• On Tulips and Bitcoin: Financial Bubbles Then and Now

    The more I hear Bitcoin discussed in everyday conversation as I'm standing in line at the store, the more I am convinced we've gotten ourselves stuck in a crazy time machine and have been plunked down onto the streets of Amsterdam in the 17th century.

    In the late 1600s, what began as a gentlemanly hobby of trading rare tulip bulbs turned into a full financial market filled with buyers and sellers and speculators driving the prices of tulip bulbs to extraordinary heights. From this historical perspective on "Tulip mania" from BBC, we read:

    As people heard stories of acquaintances making unheard-of profits simply by buying and selling tulip bulbs, they decided to get in on the act – and prices skyrocketed. In 1633, a single bulb of Semper Augustus was already worth an astonishing 5,500 guilders. By the first month of 1637, this had almost doubled, to 10,000 guilders. Dash puts this sum in context: “It was enough to feed, clothe and house a whole Dutch family for half a lifetime, or sufficient to purchase one of the grandest homes on the most fashionable canal in Amsterdam for cash, complete with a coach house and an 80-ft (25-m) garden – and this at a time when homes in that city were as expensive as property anywhere in the world.”

    Everyone got in on the act. First the gentlemen connoisseurs but later the average Joe. We read on:

    Things came to a head during the winter of 1636-37, when tulip mania reached its peak. By then, thousands of people within the United Provinces, including cobblers, carpenters, bricklayers and woodcutters, were indulging in frenzied trading, which often took place in smoky tavern backrooms. (Drink was a significant factor in the generally intoxicated mood.) Some bulbs even changed hands up to 10 times during the course of a single day.

    And then, overnight, the tavern trade disappeared. In early February 1637, the market for tulips collapsed. This was because most speculators could no longer afford to purchase even the cheapest bulbs. Demand disappeared, and flowers tumbled to a tenth of their former values. The result was the prospect of financial catastrophe for many. Disputes over debts rumbled on for years.

    Today we have Bitcoin. And what started as a very niche market for the financially tech savvy has now blossomed into a household-level investment. Standing behind me in line at the mall I could hear one man explain to his friend how much money someone made in Bitcoin, and that this profit can be repeated if they get in to Bitcoin themselves. Soon.

    One Bitcoin is now trading at over $13,000, which is up from about $1,000 a year ago. And while it has backed off from its recent highs, it's still a substantial win for anyone who got in early.

    But like the tulip bubble of the 17th century, someone may be left holding the proverbial bag. The financial experts are issuing warnings. Goldman Sachs has described the "crypto-currency boom" as an example of "speculative behavior," and others agree:

    Goldman isn’t the only firm to send up a warning flag about cryptocurrencies. JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon labeled bitcoin a “fraud.” Fed Chair Janet Yellen has said it is a “highly speculative asset,” and Bank of Japan Governor Haruhiko Kuroda said it’s being used for speculation. (Note that Goldman is also reportedly building a cryptocurrency trading desk.)

    (read the full Bloomberg article here)

    For discussion:

    How are the tulip bubble and bitcoin similar? different?

    Would you invest in bitcoin? Why or why not?

  • What Are Bitcoin Futures?

    The Bitcoin futures contract is traded on the CME and can be traded daily. This video explains the contract specifications of the Bitcoin futures contract.

    For discussion:

    1. What is one contract worth in US dollars?

    2. What causes the value of the contract to rise or fall?

    3. What are the benefits of trading Bitcoin using this futures contract?

    4. How does this differ from buying Bitcoin outright?

  • What is Bitcoin?

    Bitcoin seems to be all the rage at the moment. Is this fake money, or is it a legitimate method of payment? This video from the CME answers the following questions:

    1. What is Bitcoin?

    2. How is Bitcoin created?

    3. How can individuals and institutions own Bitcoin?

    For discussion:

    What are the risk of owning Bitcoin?

    In your opinion, is this an "asset bubble?"

  • Financial Needs of Small Businesses (2016)

    The 2016 Small Business Credit Survey published in 2017 shows:

    • Most firms are optimistic about the future, expressing expectations for 2017 similar to those they held for 2016; a net 61% expect revenues to grow and a net 39% anticipate job growth in 2017
    • At the same time, debt expectations are modest: 19% of firms expect to increase their debt level in 2017. Thirty-four percent of firms increased their debt level in 2016.

     

    And in terms of funding

    • Among nonapplicants, 47% indicated they have sufficient financing.
    • Debt aversion is fairly common—27% of nonapplicants said they didn’t want to take on debt.
    • Seventeen percent of nonapplicants reported being discouraged, meaning they did not apply for financing because they believed they would be turned down.

    For discussion:

    Why do you think that small business owners prefer to avoid debt financing?

  • The Finance of Star Wars

    The Star Wars has been a tremendous success, not unlike franchises such as the James Bond franchise and others. According to the video below by Professor Aswath Damodaran, what makes Star Wars different is the value of add-ons such as toys and collectibles.

    For discussion:

    What add-ons have been successful? What percentage of revenues came from the box office?

    What add-ons have not been overly successful?

    Was the acquisition of Star Wars by Disney from George Lucas profitable?

     You will find more statistics at Statista

  • Technical and Fundamental Analysis of the Stock Market

    Technical analysis is the use of price and volume charts to forecast buy and sell signals in financial markets. The Efficient Market Hypothesis (EMH) says that market prices already reflect all we know about a stock--that is, full information--and therefore we cannot use such price information to further forecast what will happen to a stock. In other words, if a stock price pattern were to forecast that a price is going up, then the price would already be up and there would be nothing left to gain.

    What I just described above is the EMH in the "Weak Form." The EMH comes in a semi-strong and a strong form as well. The semi-strong form of the EMH states that stock prices reflect not only past price and volume information, but they ALSO reflect all public information about a company that can be gleaned from a firm's annual report, news releases, and current and future potential projects. The strong form of the EMH states that stock prices reflect all the information covered by the semi-strong form AND all private information as well, that is secret deals of mergers and future product launches that other investors do not yet know about.

    We generally don't believe that markets are efficient in the strong form. How do we know? Because once in a while, we see news stories about someone who got caught making a killing by trading on material non-public information.

    As for the semi-strong and the weak forms of the EMH, well, we don't all agree.

    In the semi-strong form, investors who try to select investments based on dividends or earnings are basically saying that they think they can outperform the market by evaluating fundamental data and buying the "right" stocks. In the weak form, investors who follow the trading patterns described in the infographic below, are saying that they can outperform the market by evaluating price and volume trends and buying the "right' stocks.

    For discussion:

    What do you think? Do you believe you can extract enough information from a candlestick chart to buy and sell at the right time? Why or why not?

  • How Do Investment Banks Make Money?

    This video explains how Goldman Sachs made money back in 2010. Several financial issues are raised here:

    1. What is the goal of the firm? What is the goal of an investment banking firm like Goldman Sachs?

    2. What does it mean for Goldman Sachs to be a "hedge fund masquerading as a bank?"

    3. Are investment banks like Goldman front-running their clients as indicated in this video?

    4. Should Goldman trade securities that bet against their clients, or is this trading activity simply risk management?

      

  • How Options Work

    Option contracts are agreements between a buyer (holder of the option) and a seller (writer of the option). The agreements give the holder the right to buy or sell an underlying asset at a predetermined strike price on or before a future expiration date. 

    These contracts are effectively insurance contracts, and they are described in the video below.

    For discussion:

    In your own words, how are options similar to car insurance? How are they different?

  • The Greeks and Option Pricing

    Option contracts are "derivative" contracts that give the holder the right to buy or sell an underlying asset on or before a future strike date at a predetermined exercise price. The right to buy is called a "call option" while the right to sell is called a "put option." 

    These contracts have an entry fee or price that an option holder must pay the option writer, and this price is determined by or derived from the price of the underlying asset as well as some other factors. 

    As these factors change, the price of the option also changes. The sensitivity of the option price to the changes in these factors are called the "Greeks."

    The video below describes each of the Greeks.

    For discussion:

    What are each of the Greeks and what do they mean for an options trader?

  • Crowdfunding v. Traditional Funding

    Crowdfunding is a way for startups or new ventures to raise capital from many investors in small amounts. The Securities and Exchange Commission (SEC) has rules in place for crowdfunding, and here is a recent excerpt from an SEC bulletin:

    Crowdfunding generally refers to a financing method in which money is raised through soliciting relatively small individual investments or contributions from a large number of people.  Over the last few years, crowdfunding websites in the United States have proven a popular way by which to solicit charitable donations and to raise funds for artistic endeavors like films and music recordings. 

    Under rules adopted by the SEC in 2015, the general public now has the opportunity to participate in the early capital raising activities of start-up and early-stage companies and businesses by way of crowdfunding.  Companies can use securities-based crowdfunding to offer and sell securities to the investing public.

    Can I make a crowdfunding investment?

    Anyone can invest in a securities-based crowdfunding offering.  Because of the risks involved with this type of investing, however, you are limited in how much you can invest during any 12-month period in these transactions.  The limitation on how much you can invest depends on your net worth and annual income.

  • How and Why To Invest In Commodities

    The best assets to add to an investment portfolio are those that increase the portfolio expected return while reducing the total volatility. To find such assets, investors seek those whose returns are not perfectly correlated with the returns of the existing portfolio. This is diversification. In other words, although the asset may have returns that are expected to vary wildly from one period to the next, as long that variation is not perfectly in tandem with the variation of the returns on the existing portfolio, then the asset may be a good investment and reduce total portfolio return variation.

    Enter commodity markets. Though volatile, these assets may offer diversification benefits to portfolios of stocks and bonds.

    This video explains commodity investing and the related diversification benefits.

    For discussion:

    How can an investor participate in the commodity markets?

    What is hedging, and how does an investor hedge risk in commodities?

  • What's Driving the Dow?

    What drives a stock market? Is it strictly gambling sentiment that tosses stock prices around, or is there something more that underlies stock prices?

    According to this article by Euronext:

    Simply put, the price of an individual stock is determined by supply and demand. The supply of stock is based on the number of shares a company has issued. The demand is created by people who want to buy those shares from investors who already own them. The more that people desire to own a stock, the more they are willing to pay for it.

    But the supply of shares of any stock is limited. Investors only can buy shares of stock that are already owned by someone else. So if one person wants to buy, somebody else has to sell, and vice versa. If a lot of people want to buy at the current price and not a lot of people want to sell, the price goes up until more people are willing to sell.  When the price gets so high that buyers no longer want the stock, the price starts to drop.

    The article goes on to identify several factors that drive stock prices:

    1. A company's financial health
    2. Industry information
    3. Economic trends
    4. World and national events

    In this video from CNN Money, we see some explanations for why the Dow has had such strong performance in 2017. Using the information in the video and the article above, can you identify which of the factors drove the market to its current level?