• Protecting Your Financial Data

    Before a thief uses your data to steal a large sum of money, he or she will often test your vigilance by stealing a small sum of money.

    So to prevent the big frauds, it's wise to pay attention to even small financial "errors" on your bills.

    For discussion:

    What advice can you add to the information below?

  • How Valuable is Gold?

    Gold has always been popular. From ancient times to today, gold is both an investment and a decoration.

    This infographic by Daniel Wesley gives a nice summary of the supply and demand for gold--something to consider before investing.

    For discussion:

    Would you invest in gold?

    If you wanted to invest in gold, how would you go about accomplishing it?

  • Wells Fargo: The World's Largest Bank

    Wells Fargo is now the world's largest bank with around $300 billion in market cap, placing it ahead of competitor JP Morgan Chase.

    As banks get bigger, the conversation often turns to "Is the bank too big to fail?"

    From the Richmond Fed's website, here are a few points from the Too Big To Fail issue:

    • A contributing factor to the financial crisis of 2007-08 was the government's long history of emergency loans to distressed institutions and markets deemed "too big to fail." This history has created an expectation that certain parts of the financial sector will be protected from losses.
    • This government safety net effectively subsidizes risk-taking. Investors that feel protected by the government will be less likely to demand higher yields as compensation for risk, and creditors will feel less urgency to monitor firms that are implicitly protected.
    • Excessive risk-taking makes firms more likely to experience distress and require bailouts to remain solvent. Additional bailouts can then further erode market discipline.

    For discussion:

    (Basic) What is market capitalization and how can a firm grow its market cap?

    (Advanced) What is a "moral hazard" and why does that exist with banks that are allowed to become too big to fail?

  • Investing in the Technology Behind Bitcoin

    Investing in Bitcoin is a bit of a misnomer. It could mean buying the currency itself, but more likely, it means investing in the structure underlying the electronic payment system. This Financial Times video provides a good explanation of what Bitcoin is and how it works.

    For discussion:

    What do traditional financial institutions offer that Bitcoin does not?

    Would you invest in Bitcoin? Why or why not?

  • Wanted: College Grads Who Can Tolerate Ambiguity

    The problem with most finance textbooks is that they lead us to think there's always a right answer. Money problems are messy, financial decisions are complicated, and no end-of-chapter solutions exist. Learning to tolerate ambiguity is a skill that will serve graduates later in life, but it's a difficult skill to acquire. Especially if you're a pretty good student and you've always been able to navigate school requirements.

    From a recent article on LinkedIn (Selingo, 29 Jun 2015):

    Dweck has conducted several studies over the years that found people would do better if they thought of their intelligence as flexible and not something fixed at birth. People with what she calls a “growth mind-set” see challenges as opportunities to broaden their skills. But people who have been constantly praised for their intelligence freeze in ambiguous situations when they don’t know the answer and often tie themselves in knots trying to reach perfection.

    The ability to tolerate ambiguity on the job requires people to think contextually, what I call the “connective tissue” that occupies the space in-between ideas. It is the “killer app” of today’s workplaces. We make these connections by following our curiosity and exploring and learning from peers.

    This trait is often acknowledged as a key component in successful entrepreneurs. From an article in Forbes from several years ago (Sandefer, 17 May 2012) about how entrepreneurs rarely feel the questions and answers were clearly defined:

    But this isn’t what entrepreneurship feels like in the trenches. There’s no clear story line. Happy endings are far from certain. There’s a sense of chaos, hectic decision making and moments of great fear and doubt. You are making up the story as you go.

    Life is difficult. So why should business be any different? An entrepreneur’s journey is a hero’s journey, but it’s a much more difficult and tortured journey than most of us would like to believe.

    And it’s a tolerance for ambiguity that makes all the difference.

    In fact, the article goes on to say this:

    The best way to develop a tolerance for ambiguity is to make mistakes early, cheaply, and often. To learn that failure is a blessing, if it helps you grow. To learn that failure in pursuit of a worthy goal is noble and that questions are more important than answers.

    For discussion:

    What are some finance-related questions where a tolerance for ambiguity will be helpful?

    What are some finance-related careers where a tolerance for ambiguity will be necessary?

  • Insurance: Back to Basics

    Insurance is built on the idea of risk sharing. Those who do not want to bear risk shift it to others who are willing to bear the risk. Insurance buyers pay a premium in exchange for insurance providers paying benefits when and if those benefits are needed.

    The idea of risk sharing is an old concept--as old Karl Marx himself. And it is resurfacing in peer-to-peer insurance. From a recent CNBC article (Guzman, 18 July 2015):

    Enter peer-to-peer insurance, which is at least partly steeped in the socialist tradition of sharing risks and cost. Innovators in Europe are looking to leverage the power of your friends and social networks all while asking a simple question: Nobody knows your friends better than you, so why are you paying an insurance company to analyze their risk?

    Friendsurance is one such peer-to-peer insurance provider, or rather "person-to-person" insurance website. From The Economist (June 15th, 2012):

    The idea is to more efficiently replicate for a group of friends what traditional insurance companies do for a large number of strangers.

    Friendsurance offers household, personal-liability and legal-expenses insurance. Large claims are still covered by normal insurers, with whom the firm has partnerships. But the costs of smaller claims, which would normally be paid by a policyholder as part of a “deductible” amount, are shared within a small circle of friends, who can either sign up as a group or hook up on the site. Part of their premiums are set aside to settle these small claims. If something is left over at the end of the year, each friend gets back his share. “We are essentially insuring the deductible,” says Mr Kunde.

    For discussion:

    What factors determine what premiums will pay for insurance?

    What are the benefits and risks associated with peer-to-peer insurance?

  • Financial Alpha and Beta Explained

    This short video from the Financial Times gives a very quick overview of how investors try to beat the market. Traditionally, investors chased "alpha" or the return that is above what would be expected by the market itself (also called "excess return"). However, the average of all alphas is zero--that is, some win and some lose, but on average they're all average.

    In this video, we see that fund managers are now trying to win by using a strategy called "smart beta." Here, rather than just match the market and earn whatever the market is expected to earn, investors are defining the market a little differently. Traditionally, the market is comprised of a stock index that is weighted according to market value. So to match the market, an investor would buy a lot of stocks with larger market caps. By defining the index based on other factors rather than simply on market cap, investors are seeking ways to beat the market.

    For discussion:

    What is passive or index investing and how does that differ from active investing?

    What are some of the other factors that are identified in this video?


  • What Drives Commodity Prices

    Who can think of crop reports without thinking of the 80s movie, Trading Places, starring Eddie Murphy and Dan Ackroyd? Well, the crop report is still relevant today, and this Bloomberg interview describes the factors that affect commodity prices which in turn affect the price of groceries on the shelves.

    For discussion:

    What are the factors that drive the prices of corn and wheat? How can commodity traders anticipate the prices of these products?

  • Cash: One Function of the Banking System

    Banks serve several important functions in society. They transform liquid sources of funds (savings) into illiquid uses of funds (commercial and real estate loans). They monitor credits so that households don't have to evaluate the credit worthiness of borrowers. Banks allow governments a mechanism by which to collect revenues, make payments, and manage the money supply.

    And banks supply cash.

    What seems like the simplest function is turning out to be a very important function for Greeks.

    From the Washington Post (Faiola, 11 July 2015)

    Greeks are facing a mega cash-crunch with banks closed and ATM withdrawals limited to 60 euros ($66.60) per day.

    As my colleague Ylan Q. Mui and I wrote Friday, while the government's latest bailout proposal was reviewed, "In the balance is whether Greece remains part of the 19-nation euro bloc or drops into a fiscal abyss that would leave banks without cash and drive the country back to its former currency, the drachma."

    Sixty euros doesn't buy much, and though Greeks can use their debit cards with merchants, many are requiring cash payments only.

    Even tourists are warned to bring enough cash. From the BBC (Campbell, 29 June 2015)

    The official advice from the Foreign Office is that people have enough euros in cash to cover emergencies, unforeseen circumstances and any unexpected delays.

    It has also warned that banking services throughout Greece, including credit card processing and servicing of ATMs, could potentially become limited at short notice.

    In practice, travellers should probably bring enough cash to cover any likely payments on a trip.


    For discussion:

    Read this article from the San Francisco Fed and describe the economic function of a bank.


    "The Parthenon in Athens" by Steve Swayne - File:O Partenon de Atenas.jpg, originally posted to Flickr as The Parthenon Athens. Licensed under CC BY 2.0 via Wikimedia Commons -

  • Technology is Great...When It Works

    This week, the New York Stock Exchange experienced a computer issue that shut it down for four hours. Though highly unusual, this shut down was described as nothing more than a technical issue.

    From the Washington Post (Harwell, Moore, and Bogage, 8 July 2015):

    The freeze in trading at one of the world’s largest exchanges was highly unusual. A U.S. official told The Washington Post that there was “no indication” that the problems were the result of a cyberattack. The person, speaking on condition of anonymity, added that the incident “seems like a technical issue.”

    For discussion:

    What are the implications of the technology failure for financial markets?

  • The Greek Crisis Explained

    This week, Greece failed to make its debt payment to the IMF. To stop capital from fleeing the country, the government has imposed a bank holiday and has restricted the amount of cash that people can access.

    This Bloomberg interview explains what it means for Greece to exit the euro.

    This infographic provides a picture of the situation leading up to the Greek crisis today.

    Courtesy of: Visual Capitalist
  • The How and Why of Investing in Commodities

    The commodities markets are among the oldest in the world. Long before we had stocks and bonds, civilization traded in agricultural products and precious metals.

    Today, investors choose commodities to diversify their investment portfolios. And by "diversify," we mean that investors are seeking investments that are not highly correlated with the stock market.

    This brief Financial Times video explains commodity investing.

    For discussion:

    What are the benefits and limitations of investing in commodities?

    What investment vehicles are available to allow investors to access commodity markets?

  • Paying Puerto Rico's Debt

    This week, the sunny island paid it's municipal debt, but the future still looks cloudy. Unlike other U.S. municipalities, Puerto Rico faces some challenges in that it cannot access the bankruptcy laws that protect other U.S. municipalities. Additionally, the investor base of Puerto Rican debt has shifted from retail investors to hedge funds, and that may impact the outcome of the settlements.

    From a recent MarketWatch article (Ismailidou, 2 July 2015):

    Over the past couple of years, the buyer base of Puerto Rico's debt has changed, as traditional municipal-bond investors have been selling and aggressive crossover investors, mainly hedge funds, have been buying into the market.

    According to most recent estimates, about 60% of Puerto Rico's bonds are owned by traditional municipal investors and the rest is in the hands of hedge funds and other crossover investors.

    This has practical repercussions in terms of investment strategy.

    For discussion:

    What are the different types of bonds issued by Puerto Rico?

    What does it mean to "clip the coupon" on bonds?

    Why might institutional investors like hedge funds respond to the debt crisis differently than retail investors?