Tag Archives: investment

T-Mobile Provides a Compelling Investment Opportunity

I have written at length about my research regarding government regulation in the wireless telecommunications industry, which I had to conduct for Econ 432. As I studied the regulatory and antitrust issues facing this industry, I because interested in it from an investment stand point as well. Last month, I pitched an investment in T-Mobile (NYSE:TMUS) to an investment club that I am a member in called Michigan Interactive Investments and the club invested in the company following the pitch. Our thesis was that T-Mobile survived an attempted takeover by AT&T in 2011 thanks to an antitrust intervention and since then has come a long way in terms of boosting its network quality and brand reputation. As the primary disruptive force, in a relatively uncompetitive industry, I believe T-Mobile has the capability to disrupt the established business model and steal significant share from its competitors, which is why I recommend investing in it now.

From an industry perspective, wireless telecommunications seems to be a very attractive industry. According to IBIS World Reports, the industry is expected to grow at 6.6% percent over the next five years, outpacing GDP growth. The driver for this growth is not necessarily adding new subscribers, but rather selling existing subscribers more data. Individuals are purchasing more devices that need wireless connections, such as tablets so data needs will continue to rise for some time to come, which will benefit the entire industry.

The necessary requirement in order to sell more data to consumers, however, is a good network. A good network requires heavy investment in infrastructure and spectrum licenses. This mean that barriers to entry are very high, which should protect incumbents like T-Mobile. One question is, though, how does T-Mobile’s network stack up against competitors? According to CNET, T-Mobile CEO John Legere has claimed that the company now has the fastest 4G LTE speeds in some markets, as shown by average speeds on Speedtest.net, a long way from not having LTE at all three years ago. It is true that they are the smallest of the Big 4 wireless companies, but they have made great strides in improving their network. Now that they have a network that they are closer to their rivals in terms of quality, T-Mobile is free to compete on other points like price and contract flexibility in order to win customers.

I also believe now is a great time to invest in T-Mobile because there is a very low-key catalyst that could boost the stock significantly – the 2015 600 MHz spectrum auction. According to the Wall Street Journal, the FCC is planning to auction a significant chunk of spectrum in the 600 MHz range, which has some of the best properties of any spectrum ever auctioned, making it incredibly valuable. All spectrum below 1 GHz is considered low frequency and has excellent propagation and range properties, which make them very valuable to wireless broadband providers. T-Mobile is the only wireless company without significant low frequency holdings as shown below as the WSJ explains.

The key to the 2015 auction is that the FCC is considering imposing caps that limit how much the Big 2 – AT&T and Verizon – can acquire of the low frequency spectrum. This could be a big win for T-Mobile, which would have a clear path at acquiring the spectrum it needs to further improve its network and compete at a higher level with the Big 2.

Because the market may not be fully buying into T-Mobile’s turn around, or may not be fully pricing in the possibility of the company winning low frequency spectrum, I believe the stock may be underpriced at the current level and now is a great time to invest in a company that is one the rise.


Delaware: incorporate for the taxes, stay for the arbitrage


A little known court ruling in Delaware from 2007 has had some big consequences.  While it has provided some benefits for investors, it also results in the inefficient use of resources, increased costs for mergers and acquisitions, and arbitrage.  After examining the source of these effects, it may be possible to reduce the costs while keeping the benefits.

The case, which found that a shareholder could vote on a proposed deal if they held stock on the date of the vote, as opposed to the date of record (when the offer was made). This has allowed hedge funds and activist investors to take positions in a target companies after a deal price has been announced, then vote stop the deal in order to determine a fair price through what is called an appraisal.  This has resulted in what is known as appraisal arbitrage. While this plan can backfire if the judgement decreases the price, professional investors are in as good a position as anyone to decide whether a price is too low, and there is an additional incentive that mediates the cost of the appraisal and the possibility off loos.  However this outcome is actually quite rare: 80% succeed in getting a higher price.

Hedge funds argue that investors can actually be made better off by these deals because it allows bad deals that would have otherwise gone through to be recognized by professionals and provides an avenue to rectify the situation (with interest!).  Recent examples in the news demonstrate this. The threat of appraisal by Carl Ichan didn’t prevent Dell from going private, but it did secure a higher price per share for investors. Currently, Dole is in court over its acquisition last year being too low, and Darden Restaurants is currently dealing with Starboard Value LP, a hedge fund who wants to stop the sale of its Red Lobster Chain of restaurants.

While such actions by activist investors and hedge funds have made investors better off in the past, it’s called arbitrage for a reason.  Once the case arrives in court, the price is arrived at via the discounted cash flow method.  According to David A. Katz, a partner at Wachtell, Lipton, Rosen, and Katz, “Discounted cash flow analyses, however, often produce values in excess of what a buyer would be willing to pay or the value of the company’s stock in the public trading markets.”  In addition to the inflated measure of value the company has to pay 5.75% interest on the judgment, even if the original price is found to be fair.  This amounts to a practically risk free profit if the deal was even close to fair to begin with.

Appraisal arbitrage can be seen as less an economic issue and more of a legal anomaly.  To fix this problem, while preserving the economic benefit for consumers, the court should allow for the use of whatever valuation method is most appropriate to the company in question.  Most importantly, it must reduce the interest rate that it pays on the judgments to be pegged to treasuries to end the arbitrage opportunity.  In this way, activists and funds will intercede only when investors need them most.






Peru: potential growth hindered by politics

Politics and Economics are often grouped together by those who don’t particularly interest themselves in these subjects. As Economics students, we know that they are two very different things. But we often forget the significance of their coexistence. The world is witnessing so many cases where poor governance inhibits economic growth. Countries like Venezuela, which has the potential to be a significantly wealthy country, are held back (and destroyed, in Venezuela’s case) by incompetent and corrupt governments. The result is not only slow/negative growth, but also the lack of ability to grow because those who have wealth are too afraid to invest it in their own country. In the United States, this is not even considered because the US is perhaps the best/safest place to invest in the world. Whether or not this is actually true, what matters is that it is in fact the general belief worldwide.

Peru is a country that falls into this trend, though not to the degree seen in Venezuela. I will say, for purposes of reliability, that I am Peruvian and know a lot of information first-hand (especially about people’s views). It should also be noted that Peru is a country very much divided by socio-economic status and race (though this is improving). The current president of Peru, Ollanta Humala, initially ran for president in 2006 as a supporter of Venezuela’s Hugo Chávez; he lost that election and in 2011 reinvented himself as a “pro-Brazilian social democrat.” When Humala won the election, people feared that he would turn the country into Chavez’s Venezuela or Castro’s Cuba. Like in those countries, his supporters were mostly lower-class. But to many people’s surprise, and relief, Humala “opted to stick with the free-market policies that have brought a decade of strong growth.”

Peru had been growing significantly before 2011:


Gross domestic product per capita nearly tripled from 2000 to 2010.

And real GDP nearly doubled from 2002 to 2011:


Peru became an important emerging market by 2009, and recognized for its steady growth. Though growth has slowed since 2009, last year the country experienced a 5.6% expansion. Peru’s main exports are copper, gold and silver. As has been discussed by other students on this blog, China’s slow-down has had many repercussions worldwide. The decreased demand for copper, is largely the cause for this slow-down in growth. As for inflation, economists have raised their inflation projection to 2.8 percent from 2.6 percent for this year and maintained their 2.5 percent estimate for 2015. As well as a 5.7% growth estimate for 2014.

So the economy in Peru is doing well. Investment is significant, but it largely from foreigners. Though Humala’s government has done decently on the economic side, people are very distrustful of the government (and not just the current one). In Peru, a common joke among citizens is to compare stupid, incompetent, or corrupt people to those in Congress. Basically, the government has little credibility and this is influencing those with the power to invest in Peru’s financial markets. With this growth, there is an immense amount of money flowing into pockets. While I was there in December, a family friend (a very wealthy one) explained to me that there are so many people with millions that don’t know where to invest them. Since they fear the government’s instability, corruption, and dishonesty, they don’t want to invest their money in the country. And, like you probably guessed, most invest in the United States; the current fad is to invest in real estate (mostly Miami).

Thus, Peru is growing steadily and is looking at a bright future. However, the political situation is still holding back potential growth. If Peruvians saw Peru’s market as a safe investment, there would be a considerable effect on the economy. But the fact that the country has a very long history of corrupt and unstable governments (my own grandfather led a military coup), makes it difficult for people’s fears to subside anytime soon. Before that can even be considered, though, there have to be major changes in the Peruvian government — and that doesn’t seem likely in the near future. Although Peruvians are discontent with the government system, they are accustomed to it.

Let Them Borrow and Build Schools

In his recent column on The Boston Globe, Lawrence Summers, a economics professor at Harvard and former Treasury Secretary (fun fact: he has two Nobel Laureate uncles on both of his parents side), wrote on public investing in the infrastructure. His main point was that while the economy is running on low interest rate  coupled with still troublesome high unemployment rate for considerable period, the U.S. government should borrow more and invest it on the public infrastructure such as airports, transportation and schools.

I agree with Summers because of three reasons: high unemployment in construction sector, inevitable investment in those infrastructures and more equal externality in the society.

Let me emphasize on each point.

First, with unemployment rate in the construction sector is hovering at 11.3 percent currently, there should be policy directed to those unemployed people, who suffered most during the recession. The beneficiaries of the investment in infrastructure will be the those unemployed people in the construction sector.  Those people who would be employed for these new projects could continue their employment for other private projects once the economy recovers and construction and housing sector picks up. At that moment, these people would be already have been employed for two years, so their opportunity to get back on the employment list increases compared to the case when those people would be long-term unemployed people. Regarding the interest rate,

Second, these infrastructures including transportation and schools are inevitable in the future even though it doesn’t get done today because of increasing population and imminent increase in need for them. It might be  the case that, today, primary and secondary schools are enough in numbers, but these will be insufficient as the population grows and socioeconomic status of low income families get better, and their children attend to school in growing numbers. Aside from new school buildings, there are still already built school infrastructures  which don’t fulfill the need of better learning environment. In other words, it is evident that America will need more of schools and better transportation and education infrastructure, so why shouldn’t the policy makers tackle this projects now?

Last, these new projects will benefit most citizens- if not all- regardless of their today’s socioeconomic standings. At the end, who don’t drive on highways and wouldn’t like their children to attend better schools? As income inequality has been a discussion topic lately, the investment in public infrastructure will help to decrease the gap between people on different socioeconomic ladder.

Not only these projects put today’s unemployed people to work, these new infrastructures will benefit U.S. economy in the long-run as more children attend to school let alone better school. Investment in education is certainly inevitable if the U.S. seeks to improve its education system to be a front-runner in the world.

More About Jobs: Figures and Theory

According to recent data about job creating, there has been an increasingly upward trend of job creation in the country. The Wall Street Journal reported the number of jobs created in each month of the first quarter of 2014. In January, 139,000 jobs were added to the economy. February saw 178,000 jobs added to the market. And March’s job creation number:…(drumroll, please)… 191,000 jobs. The unemployment rate fell from 6.7% to 6.6%. It is important to keep in mind that February and January were the months of the brutal polar vortex. The economy is indeed thawing, according to the previously mentioned figures.

The Washington Post attributes March’s job creation figures to growth in specific American industries, such as construction, finance and automobile production. The construction industry added 20,000 jobs, which is 4,000 more than the average across the past three months. The financial industry added 5,000 jobs to firms of different sizes. The automotive industry exceeded analyst expectations. Sales rose 6% to 1.5 million.

If these trends continue, unemployment could become less and less of a problem. Since each month of the first quarter of 2014 produced more jobs than the previous month, it is safe to say that the US economy is gaining momentum in the labor market. We cannot be sure if these trends will continue, but we can hope that they do. If all goes well, the US economy could see more than 200,000 jobs added this month. This, in turn, could help increase the nation’s economic output, which could combat the current economic slump.

A New York Times article discusses the theory of job creation. According to the article, the people who give others jobs, employers, do not do it out of the kindness of their hearts. This is similar to why producers produce goods in Adam Smith’s Wealth of Nations. They do it because it is in the best interest of their firms. They do it so their firms can create a supply that meets the demand, and so they do not lose to competitors. These people, however, are not the jobs creators. The job creators are the consumers and investors. They are the ones who provide firms with money, which is used to expand and improve production.

To put all of this together, one could attribute the increasingly upward trend of jobs added to the economy to the fact that people are consuming and investing more. This could be a feasible claim. When firms have more money, they can produce in larger quantities and more efficiently. Using this theory, it seems that the way to continue this trend of job creation is to consume and invest more. Every time a firm makes money and expands, it will need to hire more people to keep everything running as smoothly as before the expansion. This money comes from purchase of the product and investments. These firms can afford to hire more people when they have more money.

Diversification for Asset Allocation – A Random Walk Down Wall Street

After reading the book “A Random Walk Down Wall Street”, I came to realize that investment is a lifelong lesson. Either you are an individual investor or an asset manager, the central goal of investment is to optimize the risk-return payoff through well-structured asset allocation. Since investors have different income level and risk tolerance, there is not a so-called “best” portfolio that fits everyone’s needs. Nevertheless, one concept is set in stone for asset management: diversification is the key to any investment portfolio.

So here comes the question: how to diversify a portfolio appropriately? In my view, it has to do with your understanding on the market reality, as well as on yourself.

Principle 1: History shows that risk and return are related.

Common stocks have clearly provided very generous long-run rates of return. It has been estimated that if George Washington had put just one dollar aside from his first presidential salary and invested it at the rate of return earned by common stocks, his heirs would have been millionaires more than seven times over by 1999. Roger Ibbotson estimates that stocks have provided a compounded rate of return of more than 8 percent per year since 1790. But this return came only at substantial risk to investors. Total returns were negative in about three years out of ten. So as you reach for higher returns, never forget that “There ain’t no such thing as a free lunch.” Higher risk is the price one pays for more generous returns.                                                                                                                                                                           ——A Random Walk Down Wall Street

I believe almost every investor has heard of this oldest theory in investment. The table below summarizes the risk-return relations for five major asset classes in the past century, in which small growth stocks have the highest, and U.S. Treasury bills have the lowest. The distinctive features of different asset classes make U.S. Treasuries the “safe-haven asset”, so investors usually pour a significant portion of funds into it for lower risk exposure when there are huge uncertainties in economic situation and market trend (i.e. Fiscal Cliff in 2013 & Yellen’s Speech last week).

                                                        Average Return       Average Risk Index

Small-company common stocks        12.7%                      33.9%

Common stocks in general                  11.0%                      20.3%

Long-term bonds                                   5.7%                        8.7%

U.S. Treasury bills                                 3.8%                        3.2%

Inflation rate 3.1

Source: Ibbotson Associates, Stocks, Bonds, Bills, and Inflation: 1997 Yearbook.

Nevertheless, a pure focus on low-risk assets such as treasury bills and long-term bonds tends to offer lower expected return. So the incorporation of stocks and derivatives is essential for capital growth.

Therefore, a good question to ask is “what is the percentage of each asset class in a diversified portfolio?” Let’s think about principle 2.

Principle 2: You must distinguish between your attitude toward and your capacity for risk.

The risks you can afford to take depend on your total financial situation, including the types and sources of your income exclusive of investment income. Your earning ability outside your investments, and thus your capacity for risk, is usually related to your age.

                                                                                                 ——A Random Walk Down Wall Street

As I mentioned above, there is not a “best” portfolio for everyone. A responsible asset manager has to execute investment decisions for a particular client based on the well-rounded mastery of his/her financial situation and beyond.

Personally, I interned at AIA Hong Kong office as a financial planner last summer. One of the tasks I accomplished was “financial health check interview”. The goal of the interview was to understand the financial status of clients and ensure their benefits from total protection. In the fact-finding stage of the interview, I collected financial facts, including income level, family expenses, aggregate debt, and investment style, as well as non-financial facts, including age, family status, diagnosed illness, and smoking & drinking habits. Through the integration of all these facts, I collaborated with my colleagues to develop a tailor-made financial solution spanning insurance, savings, and investment for each client.

In conclusion, a truly diversified and well-structured portfolio is not the result of a random selection from various asset classes in the market. Instead, it is derived from in-depth analysis on their features, as well as on your earning power and risk appetite.

The Avengers shooting in Korea and its Economic Benefits

Is anyone a big fan of Marvel comics or the Avengers film series? The Avengers, a blockbuster film which came out in 2012 was a worldwide mega hit. Its budget was around $220 million, and gained revenue of $1.5 billion worldwide. Due to its success, a sequel titled Avengers: Age of Ultron (I will refer to it as Avengers 2 on the rest of this blog for convenience) is currently being filmed and set to be released by May 1st, 2015. In Korea, The Avengers was commercially successful, gaining more than 7 million viewers. What excites Korean fans more is that part of Avengers 2 will be filmed in South Korea.

According to the article from The Korea Herald ‘Avengers’ sequel to film in Seoul, the Hollywood blockbuster will be filmed in and around Seoul from March 30 to April 9. It is the first time a Hollywood blockbuster will be filmed in South Korea, and is expected to bring some economic benefit to Korea. Most directly, 120 Korean cinematography staff will be hired and Korean actress will be in the film as well. Furthermore, economists calculated that economic benefit to Korea is around $23 million dollars, as the film can introduce Seoul to people all around the world and thus attract more tourists. According to the article from Korea.net Heroes of the Avengers meet again in Seoul, Korea’s vice minister of culture, sports and tourism said “hopefully, the world will be able to see Korea in a positive light and gain, through the film, an improved image of our nation.”

Actually, Korea offered a cash rebate of 20~30 percent of in-country production cost to attract the Avengers 2 production team to film in Korea. According to the article from the Korea Times Unseen cost of Avengers sequel , some people are concerned about the economic benefit. The cost of production taking in Korea is approximately $9.37 million, thus Korea will need to reimburse approximately $3 million. Furthermore, traffic jams and other negative externalities will occur during the filming process, which citizens of Seoul do not like at all.

Personally, I think it is a win-win situation for both Korea and the Avengers 2 production team. Avengers 2 production team can cut the cost of production through reimbursement from Korea, while Korea can introduce its beautiful country to the world through this blockbuster film. As Korea has never been a background of any Hollywood blockbuster film, I believe its economic benefit will bypass economic cost of reimbursement and other possible negative externalities. In the book A Random Walk Down Wall Street by Burton G. Malkiel, the author defines investment as a method of purchasing assets to gain profit in the form of reasonably predictable income. In this case, Korea is not purchasing asset but instead reimbursing (or cutting down) the cost of production for Avengers 2 production team. However, Korea is expected to gain profit in a reasonably predictable income – introducing Korea to the world and gaining foreign tourists. There have been many successful cases where a country could attract many foreign tourists due to film industry. One explicit case is New Zealand, where Lord of the Rings was filmed. New Zealand became one of the biggest tourism country; it is often referred as “Tolkien tourism”, which provided a massive boost to the local economy of New Zealand. Therefore, I think Korea made a right “investment”, and I expect that as Korea continue to attract film producers it will become a more attractive country for foreign tourists as well.

The League Of Extraordinarily Lucky Gentlemen

The Wall Street Journal offers investment advice. And it’s not good advice either; or at least, it’s not obviously true that it is. In fact, I very much doubt that it is.

But I’m getting ahead of myself. What’s the article about? The author followed 196 investors since 2007, evaluating how much money they made (and lost) and checking whether they managed to beat the market, as measured by the Wilshire 5000 index. And lo and behold, a “select group” did indeed manage to do so! And these people are willing to give advice to you! The Journal stresses that they outperformed the Wilshire 500 not only during the bull market since 2009, but also during the bear market before. Which is quite a feat:

 “almost without exception, the strategies that have made the most money since March 2009 were big losers in the preceding bear market. For example, the five best advisers over the past five years, among the nearly 200 monitored by the Hulbert Financial Digest, lost an average of 58% during that downturn.”

On a side note: the article just acknowledged that past performance by no means implies future performance, right? Or is the intended takeaway here that past losses by no means guarantee future losses? Which is also true, but it’s hard to make one point without also making the other. Strange as it may seem, the author seems to miss the other side of that particular coin.

Anyway, what about that investment advice? Well, all of these exceptional investors seem to agree on one point, namely that “you should remain at or close to fully invested in your equity portfolios.” Now there are probably good reasons why, depending on your particular situation and available alternatives, you should keep whatever money you can spare right now in equity. So I’m not actually too critical of this. Although I would point out that if you ask a group of people who take “$85 to $299” for their services and tell people to buy stocks for a living, “should I buy some stocks, you think?” they’re probably gonna say, “yes (that’ll be 300 bucks, thank you very much)”.

Other than that, all six advisors seem to be invested in… wait, did you say there’s only six of them who managed to beat the market for that whole period?! Out of 196? Why, that’s… about 2.6%! I’m going out on a limb here, but I assume that that number isn’t statistically significant (-ly different from zero). For the record, I’m of course being polemic here, because I don’t have the data in question; most importantly, I don’t know by how much these lucky few beat the market, which would be what you’d really want to look at to determine whether their exceptional gains were due to chance alone.

But I will say this: I’d take a bet that if I took 196 random stock samples from the Wilshire 5000 right now, 2.6% of them could probably beat the market. Actually, I might go on and compile that list once the semester is over. I’m sure Matlab will be up to the task.

I’ve got another one for you: the initial investors probably weren’t even a random sample of all financial advisors out there. Probably, they’re the ‘good ones’. Which means that even the best of the best don’t have an awesome track record by any means, and what are your chances of drawing an advisor from that pool in the first place, let alone one of the 2.6% that manage to outperform the market? I can’t tell you, but I can tell you that they’re worse than 2.6%.

Oh by the way, it’s a little odd that the article doesn’t mention by how much these guys beat the market. Would it have earned you more than $230? (Not that that’s what you’re really interested in. What you really wanna know is, given that you have to pay a fee, is that fee greater than or equal to your chances of finding an advisor that happens to beat the market, which are smaller than 2.6%, times the amount by which he or she is going to beat the market, which the article doesn’t provide? They’ll need to outperform the market by quite a bit to make that work).

But I digress; I fear that I never got to share the great investment advice, but luckily you can just go and read the article. I do have one last thing that bothers me though: if one of those six really, actually had an awesome secret to making boatloads of money, would they ever tell you? Or even risk that, by observing what happens to your portfolio, you’d ever find out? As soon as the world knew, a) their strategy would probably stop working, and b) nobody would pay them 300 bucks for stock advice anymore! So it’d be in those guys best interest, even if there was a pot of gold at the end of the rainbow, to never, ever, let you get more than a faint glimpse of it.

Which, by the way, also means that anybody who’s letting you in on their big investment secrets is probably either irrational, or lying to your face. Both of which seem somewhat underwhelming traits for a stock broker.

How to Deflate the Education Bubble

In the last 10 years, outstanding student debt in the United States has grown from $240 billion to an astonishing $1.2 trillion today, driven in part by rapidly accelerating tuition rates.  At the same time, labor demand has stagnated, keeping many graduates from paying down this debt.  In fact, JP Morgan deemed the student loan market so overladen with risk that in October of 2013, the firm stopped issuing any additional student loans.  To me, the student loan market is eerily similar to the housing market before the Great Recession – there are too many bad investments and not enough good ones.  And as was the case in 2008, my fear is that the student loan market is about to crash.

Before examining a solution to the student loan issue, it is important for us to first understand the route cause of asset bubbles.  In A Random Walk Down Wall Street, Burton Malkiel makes the cause of asset bubbles very clear in his explanation of the tulip-bulb craze that plagued Holland in the early 1600s.  After the mosaic virus created “bizarres” (ie: striped tulips) in the late 1500s, Dutch citizens desperately wanted the most unique tulips in their gardens, and they were willing to pay a handsome premium for “bizarre” bulbs.  As more and more people started bidding up the price of  bulbs, hoping they would yield unique flowers, more and more people saw tulip bulbs as a smart investment.  Indeed, by the 1620’s people were selling their jewels, furniture, and even land to buy tulips!  Nevertheless, no bubble can grow forever, and in February 1637, Dutch public opinion changed.  The price of bulbs fell more than 20-fold that month, and despite the government’s best attempt to prevent a sell-off, the bulb bubble burst, leaving an abundance of disappointed and bankrupt investors (Part 1 – Section 3 – “The Tulip-Bulb Craze”)

The Tulip-Bulb craze perfectly illustrates the result of what Malkiel refers to as “Castle-in-the-Air” investment theory.  Under this theory, an investment’s value is based on public opinion, and decisions to buy and sell are based on random guesses about changes in public opinion.  When public opinion changes, bubbles can burst and investors can suffer huge losses.  In my opinion, the “Castle-in-the-Air” investment theory applies perfectly to college education; many people attend college because public opinion dictates it is the “smart” thing to do.  But as I point out in “Why College Graduates are Useless,” data does not confirm this opinion, as many students cannot find jobs, even after investing thousands of dollars in student loans and higher education.  It thus seems that it is simply a matter of time before the student loan market goes the way of Dutch tulips and crashes.

I’d argue, and I think Malkiel would agree, that a switch in investment theory could reduce the risk of asset bubbles.  In addition to “Castle-in-the-Air” theory, Malkiel also explains “Firm-Foundation” theory, which is an investment strategy based on the intrinsic value of one’s investments.  When the price of the investment is less than its intrinsic value, you should buy.  When price is more than intrinsic value, you should sell.  Because this form of investing is based on data and not public opinion, it is arguably less susceptible to speculative attack.  Indeed, Malkiel points out that firm-foundation investing is how Warren Buffet made his fortune.

It therefore seems that to deflate the risk of a student loan bubble, we need to switch investment in higher education from a “Castle-in-the-Air” model to a “Firm-Foundation” Model.  But how?  I believe the answer lies in a recent Wall Street Journal article.  In “Colleges Are Tested by Push to Prove Graduates’ Career Success,” author Melissa Korn points out a trend in prospective students requesting information on graduates’ salaries.  Given that college is an investment (that should generate a real return after an initial payment), this request seems extremely logical!  Indeed, why would anybody spend $200,000 on out-of-state tuition at UM without assurance (or at least data supporting) a sizeable income stream after graduation?

If firms are required to release GAAP-audited financial statements to aid prospective investors, I believe universities should have to do the same.  While there is currently significant push back from universities to release this data, I think that reporting graduate salaries based on school, major, GPA, etc. is an essential step in changing college education from a “Castle-in-the-Air” investment to a “Firm-Foundation” investment (the implications of this are consequential indeed, as it would likely force the cost of high-paying majors like business and engineering higher than the cost of low-paying majors like anthropology and agriculture.  That said, this is a consequence that I am comfortable with).  Personally, I believe if we can successfully alter the way that students choose to invest in college education, we can effectively reduce the risk involved in student loans and prevent student debt from repeating the Dutch Tulip Crisis and pushing America back into recession.


What Should I Do With My Money: Stocks vs. Bonds

The most important question on every single investor’s mind is: what should I do with my money? Should I mainly invest in stocks or bonds for the optimal risk-return payoff?

In this article, I am going to analyze major investment themes over the past few months, which might give us a hint on asset allocation going forward.

First, let’s think about the correlation between stocks and bonds prior to any trend analysis. Known as two distinct asset classes, they are mostly negatively correlated if we consider their trading volumes as the criteria. Nevertheless, they are more like a complement rather that a substitute to each other in the sense that diversification is the key to any investment portfolio.

Phase 1


In the past year of 2013, equity investments dominated the headline. Shown by the FRED graph above, the S&P 500 index rallied 30% over the year, the biggest since 1997, amid improving economic fundamentals and market confidence. At the beginning of the year, the settlement of a critical financial challenge called the fiscal cliff, which referred to automatic spending cuts and tax increases, removed the uncertainty about growth momentum. In particular, investors reallocated their assets to the equity market in anticipation of increasing treasury yields. As the Fed was about to taper its bond purchase program, treasuries might not be a safe-haven anymore because their value would decrease significantly if the yields were to rise from around 2% in early 2013 to their historical average of 5%.

Phase 2

In January this year, capital began to flow back into bond funds for the first time after seven straight weeks of outflows. Traditional U.S. stock mutual funds and exchange-traded funds together saw withdrawals of $18.8 billion in the week ended Feb. 5. Meanwhile, taxable bond mutual funds and ETFs soaked up $10.7 billion, their biggest intake on record, Lipper’s data showed. From my perspective, the shift was primarily due to an adjustment to the U.S. economic projection. Indeed, the economy had been on an upward trend but the strength of recovery might be originally set too high. Besides, the turbulence in emerging markets partly pared confidence in equity investments in today’s interconnected markets.

Phase 3

Most recently, individual investors are jumping back into stock trading, driving business at some discount brokerages to near record levels. At the International Traders Expo in New York, one of the largest conferences for active investors, many of them showed great enthusiasm in equity investment on optimistic economic outlook. Kim Githler, chief executive of MoneyShow Corp., which runs the event, said attendees seemed as enthused as they were before the financial crisis. “People are feeling excited and back in the game,” she said. “The energy is so different.” However, the risk is that they are betting on stock prices at the tail end of a historical rally, given the fact that the S&P 500 declined 3.6% in January, the largest one-month drop since May 2012.


I believe investors are being used to the Fed’s tapering and rationally diversifying their portfolio by adding more bond holdings, instead of solely focusing on equities like what they did in 2013, leading to increased stability in the capital markets.