struggle between the regulated (eg. the banking industry) and the regulators (eg. the federal government) which ultimately leads to changes in regulations. A cat and mouse game, if you will.
It seems that regulatory dialectic is alive and well, and continues in efforts to regulate and re-regulate the banking industry even now.
From a recent Washington Post opinion piece by former Fed Chairman, Paul Volcker (16 April 2015):
But, basically, the institutional structure for financial regulation — which traces its origins to the 1930s — has resisted repeated efforts for meaningful reform. As a result, what we see in full view are inconsistencies in approaches among the half-dozen or more regulatory agencies, differing priorities, overlaps and gaps, squabbling over turf, incentive for competition in lax regulation; and too many opportunities for agency “capture” by those regulated.
Equally important, and a large new challenge for financial regulation and supervision, has been the multiplying innovations in finance and the proliferation of complicated and often opaque instruments outside the formal (and heavily regulated) commercial banking system. Commercial banking has become dominated by enormous institutions engaged in a complex combination of activities and operating across many countries. The free flow of capital internationally has further challenged the dispersed institutions responsible for regulation and supervision.
[read the full opinion here]
We are currently in an era of re-regulation and an effort to avoid a crisis like we just experienced. But if regulatory dialectic holds, the smart minds in industry will learn to work the system and find ways to generate profits. Perhaps we'll then find ourselves in a new pattern of de-regulation, crisis, followed by re-regulation once again.
How has the U.S. banking system shown evidence of a regulatory dialectic in its history of regulation?
In finance, we learn that the goal of the firm is to maximize the wealth of the firm's owners, that is the shareholders. And shareholders benefit by improving sales while controlling expenses. Profitability, market share, future projects--all bring wealth to the owners, and therefore need to be managed properly by the firm's managers.
According to this Bloomberg video, Netflix shareholders seem to be more concerned with the "top line" which is driven by number of paid subscribers than they are with the bottom line.
In addition to maximizing shareholder wealth, what are some other potential goals that firms pursue? For each goal you name, what are some decisions (good and bad) that managers might make if the firm pursues that goal?
Jawbone, the wearable fitness band, has teamed up with American Express to allow users to pay for products and services with their wristbands. Looks like Apple Pay has some competition.
What are the benefits and drawbacks to using this product to pay for goods and services?
Do you think this company is a good investment?
According to Charles Ellis, author of Winning the Loser's Game, choosing an asset allocation and sticking to it is the secret to investing success. From this CBS MarketWatch article (Roth, 5 Aug 2013):
I spoke to Ellis and asked him what he felt was different today than when he wrote the predecessor article about the loser's game in 1972 in the Financial Analyst's Journal. Ellis explained that, years ago, individual investors represented the vast majority of stock trades, and it was relatively easy for the professional to beat individual investors. Today, institutions represent over 95 percent of all trades, and paying one professional to beat other professionals is a loser's game.
The process of asset allocation is described in this infographic from Bankrate:
What is the difference between asset allocation and security selection?
Why is trying to outperform the market a loser's game?
Cyber criminals are more malicious than ever. Rather than just attack your computer with spyware, the attackers of today have begun to encrypt business files and then hold them for ransom. An unethical, malicious, but lucrative venture for criminals.
How do these criminals attack financial markets and transactions?
How serious of a problem is cyber crime?
In your opinion, what can be done to counteract such criminal activity?
Foreclosure on a mortgage can cause your credit score to decline by 200 points, and that can cause you to be denied a loan the next time you want to borrow money. This video explains what happens to your credit score, also called your FICO score, after a foreclosure and how to recover afterwards.
What advice would you give a borrower who has experienced a significant decline in his/her credit score?
The number of Americans who play golf has declined and the number net closures of golf courses has risen.
Why is that?
This video suggests several reasons for the declining business of golf, including the length of time it takes to play a game, the complexity of the game, and the cost of a round of golf.
Look at the financial summary for the Callaway Golf Company here. What conclusions can you draw about the company's:
In your opinion, what can golf courses do to improve its prospects in the coming years?
"GeneralElectricSign" by Bubba73 at en.wikipedia. Licensed under CC BY-SA 3.0 via Wikimedia Commons
General Electric Capital is deemed to be a systemically important financial institution (SIFI) and therefore is subject to all kinds of onerous financial regulation. According to the Bookings Institution(Elliott, May 9 2013):
Certain financial institutions are so central to the American financial system that their failure could cause traumatic damage, both to financial markets and the larger economy. These institutions are often referred to as “systemically important financial institutions” or SIFIs. The Dodd-Frank Act, the comprehensive reform legislation signed into law during the summer of 2010, requires financial regulators belonging to the Financial Stability Oversight Council (FSOC) to name those financial institutions that it believes are systemically important. Such SIFIs are to be supervised more closely and potentially required to operate with greater safety margins, such as higher levels of capital, and to face further limitations on their activities.
[read more here]
Well, GE has had enough of the regulation and is getting out. According to this article from CNBC's David Faber (10 April 2015):
Dr. Lael Brainerd, Federal Reserve Board of Governors, Image courtesy of Federal Reserve
The class of 2009 faced bleak prospects as they ventured into the work force that June. From the April 2, 2015 speech given by Federal Reserve Governor Lael Brainard at the 9th Biennial Federal Reserve System Community Development Research Conference in Washington, D.C.:
The overall unemployment rate stood at 9.5 percent, and employers slashed 500,000 jobs that month, the 18th month in a row of job cuts. For young people, job prospects were even bleaker. Nearly one-fourth of teenagers in the labor force were unemployed, and the unemployment rate for people between the ages of 20 and 24 stood at 15.2 percent. Young African Americans and Hispanics experienced higher rates of unemployment than their white peers.
[Read the full speech here]
The group of young people who joined the economy in the years following the Great Recession have faced a number of challenges, and the impact has been a lasting one.
Among the topics covered in this speech, are the impact of the Great Recession on:
And yet, young people are optimistic:
So it is particularly heartening that, despite the challenges of coming of age in the Great Recession, today's young adults--including minorities--remain optimistic about their future. The challenge for practitioners and the research community is to deliver on this youthful optimism through policies and opportunities that promote strong and equitable economic growth.
Of the issues discussed in this speech, which ones have you experienced first-hand?
photo: courtesy of Tax Credits, under creative commons license
According to this CNBC article (Anderson, 30 Mar 2015), successful savers for retirement share a few common characteristics. More specifically, successful savers:
From the article:
Planning ahead helps a lot. The best retirement savers are more than four times as likely to have given "a great deal" of thought about their retirement age, their lifestyle during their golden years, their future health-care costs and their financial goals than the worst savers, according to a new survey by Voya Financial, which scored more than 1,000 full-time workers on how prepared they were for retirement.
What are some steps you can take to prepare for retirement?
The late Lee Kuan Yew, Singapore's first prime minister, is credited with bringing economic success to the small city-state country. The country started in 1965, and has flourished because of its location and natural harbor. It also welcomed international business and kept the government small and free of corruption.
What characteristics are required for economic success of small countries? What challenges do such countries face?
According to this Forbes video, many American's wouldn't be able to come up with $2,000 in the event of an emergency. A recommended emergency fund would be three to six months of savings, which means $2,000 is probably not enough. However, it's a start.
How long does it take to pay off a $2,000 if the annual interest rate is 18% and the minimum payment is $60/month?
Over the life of the loan, how much total interest would you have paid?
This dramatization by the Commodities Futures Trading Commission (CFTC) of the case of Mr. Swindler, a fraudulent commodity pool operator, shows some common characteristics of fraud.
What are some warning signs that a commodity pool operator is fraudulent? How can investors protect themselves?