Financial Bull Riding is out!

Laissez-Faire Books has released Financial Bull Riding. I would love to hear what you think!

The book examines the faulty economic theory behind conventional investment wisdom, especially the idea that business cycles are random events, explains the ABCT and offers some guidelines for investing. Here is the table of contents as of today:

Obama inflames envy

"I believe this is the defining challenge of our time," Obama said in a speech at an event hosted by the Center for American Progress, a pro-Obama think tank. "It drives everything I do in this office,” 

“The growing gap between rich and poor can be closed by actions ranging from an increase in the minimum wage to better education to following through on his health care plan, Obama said.”

The quote above was from an article in USA Today. If people care about the poor, they will give their own wealth and encourage others to voluntarily do the same. Focusing on inequality is more than just a legitimate concern for the poor: it’s an attempt to inflame envy, as the sociologist Helmut Schoeck explained in his book “Envy: A Theory of Social Behavior.” Schoeck demonstrated that almost all intellectuals, poets, historians and philosophers through the ages condemned envy and feared it as a persistent threat to society. Organizing society to assuage envy kept humanity poor and on the edge of starvation until Christianity tamed it in the 17^th century, which led to the industrial revolution.

Slate Article Pays No Dividends

Slate magazine's business and economics correspondent, Matthew Yglesias, advertises his ignorance of investing in his latest rant against dividends: Dividends are Evil. Concerning GE and AT&T's increase in their dividends, Yglesias wrote,

The only problem is that dividends are terrible. Bad for the economy, bad for business, and surprisingly unfavorable to investors. A barbarous relic of a less financially sophisticated era, they’re also indelibly coated with misleading rhetoric that perpetuates sloppy thinking about business, profits, and investment.

 Yglesias then tells what companies should do:

 The impatient move that would benefit the economy would be for a cash-rich firm with an already high share price to invest. Hire more people and do more stuff, upgrade the training of your existing workforce, reward your better employees with raises and bonuses so they don’t go elsewhere, cut prices to build customer loyalty. That’s how profits lead to rising incomes, and how rising incomes lead to demand for the stuff businesses sell.  

Of course, the left does not understand what business is for. Businesses don't exist to "benefit the economy." They exist to make profits for their owners, the people who have invested their savings in the company. No one invests one's savings without the expectation of a decent return in the form of profits. Profits are to business owners what interest is to lenders: profits are repayment of the opportunity costs of giving up the use of one's money.

The Fed's Zombie Apocalypse

Economists are trying to figure out why the Fed hasn't generated higher inflation. According to Gavin Davies, "In most countries, headline CPI inflation has been falling significantly since the end of 2011, and it has now dropped to less than 1 per cent in both the US and the euro area." Here's a graph of inflation in the US and UK from Davis:

Buffet the Great

Authors of a new paper, "Buffett’s Alpha", Andrea Frazzini and David Kabiller at AQR Capital Management crown Warren Buffett one of the best investors ever. I welcome this after decades of having to endure the worship of Keynes as the greatest investor. Keynes achieved his reputation, after years of failure, by investing in gold mining stocks during the time in which he used his political influence and notoriety to convince the US and UK to abandon the gold standard. Keynes succeeding through insider trading. Buffett did it the old fashioned way.

Here are excerpts from the paper:

We show that Buffett’s performance can be largely explained by exposures to value, low-risk, and quality factors. This finding is consistent with the idea that investors from Graham-and-Doddsville follow similar strategies to achieve similar results and inconsistent with stocks being chosen based on coin flips. Hence, Buffett’s success appears not to be luck...

Looking at all U.S. stocks from 1926 to 2011 that have been traded for more than 30 years, we find that Berkshire Hathaway has the highest Sharpe ratio among all. Similarly, Buffett has a higher Sharpe ratio than all U.S. mutual funds that have been around for more than 30 years...

We identify several general features of his portfolio: He buys stocks that are “safe” (with low beta and low volatility), “cheap” (i.e., value stocks with low price-to-book ratios), and high-quality (meaning stocks that profitable, stable, growing, and with high payout ratios).

What we have here is a failure to coordinate

                The great Austrian economist Ludwig Lachmann described the way the stock market works better than any economist I have read. He taught that expectations play a vital role in coordinating the decisions of entrepreneurs in the market process. Spot prices communicate important information, but only information about the past. For the economy to function well, that is, stay out of recessions, markets must coordinate the expectations of buyers and sellers, producers and consumers. Recessions are nothing but a failure to coordinate. Markets communicate expectations through the futures markets, including options and other derivatives, but primarily through the stock market.

                Following are excerpts from Lachmann’s books on the vital nature of the stock market to a well-functioning market economy. Lachmann shows that the market is neither mechanical, as the EMH suggests, nor irrational as behavioral finance insists.