Research Director, Research Foundation of CFA Institute, and Senior Advisor, Ounavarra Capital LLC
Investment Thought Leader, Foundation Financial Officers Group
Former Director of Research, Investment Division, The Ford Foundation
This is a nascent blog consisting of lightly annotated links to resources on economics, finance, and the “last liberal art” of investing (thanks to Robert Hagstrom, the author of a book with that title, for the felicitous phrase). As such, this blog may grow to include social science, the hard sciences, and humanities topics that are usually considered well outside the mainstream of financial economics. It is part of a larger website under construction.
The motherlode of thoughtful economic commentary (and related fun stuff) on the Web is Tyler Cowen’s blog, Marginal Revolution: Small Steps Toward a Much Better World (with co-author Alex Tabarrok). Tyler is a professor of economics at George Mason University and author of The Great Stagnation, an analysis of the current economic troubles. Non-economists may find it helpful to learn that the original “marginal revolution” was Alfred Marshall’s late 19th century discovery that the classical economics of Adam Smith and David Ricardo was missing a vital component: the idea that behavior is affected by change on the margin in the quantity of a good or service produced or consumed, rather than by the overall quantity produced or consumed. This discovery made mathematical economics possible and is the point of departure for virtually all subsequent economic analysis. For more economics resources, follow the links on the right side of Tyler’s blog. The Becker-Posner Blog provides a distinctly University of Chicago-focused perspective on economics, law, and society. Gary Becker, one of the blog’s co-authors, won the 1992 Nobel Prize in Economics. Chicago Booth School of Business’ John Cochrane (Eugene Fama’s son-in-law) has just started blogging at The Grumpy Economist. Partisans of “saltwater economics” will enjoy Brad DeLong’s two blogs, Grasping Reality with the Invisible Hand and Egregious Moderation. The prolific DeLong hails from Berkeley and provides a contrast with the market-oriented “freshwater” school associated with the University of Chicago. You’ll have to admit he has a gift for titles.
Sadly, we live in a time when conflict among world powers is once again a concern for investors. Among the best commentary on geopolitics can be found in: The home page of Harvard professor Niall Ferguson, author of The Ascent of Money: A Financial History of the World and many other books The personal web site of Stanford professor Ian Morris, author of Why the West Rules – For Now The work of Walter Russell Mead, centrist extraordinaire, whose blog title, Via Meadia, is a pun on the Latin for “middle way.” Late in the last century, the political science scholars Samuel Huntington and Francis Fukuyama found themselves on opposite sides of the question of whether history – in the sense of ongoing conflict among opposing worldviews – had in effect ended, because liberal democracy had emerged victorious over all competing systems. Fukuyama’s End of History thesis, which seemed to embody the triumphs of the years following the fall of the Soviet empire and the opening of China and India, was challenged by the late Harvard professor Samuel Huntington, who reminded us that a future “clash of civilizations” was not only possible but highly likely. Check out this summary of Huntington’s work and Fukuyama’s website.
Websites, books, and periodicals with information valuable to institutional investors are generally well known in that community. They are typically sponsored by brokerage houses, investment management firms, data providers, consultants, and academics. I will add my favorites if I get a chance.
My own work
I am on the editorial boards of three excellent periodicals: the Financial Analysts Journal, The Journal of Portfolio Management, and The Journal of Investing. These are pay sites. A recent article I wrote for the Financial Analysts Journal, “Black Swan or Black Turkey?”, is free. It argues that the crash of 2008-2009 was not a one-of-a-kind an unforeseeable “black swan,” as Nassim Taleb would have it, but a more prosaic bird – a market decline having much in common with others throughout history. I am also Research Director of the Research Foundation of CFA Institute and the books I edit for that organization can be downloaded free of charge (or purchased in hard copy at a low price) here. I’ve written one of the books (a 2003 oldie called Benchmarks and Investment Management, which covers a good deal more than just benchmarks – it reviews capital market theory pretty thoroughly) and edited four more. The books I edited contain two of my own articles, a rant on moral hazard and the crash of 2008-2009 and a supply-side estimate of the equity risk premium(co-authored with Richard Grinold, retired from Barclays Global Investors, and Ken Kroner of BlackRock). [Sorry about the broken link on that last one, my publisher is slow.] I will post my other articles as this website develops.
Barton Waring, the now-retired CIO for investment policy and strategy of Barclays Global Investors, is not only a very good friend but also my most frequent co-author for the last quarter century. His work focuses on pension policy, defined contribution plan policy, the proper roles of indexing and active management in portfolios, and allocating among managers as well as asset classes. His masterpiece, the book Pension Finance, was published in 2011. His blog is just getting started. Later, I will post some articles co-authored by Barton and me. The late Peter Bernstein was more than a financial economist – he was a philosopher. Sadly, his web site is gone, but his books live on. His superlative best seller was Against the Gods: The Remarkable Story of Risk, but my personal favorites – because they tell the stories of the investment managers, many of whom I know personally, who put investment theory into practice over the last 30 or 40 years – are Capital Ideas and Capital Ideas Evolving. Peter’s erudition is evidenced by his book on the Erie Canal, which was judged significant enough to win the John Lyman Book Award for maritime and naval history, a topic Peter didn’t begin to write about until his late eighties. He will be sorely missed. I respect Cliff Asness tremendously, but his blog, Stumbling on Truth, is more oriented to disaffected critics of the Leviathan State than to serious investors. I recommend it at my peril. Robert Arnott’s web page is unabashedly commercial, but he puts out great research. He has never shied away from controversy and I was privileged to moderate a discussion of his brainchild, fundamental indexing, with him and Morningstar research director Paul Kaplan (another frequent co-author and friend). Kaplan, whose book Frontiers of Modern Asset Allocation (foreword by me) is also well worth reading, takes the position that fundamental indexing, while it may be a worthwhile strategy, is not much different from any other rules-based system of value investing, and that the cap-weighted market benchmark is still the right measuring stick for any active or style-tilted strategy. I’m inclined to agree.
Individual investors and those who advise them have a vast presence on the web, but most of the material posted is worthless. Since individual and institutional investors face similar problems (taxation aside), good advice to either group is relevant to the other. Here are some general investing commentators who are worthwhile: The doctor, author, and economist William Bernstein’s web site, efficientfrontier.com. In a blog directed equally at institutions and individuals, Dean LeBaron, founder of Batterymarch Financial Management, calls himself an Adventure Capitalist. The even more adventurous Jim Rogers, author of Investment Biker, isn’t always wise (he’s a commodities bug) but he’s wonderfully provocative and can be found at jimrogers.com. Kate Welling, a gifted investment journalist and interviewer, can be found along with her interview guests at welling@weeden. This is a subscriber-only site that accepts soft dollars. Advisor Perspectives publishes original material plus reprints of carefully selected buy-side research. This is not primarily a website but an E-mail newsletter service. Subscriptions are free but require registration. Full disclosure: I write occasionally for Advisor Perspectives, and the article in which I interviewed Byron Wein about his Surprises list was the second most popular Advisor Perspectives article of 2011. InvestorHome is a useful list of links to resources (some good, some bad) for investors. A web-based symposium on the causes of the recent global financial crisis is housed here, and includes my take on the question. Low-cost, asset-class-based investing should be the point of departure for any investment policy. This approach and practically everything else are discussed by the public (ranging, of course, from geniuses to ignoramuses) at bogleheads.org. I’m proud to be a Boglehead!
Capital market data resources
If you need historical data on the Fama-French factors, here they are, straight from the horse’s (Ken French’s) mouth. Professor Robert Shiller of Yale, a perennial favorite to win the Nobel Prize (but he has not yet won it), is an uncommonly creative thinker about finance. He wrote the book on Irrational Exuberance and on macro markets (markets that let you hedge changes in GDP, real estate price levels, etc.). His historical stock market data, including earnings, dividends, and other valuable information, are downloadable from the Irrational Exuberance web site or from his faculty web site. His book in progress, Finance and the Good Society, sounds extremely promising: “Challenging the public and its leaders to rethink finance and its role in society, Shiller argues that finance should be defined not merely as the manipulation of money or the management of risk but as the stewardship of society’s assets.” NYU professor Aswath Damodaran’s web page has a wealth of data, spreadsheets, and other information on valuation, financial statement analysis, and other topics relevant to security analysis. Professor Jeremy Siegel of Wharton, author of Stocks for the Long Run and co-founder of the fundamental-indexing firm Wisdom Tree, runs a data and advice sales site that seems useful and, depending on your budget, may be worth the money. MSCI, S&P, Dow Jones, and other invaluable data sources are available to qualified (or paying) investors by following the instructions on their web sites.
Expanding consciousness: Extraordinarily creative websites that bear on investment management
If ever there was a Renaissance man in finance, it’s Professor William N. Goetzmann at the Yale School of Management. Art history, real estate returns, the American West of the imagination, “learning curves” that graphically make hard economic concepts easy…they’re all here. Want to know how to create a graphic presentation that will influence people instead of just impressing other graphic designers? Professor Edward Tufte at Yale University, the Shakespeare of graphics, shows you how. (His best work is in hardcopy, so buy his books.) Stewart Brand, best known as editor of the Whole Earth Catalog more than a generation ago, is another Renaissance man. His book topics range from architecture (How Buildings Learn) to a radical re-thinking of environmentalism. Finally, for a web-based romp through big-picture topics, contributed by various authors, check out bigthink.com. (Caution: it’s poorly indexed.)
Entrepreneurship and business
Gary Hoover’s The Art of Enterprise is the most inspiring business book I’ve ever read. (The first edition was published under the unfortunate title, Hoover’s Vision, which gave no clue as to the book’s topic.) Gary founded the superstores division of Barnes and Noble, changing the way we read and think about reading. His web site has many words of wisdom about business as “applied social science” – figuring out what people need and want, and how to deliver it to them.
Population, economic growth, the environment, cities, and all that
I was an urban studies major in college, and now that I’m a semi-retired gentleman of leisure, I’m getting back into it. I’ve been researching and writing a paper called “Fewer, Richer, Greener: The End of the Population Explosion and the Future for Investors,” which argues that while the world sometimes seems to be going to hell in a handbasket, we never quite get there and, in fact, health and wealth have been improving steadily for 200 years. These trends are likely to continue and will benefit emerging markets more than developed ones. Moreover, world population is likely to peak around 11 billion – that’s only about 50% more than presently – in our children’s or grandchildren’s lifetimes, and then stabilize or, more likely, begin to decline. Finally – and this is guaranteed to ruffle a few feathers – I contend that only rich countries can afford to invest a lot in environmental quality, so if we want to save the planet, we’d better try as hard as we can to get rich. Here is a draft of my paper, which is now published in the Financial Analysts Journal (November/December 2012) and available as a free download on their web site. But the fun part has been the massive amount of reading I’ve had to do to gather background material for the paper. I don’t have a list of web sites ready (but I will); here are some relevant books.
Ben Wattenberg’s book, Fewer. I think that population stabilization is wonderful news for the planet; Wattenberg is not so sure. But his book has the data that a reader will need in order to begin to decide.
Julian Simon, The Ultimate Resource and The Ultimate Resource 2. Why we should be optimistic about the future and about a growing economy’s ability to solve problems of scarcity. This is the man (recently deceased) who famously bet Paul Ehrlich that a selected group of natural resources would decline in price. Ehrlich thought that scarcity would drive the prices up. Simon won decisively. Edward Glaeser, Triumph of the City. Why cities are green (and economically productive) and traditional, rural societies are not. Bjørn Lomborg, The Skeptical Environmentalist. A technical treatise calling into question a number of commonly held environmentalist views. Peter Huber, Hard Green. Why many activities widely thought to be green are anti-green, and why traditional conservation (as practiced by Teddy Roosevelt) is not.
In a beautifully-written follow-up to “Fewer, Richer, Greener,” Bill Bernstein (introduced earlier) has submitted an article to the Financial Analysts Journal, The Paradox of Wealth and the End of History Illusion, which evokes Francis Fukuyama in the title. It’s flattering to have my work generate such a literate, and literary, response.
For my good friends at Ounavarra Capital, where I’m Senior Advisor, I write the quarterly Ounavarra Review. It’s privately circulated, but they’ve graciously given me permission to post old issues here. The first issue is entitled “The ‘New Finance’: Illiquidity, the Liquidity Premium, and Liquidity-Preserving Strategies.” The second, on inflation, is in progress.
An old (2001) project that has resurfaced, due to some reader interest, is my collaboration with Clint Stevenson, “Investment Management for Endowed Institutions.” It is a bit of a departure from my usual work in that it addresses issues of process and structure, rather than policy and strategy. Although I think the article has aged reasonably well, Clint and I would not currently recommend the risk-target method (page 16; exhibit 6) of deciding how much risk to take. Instead, we’d rely on risk capacity, a concept developed by Andrew Rudd and exposited in a forthcoming article by Andrew and me. The risk capacity of an institution (or individual) includes the ability to raise new funds, cut spending, and otherwise adjust in “live action” to changes in the portfolio value.
That’s all for now.