Another Article Accepted!

Seems like I'm on a roll lately (it's a slow roll, but a roll nonetheless). I just heard from a coauthor that a small paper of ours just got accepted. It's at a lower-tier journal, but at least we placed it somewhere (articles are like orphans - if they keep trying, they eventually find homes). The coauthor is a former student of mine who's done pretty well for himself - he started at a lower tier school and has published well over a dozen articles in four years (mostly at lower-tier journals, but one at a top-tier journal in a related discipline and several at just-below top-tier level).

A couple of years ago, my research was just beginning to fire on all cylinders when the Unknown Son was diagnosed with cancer. Then (not surprisingly) I got almost nothing out for the next three years (I was just looking, and there's gap in my vita that's exactly three years long). But over the last year and a half, I've gotten three publications and four other papers under review. It's not an earth-shattering output, and I'd certainly like to be publishing in better-quality journals. But since I was mostly cleaning out my backlog (and some of the ideas had gone stale while The Boy was sick), I'll take it.

At the school I'm at, quality is valued but numbers count too (after all, one definition of a Dean is "a person who can count but can't read").

Now I have some cover to work on longer-term projects that have a decent chance at higher-quality journals. I was just looking at my research file and I currently have four projects under way, and hope to finish 2-3 of then by December. If I do, and I get one or two more publications by the next fall, I should have a pretty good shot at tenure.

And since the Unknown Wife has told me in no uncertain terms that we're NOT moving again, I have a lot of incentive.

Like they say down South, "If Momma Ain't Happy, Ain't NOBODY Happy!"

The Unknown Son Takes His First Karate Class

We've been meaning to do it for some time, but we finally got around to it - the Unknown Son finally took his first Karate classes. We figured that it would help his strength, coordination and balance, and give him something of his own to do that's not shared by his sister.

In addition, he's a very small, smart kid (about 5th percentile in height and weight and 95th percentile in reading and math). So that means he'll probably eventually have to deal with bullies. I know this from experience, since I had a boy in my 3rd grade class that would literally kick by but halfway home on a regular basis. That's not a figure of speech - he live halfway between the school and my house, and would often "escort" me as far as his house. Every few steps, he'd plant a boot in my butt.

But anyway, U.S. had a great time. The first class was a private one with an instructor, and he was great. He made U.S. do some exercises, a few punches and kicks, a lot of jumping and physical activity, and gave him a basic orientation top the school and how classes worked. It was cute seeing him learn how to stand at attention and bow correctly (all with a lot of enthusiastic shouts of "Yes Sir!" and "No Sir").

The school (dojo) is one of the largest in the Northeast, and has over 300 kids enrolled, all who come twice a week. So, it should be good not only for the physical training and self-defense aspects but also for the friends he'll make. There are probably 30-40 kids in U.S.'s elementary school who go there, so he'll have a lot of reinforcement (not to mention well-trained friends if he ever needs a helping hand).

And he looked so proud with his white belt (the "beginner's" belt). He's excited at the prospect of possibly being able to test for the next level (the "yellow") belt in only a few months.

Stay tuned.

It's a Nice Day, So A Quarter Of My Class Is A.W.O.L.

It's a beautiful Friday here at Unknown University - it rained last night, and today is clear and sunny and about 80 degrees. So of course, 11 of my 45 students were absent from my investments class (they had a quiz Wednesday, so they figured "Why not? It's not like he'll give us a quiz!"

I try to have my students give me feed back every week or so on what they're enjoying (or not) in the class, and what they think I can improve on (or am already doing well). In addition, I ask them what topics in the course are giving them the most difficulty or causing the most confusion.

A lot of people think it's way overboard, but it only takes a couple of minutes, and often gives very valuable feedback. I don't report on ALL the feedback, but only address the few issues that are mentioned by multiple people. After all, if one student mentions it, it could be just a personal preference, but if 5 mention it, it's likely a problem. This time around, a couple of them though I spent too much time giving them grief for being late or absent. And they had a point - why lecture the people who are there about the importance of being there?

So, I told them that I agreed with them wholeheartedly . And since so many were absent, everyone who had signed the attendance sheet that day (I'd already collected it) got 5 points added to their most recent quiz score. In addition, they should mention this with a big smile to the eleven students who'd missed the class.

What can I say? I'm an applause whore at times. It had been a long week, and it's not like the missing students can complain about it to the Dean "Um - Dr. Unknown didn't give bonus points to all the students - only the ones who showed up for class."

It'd probably make his day.

Good Early Results

I've been working for the last few months on a project that uses five (count em, five) different databases. It's taken me a couple of months to line up all the data (I usually end up doing the initial "data grinding" on these types of projects, since I like doing SAS work). We finally got initial some results, and they look pretty good - everything we expected to be statistically significant, was.

So, I can relax a bit now - all that time didn't go to waste. So I think I'll go celebrate with a long bike ride.

A Website On Game Theory

Like most people with graduate level training in economics, I've had a fairly good exposure to game theory. For those who are unfamiliar with the term, game theory analyzes situations where an individual's actions affect not only their own welfare (i.e. their "payoffs"), but also the payoffs to others with whom they are interacting. The graph above illustrates probably the most well know game-theoretic scenario, known as the Prisoner's Dilemma.

The picture comes from Robert Schenk's site, CyberEconomics. He has a nice section on game theory that's both factually correct and easily understandable here.

Enjoy.

The Class Continues

A pretty easy teaching day today - my investments class gets a fairly long quiz, and we begin coverage of mutual funds, ETFs, Hedge funds, and such.

This quiz should give me a better idea whether their [performance on the first quiz was representative or not. If it was, the size of the herd may end up shrinking as we lose a few slow antelopes.

There are a couple of students in my class that probably should consider bailing out. That may sound harsh, but if a student is sufficiently far behind it's sometimes best if they drop - the effort they have to expend to catch up can end up really hurting their performance in other classes, and they also end up drastically slowing down the class they're behind in.

That having been said, I don't think they're at the point of no return yet. But they are rapidly approaching it.

So maybe I'll actually get some research done. The only problem is that I thatched and reseeded my lawn (or what passes for it) this weekend. That (and the generall pollen conditions) here near Unknown University have really made my allergies kick in. So, to the extent I can work with a case of "baloon head", I may get some work done on the revise and resubmit that's been sitting on my desk all week.

And They Say Accounting Doesn't Make Sense

As a person who's trained primarily in finance, accounting rules sometimes look like they were designed by Monty Python. Here's the latest installment - your company's credit rating drops, so the market value of your liabilities fall. As a result, you show a profit. This is what happened to some Wall Street firms recently. Read the whole story here. IMO, the best line in the article is:

But Moody’s Investors Service said buyers should beware of gains booked when brokers mark down their own debt liabilities. “Moody’s does not consider such gains to be high-quality, core earnings,” it said in a report issued Friday.

Ya think?

This is why we make all our Finance students take four accounting classes before they graduate. That way, they'll see these things often enough that they won't break out laughing.

This Reminds Me - I Need To Talk With My Graduate Assistant

I think my grad assistant needs tighter controls.

My Students Are NOT Off To A Good Start

This semester I tried something a bit different in my security analysis class. Since the finance principles (i.e. required core finance) class is a prerequisite for this one, I always assumed that they had at least a fair grasp of the basics (like time value, using their financial calculator, constant dividend growth valuation, and so on). This time, the first day of class, I announced that they'd get a quiz at the beginning of the second week on "the basics). I figured this would serve two purposes: It would give me (and them) a better idea as to what they retain from their previous classes. And just as important, since it counted toward their grade, it would give them an incentive to review the material at the beginning of class. The questions I said I'd give them included:

• A couple of questions on time value (PV of a lump sum, PV of an annuity, find the interest rate on the FV of an annuity)
  
• A constant dividend growth stock valuation problem
• A non-constant dividend growth valuation problem
• An NPV problem
• An IRR problem
• A CAPM question
• A basic question on financial statements

The results were eye-opening, and not exactly in a good way. Although the questions were pretty basic (except for the non-constant dividend growth problem), the average score was about 65, and only 3 out of the 45 students got a perfect score. Let's just say that it was a less than stellar grasp of the material. So, I told them that those who got less than 80% have a LOT of catching up to do.

After all, if they don't understand the basics, they surely won't get the more advanced material. And I simply don't have the time to review everything they're supposed to know from the class they supposedly already passed. After all, they ARE mostly finance majors.

At least I didn't teach the principles class, so I get to grouse about those who did...
It should be interesting. I think the herd may be losing a few slow antelopes shortly.

A Good Day, and A Good Ride

This was a good day - I went into the office around 11:00, finished a paper to send to a conference and then finished my PowerPoint slides for the next week's classes.

Then I went on a 22 mile bike ride. It was a bit windy, but other than that,conditions were just about perfect for a long ride - mostly flat terrain with just enough gently rolling hills to make it interesting, and a temperature of 64 degrees. It was so nice that I actually ended up holding a faster pace for the 22 mile ride than I usually do for my 16 mile course. I even passed one of my students on the road. I wonder how he felt getting smoked by a teacher more than twice his age?

Hey - I may be carrying about 15 extra pounds, but my legs and cardio are both in pretty good shape. O.K - enough bragging...

Now, it's time to read a bit to the Unknown Son before bed (Unknown Daughter is at a friend's house). The kids just watched Lemony Snicketts, so now he's reading the books (he just got the first two from the library). I particularly like them because they use some pretty complicated words, but follow them with an explanation in an aside). So, they're great not just for the story itself but also for feeding the lad's inner nerd.

How Much Should CEOs Be Paid?

There's a great editorial in today's WSJ by Robert Reich, titled "CEOs Deserve Their Pay (note: online subscription may be required). He starts out with the usual facts that get compensation activists so lathered up: the average CEO compensation for a Fortune 500 firm made almost $11 million last year (about 364 times the average employee's salary), and the 20 highest-paid execs earned an average of 436 million.

Reich then goes on to explain the increase in CEO pay over time as a rational consequence of increasing competition. In other words, 50 years ago, most large firms were in oligopolistic industries, with stable unions and predictable revenue streams. So, CEOs were almost like quasi-bureaucrats.

In contrast, now the level of competition is so fierce (and entry barriers so low) that even small differences in managerial quality can result in huge changes in profitability and market value. So, having a slightly better CEO can result in big gains to shareholder wealth. Not surprisingly, shareholders (or actually, boards of directors acting on the behalf of shareholders) realize this, and end up bidding up the price of good CEOs:

So how does the modern corporation attract and keep consumers and investors (who also have better and better comparative information)? How does it distinguish itself? More and more, that depends on its CEO -- who has to be sufficiently clever, ruthless and driven to find and pull the levers that will deliver competitive advantage.

There are no standard textbook moves, no well-established strategies to draw upon. If there were, rivals would already be using them. The pool of proven talent is small because so few executives have been tested and succeeded. And the boards of major companies do not want to risk error. The cost of recruiting the wrong person can be very large -- and readily apparent in the deteriorating value of a company's shares. Boards are willing to pay more and more for CEOs and other top executives because their rivals are paying more and more for them. Former Home Depot CEO Robert Nardelli to the contrary notwithstanding, the pay is usually worth it to investors.

RTWT here

All in all, it's a great piece. But alas, after such great writing, Reich can't help himself, and finally reverts to type:

This economic explanation for sky-high CEO pay does not justify it socially or morally. It only means that investors think CEOs are worth it. As citizens, though, most of us disapprove. About 80% of Americans polled by the Los Angeles Times and Bloomberg in early 2006 said CEOs are overpaid. The reaction was roughly the same regardless of the respondent's income or political affiliation. But if America wants to rein in executive pay, the answer isn't more shareholder rights. Just as with the compensation of Hollywood celebrities or private-equity and hedge fund managers, the answer -- for anyone truly concerned -- is a higher marginal tax rate on the super pay of those in super demand. (emphasis mine)

Ah well. Other than that line, it's still a great piece, and well worth reading.

What's the Return to Shorting Naked Puts?

We're talking (briefly) about option payoffs in class this week. So, I was excited when I came across this piece titled "Why are Put Options So Expensive?", by Oleg Bondarenko of the University if Illinois at Chicago. In it, he provides some very interesting figures. First off, the abstract:

This paper studies the "overpriced puts puzzle" - the finding that historical prices of the S&P 500 put options have been too high and incompatible with the canonical asset-pricing models, such as CAPM and Rubinstein (1976) model. Simple trading strategies that involve selling at-the-money and out-of-the-money puts would have earned extraordinary profits. To investigate whether put returns could be rationalized by another, possibly nonstandard equilibrium model, we implement a new methodology. The methodology is "model-free" in the sense that it requires no parametric assumptions on investors' preferences. Furthermore, the methodology can be applied even when the sample is affected by certain selection biases (such as the Peso problem) and when investors' beliefs are incorrect.

We find that no model within a fairly broad class of models can possibly explain the put anomaly.

Writing put options should make consistent small profits,. but with a chance that the option writer will occasionally get really hosed. But by Bondareknko's analysis, markets consistently overvalue at the money (ATM) and out of the money options (OTM) that are "close" (i.e. within 6% of ATM). In fact, writing options seems to result in average returns of 39% per month, with returns for deep OTM options of almost double that. That's right - almost 40% per month.

So, how likely is the "hosing"? Does this merely reflect the risk of large losses? By his estimates, there would have to be a meltdown like the one in October 1987 1.3 times a year for the option writer to lose money.

So, why are put options so apparently overvalued? There are at least two possible explanations (other than something really funky/wrong with the data): one is that investors systematically overestimate the chance or severity of large market declines. The other is that option buyers have a utility function that is extremely risk averse. In either case, there's apparently an excess demand for insurance that option writers can benefit from (if they're willing to bear the risk).

HT: CXO Advisory group

What Non-Finance Courses Should Finance Majors Take?

Since school just started here at Unknown University, that means undergraduates with questions about majors, classes, internships, and so on. This is the first time I advise students her at my current school (I got a pass for the first year). Our program is such that they don't have a lot of options for the finance part of their curriculum, but I get a lot of questions about what other classes (besides finance) to take. So, I though y'all might also benefit from my take on things (or at least get a good laugh):

• Financial Accounting: The typical undergraduate finance major takes one or two introductory level accounting classes. Then, when they get their first entry-level job, they often find themselves doing tasks that use a lot of financial statement information. Accounting can be hard and (to many finance majors) a bit dry, but taking more accounting classes definitely sets you apart from other new graduates. Back a few years, I used to place a number of students with the credit analysis unit of Bank of America. They didn't even look at most students unless they had three or (preferably) four accounting classes. There's not that much advantage to taking Tax or Auditing for a finance major, but there is to taking Financial - I'd recommend at least Intermediate Accounting I (and if you can manage it, Intermediate II).
  
• Macro Economics - Although the undergraduate business curriculum typically requires an introductory class in macro, most students come out of it with only the barest hint of what's going on. A second class in this area will help you to get a much better understanding of the larger economic forces that effect equity (and to an even greater extent, fixed income) markets.
• Money and Banking (from the Econ department)- Similar to the above, it's also good to see the money and banking material twice. Although you often get a money and banking class in the finance department, it's good to see the same topic taught from a different perspective.
  
• Statistics and Econometrics - The undergrad finance curriculum usually has an introductory statistics class. Almost everyone can benefit from more exposure to this material. But most importantly, make sure the class is "hands on". There's no substitute for analyzing real data.
  
• More math - You might not use linear algebra or higher-level calculus, but taking extra math (and getting getting good grades in those classes) serves as a pretty good signal that you're either smart or hard working (or both). Today's finance world is math and stat -driven. So, the more you take of these topics, the better.
• A programming class - like math, programming is also hard. Having a little more background in a commonly used language always helps.
  

Of course, this is only my opinion, and a lot of it has been shaped by what I hear from employers (or see on the CFA exam). If you have other thoughts, I'd love to hear them.

Advice For New College Freshmen

Ben Stein has said some pretty goofy and (IMO) off base things about private equity, but he hits the mark here with advice for new college students (he's sending his first son away to college):

Make friends with your teachers. To get on their good side, read the material before class, ask questions, and use their office hours to get clarifications on material that's unclear.

Learn to manage your time. Make sure you do your work on time (and neatly) and follow the instructions carefully on assignments.

Be well rounded - take classes in the area you want to specialize inm, but also in others. You never know what you might end up using, so it's important to have both depth and breadth of knowledge.

Affability and netness count. Join a frat or sorority, or some other group. And if you dress like a slob, make sure your thoghts and speech are more ordered - it'll offset the impression your appearnace makes.

Finally, don't indulge to excess, get some exercise, and develop good work habits.

Read the whole thing here.

As a professor, I can vouch for the first piece of advice. Most students don't make the effort to get to know me outside of class. So, I tend to go the extra mile for those who do (particularly when they need reference letters).

How Often Should You Meet With Your Advisor?

Like in most things, corner solutions aren't optimal.

G'Bye Alaska

Couldn't find any libraries, plus it's Labor Day, so I'm at a random hotel poaching their computer.

Exodus from Homer

I hitched into Anchorage today, waiting for my flight to Portland tomorrow night.Life continues magical, but has also had tragic moments. My cousin,Annie and her twin sister's daughter Megan came into Homer weeks ago. Annie was planning to take us to Denali for a camp-out, but Megan's dad suddenly died, and they had to fly back to San Francisco. Megan was totally torn up, of course. Since last writing, I spent most my time in Homer, not doing much. But it was good, cuz I was having a usual bout of chronic fatigue.

The day before I left, 3 young guys were unnaturally friendly and offered to buy me coffee. I knew right off from their insincerity they had a religious agenda. Sure enough, they were with "Youth With A Mission." I like talking religion, if it's real. But it rarely is. Those boys seemed cool & likable enough, but I wasn't talking to boys, I was talking to a "YWAM," a system. The majority of interaction in this world these days is not human, but with systems, either corporate or religious. Imagine loving for the sake of loving, without ulterior motives!

That was my cue to leave Homer. I got a couple rides in the back of trucks, then a ride with a couple from Grand Junction, Colorado (where I went to high school, & part of my family is), then from a guy named Terry, who brought me to Gerdwood (37 south of Anchorage). So I stayed in Gerdwood for a while. A charming town, awesome scenery, nice people, & luscious berries.

Shelter & Food Just Keep Coming When I Need Them

A little problem was I was back in mosquito country. Last time up here I was tormented by 'em all night long. They even bite through my sheet-bag, PLUS a layer of clothing! I have refused tents before, because I prefer a simple tarp - easy put-up, easy take-down. But this time I thought a tent would be nice. In the evening, walking the bike path, I noticed a pile of free stuff. With a Northface tent, almost new. So not even a night in mosquito land without a tent.
Even then, my faith was going through a usual slump, also despite that I'm coming on my 7th anniversary of being moneyless, without a full day hungry. Dumpstering is hard in AK. People don't throw out as much! Maybe it has a lot to do with bears, too. So I had the notion of leaving Gerdwood. I spent one day all day hiking the backcountry. I started fatigued, but then started gorging on berries galore. My hunger & fatigue vanished. In fact, I felt better & more energized now than anytime before this summer. I got back to my camp, feeling content, satisfied. But my mind kicked in, saying, "You should get some carbs." So I went to a Pizza place & found pounds of fresh dough. I cooked it & ate it, even though I wasn't even hungry for it! But it was addictive. I was full. Then, ironically, fatigue & craving set in! This isn't right, I thought.

I thought how I spend too much time thinking about food, searching for it. Yet it comes when I stop searching, stop thinking about it. Both Jesus and the Zen sage Eihei Dogen (who brought Soto Zen Buddhism to Japan a thousand years ago) say not to search for food or clothing, that it comes if you seek first the Kingdom of God (says Jesus), seek first the Buddha Way (says Dogen). Who believes this??? Certainly not your usual professed Christian or Buddhist.

So I resolved to stop searching. Next day I went to find water to bathe. I found a creek, and it was full of spawning salmon. Too fast to catch. Nine years ago it took making a good spear & hours to spear a river salmon. But I noticed many fish were dying, energy spent. So I stepped into the creek, and an energy-less fish passed right under my right-hand grasp, like it gave itself to me! Now that's beautiful, I thought. Then I reached down my left hand and grabbed another. Dinner & Breakfast!

Granted, the fish didn't taste too good - energy spent & unhealthy skin. I went back a couple days later and discovered I could catch healthy fish if I passed up all the fishermen, who wait all day with their lines & hooks, and just be still. Small creatures see time more slowly than large. If you move slowly enough, you are like an clock's hour hand to the fish. So I found I could creep right on them and gently grasp them at the gills. It's so easy it's funny. I even went to the river and tried the same with the really big salmon. So easy!

So I've been living off the land, so at ease, chowing on berries & fish, without nary a tool but a knife to cut the fish. And I feel more splendid than before! I've had a bear's diet! And my poop has become black as the ace o' spades, and full of seeds, just like the bear poop.

Who On Earth Believes Their Own Religion?

Now the burning question: could all the sages of every culture be wrong? I'm going to leave off with some quotes from sages of various cultures, all testifying to the same thing:

Christianity:

"Do not worry about your life, what you will eat; nor about the body, what you will put on. . . For all these things the nations of the world seek after, and your Father knows that you need these things. But seek the Kingdom of God, and all these things shall be added to you" (Jesus Christ, Luke 12:22, 30-31)

Buddhism:

"Students of the Way, do not worry about food and clothing. Just maintain the Buddha's precepts and do not engage in worldly affairs....
Those who truly study the Way have never practiced with the priority of providing for their livelihood....
Moreover, I have never red the collection of all the Buddhist scriptures of a single Buddha or Ancestor, who transmitted the Dharma in the three countries, dying of starvation or cold. In this world, inherently each person receives a certain amount of food and clothing as a gift. It does not come by being sought after, nor does it stop coming by not seeking after it. Just leave it to Fate and do not worry about it. If you refrain from arousing the mind of Awakening in this life, excusing yourself on the grounds that this is the degenerate age, in what life will it be possible to attain the Way?" (Eihei Dogen, 1200-1253 AD, from his Shobogenzo Zuimonki)

"Heaven and Earth give themselves. Air, Water, plants, animals, and humans give themselves to each other. It is in this giving-themselves-to-each-other that we actually live. Whether you appreciate it or not, it is true." (Zen Monk Sawaki Roshi)

"The world in which people give and receive things without saying "Give it to me!" is the truly beautiful world. It differs from the world of scrambling for things. It is vast and boundless." (Sawaki Roshi).

"If your heart is pure,
Then all things in your world are pure.
Abandon this fleeting world,
Abandon yourself;
Then the moon and flowers
Will guide you along the way." (Zen Sage Ryokan)

Judaism:

"I have been young, and now am old;
Yet I have not seen the righteous forsaken,
Nor his descendants begging bread." (Psalm 37:25

"Do not forsake Wisdom [Hakmah], and She will preserve you;
Love Her, and She will keep you.
Wisdom is the principal thing;
Therefore get Wisdom.
And in all your getting, get understanding.
Exalt Her, and She will promote you;
She will bring you honor, when you embrace Her.
She will place on your head an ornament of grace;
A crown of glory She will deliver to you."(Proverbs 4:6-9)

"He who trusts in his riches will fall,
But the righteous will flourish like foliage." (Proverbs 11:28)

And remember the Sunday school stories of manna from heaven (Exodus 16) and Elijah fed in the wilderness (1Kings 17:6-16)?

Hinduism:

"As for those who worship Me,
thinking on Me alone and nothing else,
ever attached to Me,
I bear the burden of getting them what they need." (God, Baghavad Gita 9:22)

Taoism:

"Be really Whole
And all things will come to you" (Tao Te Ching 22)

There are droves more quotes of scriptures, and also Muslim quotes, from Sufi sages, which I don't have on hand, as well as Christian Rhineland and Bahai sages. And for Mormons, the entire book of Fourth Nephi couldn't state it more beautifully.

Imagine that, all the civilizations of the world claim these sages as their foundation, as their very heart, yet none believes them, yet all are wallowing in materialistic greed and worry and strife. I myself am thick-skulled, still coming to believe these sages, who are really only One Sage, One Way. Keep your eye Single, One, and all else falls into place.

Again, to Christians, I still repeat: before you start harping again on the falseness of other religions, I challenge you to first believe your OWN religion, and then you will see whether or not I am blowing hot air.