Dollars and Jens
Wednesday, March 21, 2007
Bad Managers
Morningstar makes a reasonable case that the management of OSI (Outback Steakhouse) has been working against shareholders' interests in their effort to take the company private, and encourages a vote against the buyout offer. I'm sympathetic, but then what? Do you hope a large investor buys enough shares to put together a new management team? Or do you just go ahead and accept that your managers aren't going to act in your interest? I assume you don't sell at the market price, which is even lower than the buyout offer you're rejecting, unless the goal is to spend money punishing bad management.

Tuesday, March 20, 2007
credit crunching in mortgages
I'm 98.6% sure this article, headlined "Banks Pick Up Where Fed Left Off, Tightening Credit", isn't intended as parody:
Countrywide Financial Corp., the biggest U.S. mortgage provider, last week stopped taking applications for no-money-down loans from risky borrowers without proof of income.
Boy, looks like they're really getting tough.

It's reasonable to note how forces other than the fed (directly) are affecting financial tightness, but this article doesn't make a particularly compelling case on whatever case it's trying to make.
"The environment has improved for borrowers that have good credit," said Greg McBride, senior financial analyst at North Palm Beach, Florida-based, which tracks consumer interest rates. "It's the best it's been in months. And that's the majority of borrowers."
Meanwhile, interest rates even for BBB corporate debt are lower than they were at the meeting last June, lower than at the meeting last August, and even lower than the last time the FOMC met at the end of January. If the markets are finally acknowledging the existence of credit risk, they're not getting carried away with it yet.

Thursday, March 15, 2007
lifetime budgeting

I can't imagine having a finance column and getting questions like this:

My husband and I are retiring in 10 years, but haven't set up any retirement accounts. We need some advice on what we can do in such a short time. Any suggestions?
His first response is,
Wait a minute. I don't get it. How can you say with such certainty that and your hubby are retiring in 10 years when you apparently haven't saved a dime up to now?
This is more polite than "Stock up on dogfood to hedge against future price increases."

The thing is, though, she hasn't actually said she has no savings; she just doesn't have a formal retirement account. In fact, the columnist knows little about her financial situation, and goes on to speculate, suggesting for example that an option is to pull equity out of a house.

One and a half points that he makes, though, are fairly general, supposing she and her husband don't have savings:

When you do the analysis I recommend above, I think you'll find that unless you start really socking it away, you may be in for a downsized retirement. So do whatever you must to start saving as much money as you can immediately.
The flip-side to saving is generally spending less, so this boils down to "you may have to spend less in retirement, and/or you may have to spend less now." Saving now not only allows you to accumulate more for retirement, it allows you to adapt to the kind of lifestyle you can afford.

And here's where I'm going with this: you can choose to spend a dollar now, or you can spend what that dollar and associated investment returns would be later. This is true whether "later" is before or after retirement. I'm not a big fan of "retirement planning"; I don't entirely like the idea that we seem to have culturally adopted that you should be useful up until a certain magic age and then be left fallow until you die. More to this point, though, I don't think it makes sense to do your long-term financial planning the way it usually gets spelled out, in that you figure out how much money you're going to need at the magic cut-off date and save enough to get there. What matters is that net present value of future income, plus assets, equal (or exceed; that's okay, too) net present value of future spending. If you are planning to make less money at some point in the future than now, it makes sense to spend less than what you make now. If your heart is really set on retiring ten years from now, you can probably arrive at a reasonable estimate of the asset side, i.e. net wealth plus present value of future earnings. Lifetime budgeting requires that you figure out how you would most like to spend that over the rest of your life, and you'll save while it's less than your income, and dissave when it's not.

Mortgages and Pensions
Apparently, some public pension funds have been dabbling in subprime loans. Here's my favorite paragraph:
Tettament said he isn't sure what type of collateral backs the CDO, though he thinks returns exceeded 20 percent last year.
If I had to choose between two candidates to manage my money, and the first candidate endorsed an investment he knew nothing about, I'd be pretty open to the second candidate. But if the first candidate endorsed an investment about which he knew nothing except its last year's returns, I'd hire the second candidate on the spot.

Monday, March 12, 2007
Fudging the Data
This is, as Megan McArdle says, an enormous scandal:
Comparing two snapshots of the entire historical I/B/E/S database of research analyst stock recommendations, taken in 2002 and 2004 but each covering the same time period 1993-2002, we identify tens of thousands of changes which collectively call into question the principle of replicability of empirical research. The changes are of four types: 1) The non-random removal of 19,904 analyst names from historic recommendations ("anonymizations"); 2) the addition of 19,204 new records that were not previously part of the database; 3) the removal of 4,923 records that had been in the data; and 4) alterations to 10,698 historical recommendation levels. In total, we document 54,729 ex post changes to a database originally containing 280,463 observations.
I want an explanation. Or at least a scapegoat.

Wednesday, March 07, 2007
Drug Discovery and Attention Biases
Drug researcher Derek Lowe writes on drug research failures:
I almost wish that more were made of these failures. It would be painful for the companies involved, but it would give people a better idea of how painful drug discovery can be. I had a friend who was always worried about flying anywhere, and I kept wanting to pop in every few seconds, all day long, with news of yet another plane that had landed safely in Chicago, Atlanta, LAX or wherever, just to get the point across. In the drug industry, though, we have the reverse situation - almost everything we try to put into the air crashes. There should be some way to get the point across that most of our drug candidates never make it, taking all their development money down with them.
In most fields of research, failures are even more invisible than in drug discovery, since you don't have your products going through clinical trials for most of a decade before they get to market. There's a difference between a press release and a product, and an even bigger difference between a project your cousin's wife's sister is working on in a lab at a publicly traded company and a product.

There are a few more things I could add along these lines (don't think you know the odds of something, for example, just based on anecdotal evidence), but it was probably a mistake to add anything to Lowe's comment. I posted it here as relevant to investment psychology, but even if you're not investing and you already know what he's saying, it's worth re-reading and reflecting on once in a while.

Thursday, March 01, 2007
Berkshire Hathway Annual Report
Warren Buffett's letter to shareholders and the annual report will be released around market-close today, presumably here.

UPDATE: The biggest news seems to be that he's looking for an intern (or several) to mentor to take the Chief Investment Officer position when he dies — Lou Simpson isn't much younger than Buffett. Also, Berkshire had a pretty good year.

UPDATE 2: Apprentice. That's the word I'm looking for.

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