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International Center for Finance "In the News" News Archive 2004 News Archive2003 News Archive 2002 News Archive Other News 
Commodities Enter Investment Mainstream The Wall Street Journal , 9 September, 2004 "HEDGE FUNDS AND other speculators have taken some criticism for the soaring price of oil and other commodities. But amid the din of the blame game, a broader and more-significant trend in the global investment community has largely been overlooked: Mainstream investors such as pension funds, insurance companies and university endowments -- even Harvard's -- are pumping more money into commodities. "Commodities will be a bull market into early the next decade," predicts Felix Zulauf, principal partner of Zulauf Asset Management. In July 2003, the Zug, Switzerland, firm launched the Gondwana natural-resource fund. With more than $605 million in assets, the fund is now closed to new investment. Commodities' status as an acceptable investment for mainstream institutions could get a further boost from a recently published paper: "Facts and Fantasies about Commodity Futures" by Gary Gorton of the University of Pennsylvania's Wharton School and K. Geert Rouwenhorst of the Yale School of Management at Yale University. The two academics conclude that during the past 45 years, commodity futures have had roughly the same return as stocks with less risk, have way outperformed bonds and are a better hedge against inflation than either stocks or bonds. "As this sinks in and as commodities do well, trustees, directors, portfolio managers, fiduciaries and others will no longer be able to dismiss commodities out of hand," says James Rogers, an independent investor and co-founder with financier George Soros of Quantum Fund. The Gorton-Rouwenhorst paper, predicts Mr. Rogers, "is going to change completely the investing world over the next decade."
Canvassing the Art Market - Old Masters and New Money : Getting a Realistic Perspective on Indexes that Track Prices The Wall Street Journal Europe, 6 August, 2004 "PICASSO'S "Garcon a la Pipe" made the headlines when it sold for the equivalent of 86.5 million euros at Sotheby's New York this past spring, setting a record for the most-expensive painting sold at auction. But as an investment, a lesser-known drawing by the Spanish master, "Tete de Femme," was an even bigger gainer. While most art investments aren't going to perform like "Tete de Femme," especially over the short term, advisers and investors are recognizing more and more that art is a legitimate asset class that can improve returns. Art as pure investment may be catching on. There's no shortage of figures -- a number of firms track art sales one way or another, maintaining databases that generate charts reassuringly reminiscent of those that follow, say, the stock market. Though most databases were formed between 1968 and 1987, they've generally backfilled historical data from before their founding, permitting analysis of longer-term trends. As for comparing indexes between firms, that too can be of dubious value because of differences in methodology. Some indexes include art that fails to sell at auction, recording it at 75% of the low pre-auction estimate. Mr. Kusin favors the use of these so-called buy-in figures, saying they're essential for assessing downside risk. While concurring that buy-in figures are useful, William Goetzmann, a professor at Yale School of Management and co-creator of the Gabrius index, warns that such figures could at times be substantially off the mark, contributing to inaccurate risk assessment."
Basel and the brush - Modern art The Economist, June 26, 2004 "FOR most of the year, the sleepy Swiss city of Basel sees nothing more exciting than a steady stream of central bankers on their way to the Bank for International Settlements. Except in early June, that is, when the place is invaded by a very unsteady flood of contemporary-art collectors rushing to the six-day Basel Art Fair. The fair is arranged on two floors: on the ground floor are the blue-chip art dealers such as Acquavella, Berggruen, Beyeler and Krugier. Upstairs are the more lively contemporary galleries where prices start at around euro5,000 ($6,000), but can be as high as the £450,000 ($824,000) paid for Jake and Dinos Chapman's sculpture of a copulating couple. Some collectors come to Basel with their personal curator to advise them. Most collectors start by decorating their own houses. Collectors who want to keep an eye on the value of their art can turn to the Gabrius Index for help. Set up by William Goetzmann, a professor of finance at the Yale School of Management, it charts changes in the price of art that has been auctioned more than once. Mr Goetzmann says that contemporary art is like a "high beta" stock: one that rises and falls faster than others. Last year, the sub-index of abstract contemporary art prices rose by 97%, a rate not seen since 1991. Does this presage a bubble similar to that of the late 1980s, when prices doubled almost every six months? Not yet, says Mr Goetzmann: "We are seeing the first flush of enthusiasm rather than a boom." The sober-minded at Basel (a minority) noted that at the end of 2002 the abstract-art index stood at almost exactly the same level as a decade earlier."
Short Interests: Yale dives into the world of behavioral finance Christine S. Lee & Brooke Southall, Investment News, May
31, 2004 "Behavioral finance has been granted a home at The International Center for Finance at the Yale School of Management in New Haven, Conn., with a $1.6 million endowment from Yale alumnus Andrew Redleaf and his company, Whitebox Advisors LLC of Minneapolis. Behavioral finance is a relatively new field of economics that attempts to understand and explain how social and psychological factors such as bias and emotion influence economic and financial decision making. The program will be led by Yale School of Management professors William N. Goetzmann, the ICF's director; Robert J. Shiller, a founder of behavioral finance; and Ravi Dhar, a leading behavioral-decision theorist. "[Behavioral finance is] exciting because it deals with the actual process of human decision making,'' Mr. Goetzmann said. "It also has the potential to explain why and when markets break down. The grant will be used to conduct an annual survey of recent home buyers to measure attitudes toward real estate values, expand the Yale School of Management stock market confidence indexes and appoint Whitebox Advisors visiting scholars and doctoral fellowships. The grant is enormously beneficial because behavioral research relies on funding for experiments and surveys, and work with human subjects,'' Mr. Goetzmann said."
In the Mainstream: Whitebox gives Yale $1.6 million Joel Chernoff, Pensions & Investment News, May 31, 2004 "Hedge fund manager Whitebox Advisors, Minneapolis, has awarded a $1.6 million grant for behavioral finance research to the International Center for Finance at the Yale School of Management, New Haven, Conn. Whitebox was formed in 2000 by Andrew Redleaf, who received both his BA and MA from Yale University in 1978. Top scholars leading the new program are: Robert J. Shiller, professor of economics at Yale Univeristy and author of "Irrational Exuberance," a book about the late 1990s tech-stock bubble; William N. Goetzmann, director of the international center and a well-known finance professor at the Yale School of Management; and Ravi Dhar, professor of marketing at Yale's business school. "The real goal of this grant is to try and move Yale to the very forefront as a research center for behavioral finance,'' Mr. Goetzmann said. "The reason we need money is because behavioral finance is actually pretty costly.'' Doing experiments with people is more expensive than researching historic stock prices, he said. " The grant will finance several initiatives: launching an annual survey of recent homebuyers; expanding the business school's stock market confidence indexes to China and possibly India, the Middle East and Europe; What the grant also shows is that behavioral finance is no longer a stepchild of the business school. "BF (Behavioral finance) is in the mainstream now, as conventional as a middle-aged man,'' quipped Meir Statman, chairman of Santa Clara University's finance department and a noted behavioral finance expert, in an e-mail."
SOM receives human behavior grant Erica Youngstorm, Yale Daily News, April 23, 2004 "The School of Management announced this week that its International Center for Finance has received the Whitebox Advisors Grant for Behavioral Finance. The ICF received the grant -- which will provide $400,000 annually for the next four years -- from Andrew Redleaf '78 GRD '78, who founded the investment firm Whitebox Strategies. ICF administrators said the center will distribute the money to researchers who are involved in projects related to behavioral finance in a variety of Yale departments, including economics, history, psychology and sociology. "I hope that this grant will help create a strength at the Yale School of Management in behavioral finance," economics professor and ICF Fellow Robert Shiller said. SOM Professor and ICF Director Will Goetzmann said the grant will enable the SOM to move to bring research efforts like Shiller's to the "next level." Goetzmann said the grant money will enable the ICF to expand the project to other countries, allowing comparison of investor behavior in different parts of the world. ICF Executive Director Christos Cabolis said distribution of the funds will begin this summer. Shiller said ICF fellows and administrators will meet regularly to evaluate researchers' proposals. "Behavioral finance is an area that is of great interest to us," Cabolis said. "We want to expand it. We want to create an environment that will foster cutting-edge research."
Roger Ibbotson Receives 2003 Graham and Dodd Scroll Award Professor Roger Ibbotson is a recipient of the 2003 Graham and Dodd Scroll Award for his paper “Long-Run Stock Returns: Participating in the Real Economy” with Peng Chen. The award is given by the Association for Investment Management and Research and honors excellence in financial writing. Ibbotson was also a guest on WBIX Radio’s “Risk Taking: Your Life & Your Money” (3/27), and his book Global Investing was cited in a list of “picks for your investment library” in The Oregonian (3/21).
Under the Gun, Funds Deploy a Novel Defense Tom Lauricella, Wall Street Journal , March 3, 2004 "So say some mutual-fund companies in response to allegations that they allowed certain traders to improperly buy and sell fund shares. Because other fund shareholders seemingly suffered little or no financial harm from some of these trading arrangements, the firms involved are invoking the sports adage -- that there's no harm so there's no foul -- as a defense against regulators pursuing fraud and similar charges. However, experts doubt this defense will be enough to sway investigators. Franklin Resources Inc., which operates the Franklin Templeton and Mutual Series fund groups, is one fund company using this defense. In its written response to the Massachusetts charges, the company used variations of the phrase "no harm" five times in the first four paragraphs. At the center of the six-month-old investigations into trading abuses is a practice known as market timing. Market timing is intended to take advantage of "stale" fund-share prices that understate the value of the securities in a fund's portfolio. While market timing isn't illegal in itself, timing activity can result in fraud charges if a fund company allows such trading while pretending to block it. Legal experts and regulators say that while claiming "no harm, no foul" may help with damage control for a firm's reputation and as a defense against financial liability in shareholder suits, that argument may not do much to fend off charges of wrongdoing from regulators.Regulators and academics say that even in a down market, long-term fund shareholders suffer from the timing. "It's not the timing per se that causes the damages, it's the exploitation of the stale prices," says William Goetzmann, a professor of finance at the Yale School of Management, who co-wrote a study published in 2000 about the impact of market timing."
Finally, a Few Buyers Are Returning to Antiques Brook S. Mason, New York Times, November 9, 2003 When Frank Partridge packed up his fine 18th-century Georgian chests, Regency tables and Adam mirrors from a fair a few weeks ago at the Park Avenue Armory in Manhattan, he was happier than he had been in a long time. He had sold $1 million in antiques, including a pair of Gainsborough chairs. After a tough time, that number was a good sign. Antiques dealers have been hit by one blow after another, including a sluggish economy and a travel slowdown that has meant the wealthy aren't going as far to shop. But there are some signs of a turnaround, although only at the highest end of the market. Some people worry that sales of antiques are being affected by something that has nothing to do with the economy: changing tastes. Whether antiques are more sensitive to the swings of the economy than standard retail goods is not known, said William N. Goetzmann, an economist at the Yale School of Management who has studied trends in art prices and financial markets going back to 1600. But he points out that the uncertain environment has plagued institutional buyers like museums, a powerful force in the antiques market. The recent strength in the stock market appears to be helping sales in the United States. "If the uptick in the stock market continues, this area will rebound," said Dr. Goetzmann at Yale.
Walking and talking David Marcus , Daily Deal, November 7, 2003 "Corporate governance: What is it good for? A sampling of views from academics who have tried to measure just that. Few lawyers are able to muster much enthusiasm for the prolonged discussion of corporate governance that they have been forced to engage in over the last two years. Instead, most find the topic tedious and pointless -- and this from people who specialize in minutiae. Scholarly attention to such issues has been consistent over the last generation, with the production of a massive literature setting forth theoretical arguments for governance practices and empirical studies of their efficacy. A later paper explores the relationship between the market for corporate control and corporate governance. K.J. Martijn Cremers of the International Center for Finance at the Yale School of Management and Vinay Nair at New York University's Stern School of Business conclude in "Government Mechanisms" and equity prices that the interaction between a company's vulnerability to a takeover and its having large shareholders is critical. They argue that "public pension fund ownership is important only in the presence of takeover vulnerability." Companies with high takeover vulnerability and high public pension fund ownership outperform vulnerable companies with low pension fund ownership by a significant margin, while firms with low vulnerability and high pension fund ownership do not outperform low-vulnerability firms with low pension fund ownership. Thus, neither governance practices nor block shareholders themselves lead to better stock market performance; only a favorable interaction between the two does. "
What's a Ball Player Worth? Brian Hindo, Business Week , November 5, 2003 "Can B-schoolers teach Major Leaguers? They're going to try. Benjamin Polak, a game-theory expert at Yale School of Management, and Brian Lonergan, Polak's former PhD student, have developed a novel way to evaluate baseball players, based on probability theory. Using reams of historical data, Lonergan and Polak can measure the probability of a team's chance of winning a game, given any set of circumstances. With each at-bat, a player can help or hurt his team's chances. Here's how their method works: Let's say the home team is down by two runs in the bottom of the fifth inning, with no outs and a runner on second base. At that moment, the home team has a 39% chance (or 0.39 probability) that it will win. If the batter grounds out, and the runner at second fails to advance, the team's chance of winning falls to 33%. The difference between the two, -0.06, is assigned to the batter who just grounded out. The method has some distinct differences from other quantitative analyses, such as the "sabermetrics" (named after SABR, the Society for American Baseball Research) method popularized by baseball historian Bill James and others. Lonergan and Polak claim that their method, which doesn't rely on traditional statistics, eliminates a step -- going directly to the measurement of game outcomes Another advantage is that their game-theory approach automatically rewards "clutch" hitters and pitchers. Lonergan says he stumbled onto the method while getting a PhD in economics at Yale, working on a short paper about why baseball players are paid so much. "I needed some way to value wins," he says. So, with Polak, he developed the game-theory model. Lonergan's and Polak's algorithm has its limitations and they know their probability-based approach faces an uphill climb to mass acceptance, especially given the experience level of most baseball people with game theory. "
Don't Stop Thinking About' The Candidate Eric R. Danton, Courant Rock Critic , November 2, 2003 "Political campaigns are essentially juiced-up sales pitches by people desperate for you to buy their product - themselves. They'll try anything: kissing babies, bad-mouthing the fat cats in Washington, catchy slogans and - for nearly as long as there have been campaigns - music. Bill Clinton co-opted Fleetwood Mac's refrain "Don't Stop Thinking About Tomorrow" for his successful presidential run in 1992, but he was hardly the first to adopt a theme song. Franklin D. Roosevelt sold voters on his 1932 campaign with the jingle "Happy Days Are Here Again," and Henry Clay had his own march for his unsucessful bid in 1844, titled "Hurrah for the Clay!" "Music has always been part of the campaign process," says Harry Rubenstein, political history curator at the National Museum of History in Washington. Now it's practically an icebreaker to ask presidential candidates about their favorite songs and artists .Interesting, sure. But what's more interesting is the role music plays in campaigns and the subtle effects it has on the emotions of voters.Advertisers use music, particularly pop music, to associate their products with the feelings such music evokes in their target audiences: better moods, nostalgia, hipness and so on. The same principles apply in political campaigns, says Ravi Dhar, professor of marketing at the Yale School of Management. "They use similar ideas. One thing was using patriotic music, for instance, or the flag flying at the back. It's that idea of trying to link any positive feelings or associations you have for the flag or for the country onto the politician," he says. "And obviously you often use music of the generation of the people you're trying to attract and relate to. So, if you like a certain type of music, and then you hear that music, you sort of transfer that liking to the [politician] because in a way you might assume they have similar taste." It's not a conscious process, Dhar says, which is part of why it can be an effective tool. "The key is that people aren't aware of the way music affects them, and when you're not aware of how something is affecting you, it has a much larger effect, in some sense," he says. "If you ask somebody if the music played by a politician has an effect on your liking for the politician, they'll say, `No.' ... But studies have shown that people are not aware of the ways in which these variables influence their preferences." Music in campaigns can also help communicate a candidate's message, says Dee Dee Myers, press secretary for Clinton in 1993-94. It can backfire, too, as the Reagan campaign discovered in 1984, when it tried to turn Bruce Springsteen's song "Born in the U.S.A." into a patriotic anthem. Unfortunately for them, the song is about a Vietnam veteran's hellish tour of duty and subsequent difficulties finding a normal life upon his return home."It was absurd," Myers says.That's been the point of music in political campaigns for 200 years - getting people to respond to candidates, issues and each other."
Auditor Consolidation: Few Choices, Big Implications Eric Krell, Business Finance, November , 2003 " Rick Antle, senior associate dean and the William S. Beinecke professor of accounting at the Yale School of Management in New Haven, Conn., compares the accounting industry's interlocking structure to the complex power grid that delivers electricity to the Northeast. When systems threaten to fail, tensions among those who work on the grid mount. Put a CFO, a financial analyst, an auditor and a plaintiff's attorney in a room, Antle suggests, and watch the blame fly. "Each of those individuals feels unique pressures as a result of the way the entire system is orchestrated," he explains. "When you push on one part of that system, other parts of the system adapt." The transformation of the Big Eight into the Big Five was motivated by radically different factors than the five-to-four transition. IThe primary motivation behind each consolidation was economic.Their customers benefited from the changes.These changes did create competitive barriers for service providers outside the Big Five. "Every change in the past decade or two seems to have made the biggest accounting firms even bigger," says Antle. The GAO report repeatedly emphasizes that smaller public accounting firms face formidable obstacles to enter the top tier. The gap between the largest accounting firms and the next four firms widened significantly between 1988 and 2002 . Some CFOs are now complaining about footing the bill for compliance with the law when their dollars are pouring into the Big Four. But Antle, who recently co-authored the textbook "Financial Accounting" (South-Western College/West, 2003) and who has studied the dynamics and structure of public accounting firms for 20 years, says someone has to pay for improvements in governance. "I've done a lot of research on the compensation of executives in the industry," Antle says. "Suffice it to say, I didn't find any evidence that our society is supporting a whole bunch of overpaid accountants." He says that unless accounting firms were making abnormally high profits prior to Sarbanes-Oxley -- and the widespread treatment of audit services as a commodity suggests that they weren't -- the firms can be expected to pass on the cost of additional audit requirements to their customers. Nicholas Moore, the retired CEO of PricewaterhouseCoopers, sees real challenges for the Big Four in the near future."For a long time, accountants had been alleging that their liability burden was too high," says Antle. "Yet I don't think many of them thought that their existence could be threatened in the way Andersen's was. The risk accountants bear has been made much more real to them since Andersen's collapse." If they were Big Four executives right now, both Moore and Antle say, they would be deeply concerned about the effects that the current regulatory environment will have on the talent pipeline. In the past, large accounting firms would bring new employees, culled from top undergraduate accounting and business programs, up to speed slowly. Antle is not convinced that the best and brightest have made that decision -- yet. Earlier this year, while promoting his new textbook in meetings with accounting professors, he encountered a surge of interest in accounting. Like so many other factors surrounding public accounting, the future of recruiting into the profession remains unknown. For observers and teachers, that uncertainty makes for an i nteresting study. For public companies and the Big Four, it could lead to additional cost and risk. "It was interesting before because of the consolidation," Antle says. "The debacles and new regulations create even more uncertainty. The only thing that's certain is that audits are going to cost more." "
Snow Takes on Senate over yuan David DeRosa, The Korea Herald, November 3, 2003 "U.S. Treasury Secretary John Snow had his day in Congress, testifying on the Bush administration's currency exchange rate policies. He faced tough criticism from senators of both political parties who believe that Asian nations are taking advantage of the U.S. by manipulating their exchange rates. The lawmakers are blaming that for a record U.S. trade deficit. Only the second Treasury chief in 12 years called to the Senate to explain currency policy, Snow testified before the Senate Banking Committee. His comments echoed the Treasury Department's semi-annual report on currency rate policies, which ably presents the administration's view that exchange rates should be determined by market forces. It also acknowledges that countries around the world "follow a variety of exchange rate policies," ranging from a floating system to currency unions and full dollarization. The report correctly says it's "good news" that nearly 100 countries have "eschewed pegged exchange rates and have 'Bipolar' view Several years ago, Dr. Stanley Fischer, then first deputy managing director of the International Monetary Fund, published a paper that addressed the "bipolar" view on exchange rates. Exchange rate regimes run a spectrum, as Snow indicated, from fully floating to the so-called "hard pegs." A hard peg is where a country adopts a currency board or uses another country's currency (an example being dollarization). The bipolar view is that extreme, floating or a hard peg, can work. In between these two are a variety of crude devices that attempt to achieve exchange rate stability. They include target zones and creeping pegs systems.chosen to use a flexible exchange rate, dollarize, join a currency union, or create a currency board." What we learned yesterday is that Snow is a bipolar kind of guy, though he prefers the free market's pole to the other, where the supporters of hard pegs reside. Meanwhile, some members of the U.S. Senate were left fuming by Snow's refusal to officially label any Asian nation - particularly China - a currency manipulator. Instead, Snow took a conciliatory tone, saying a diplomatic approach is getting results. China gets the most criticism from U.S. lawmakers for its policy of pegging its yuan (8.3) to the U.S. dollar. Avoiding manipulator label While Snow advocated a flexible exchange rate for China Snow also reported that China's central bank has endorsed a project to bring currency futures trading to China with technical assistance from the Chicago Mercantile Exchange . Thursday was a good day for Snow, though he hasn't heard the end of exchange-rate blathering from Congress - just as the House of representatives demonstrated last night. It voted 411-1 to approve a nonbinding resolution calling on China to drop its dollar peg rate. David DeRosa, president of DeRosa Research & Trading, is also adjunct finance professor at Yale School of Management and author of "In Defense of Free Capital Markets." "
When Jobs Move Overseas (to South Carolina) Yilu Zhao, The New York Times, October 26, 2003 While many American manufacturers look to China as a place to make their products with cheap labor, an odd turnabout is taking place in this small town northeast of Columbia. There, one of China's best-known companies, the Haier Group, is churning out refrigerators at a factory staffed by American workers. To the company, which had $8.5 billion in revenue last year, the plant is at the core of its vision to expand in the United States. The factory, completed in 2000 at a cost of $40 million, is designed to respond nimbly to American retailers, who stock little inventory but want to replenish supplies quickly when products run out, said David Parks, a senior vice president of Haier's American unit. Shipping refrigerators from Asia can take up to six weeks. ''The factory makes perfect sense,'' Mr. Parks said. ''When you ship refrigerators, you ship a lot of air, and shipping air is expensive.'' But the factory is about far more than saving money on refrigerators. It is an expression of nationalist pride and of the Chinese government's determination to expand overseas in markets that it considers prestigious. The government's objective is to catapult at least 50 Chinese companies onto the Fortune Global 500 list from the current 11. Scholars of Chinese business say leaders of state-owned companies are often willing to try tactics that don't make economic sense for their companies but yield political benefits for themselves. The careers of top managers at companies like Haier that are entirely or partially state-owned are heavily directed by the government. ''Ultimately, the managers are accountable to the political leaders,'' said Zhiwu Chen, a finance professor at the Yale School of Management. ''They are not accountable to the shareholders.'' Although the Chinese government does not give outright subsidies to native companies to encourage overseas expansion, it has arranged for state-run banks to offer them low-interest loans.
Prof offers proof Cubs have only themselves to blame Dave Newbart, Chicago Sun Times, October 24, 2003 "It might not take a rocket scientist to conclude that the Cubs' failures were bigger in their loss to the Florida Marlins last week than that of infamous fan Steve Bartman. But a professor has shown scientifically that the Bartman play had little impact on the outcome of the game and series. Ben Polak, a professor of economics who teaches a course in game theory at the Yale School of Management (and apparently has much too much time on his hands), used an algorithm to analyze the Cubs' chance of winning both before and after the play in Game 6 when Bartman inadvertently prevented Cubs left fielder Moises Alou from catching a foul ball. Polak had handy an analysis of every National League plate appearance for the last few years to determine a team's chance of winning at every possible moment during a game. Before the play, leading 3-0 with one out in the eighth inning, the Cubs had a 91 percent chance of winning the game, according to the analysis. If Alou had made the catch, the Cubs' chance of winning would have jumped to 94 percent. That means the foul-ball fiasco cut the Cubs' chance of winning by only 3 percent. Much bigger factors were Alex Gonzalez's error (10 percent), Derrek Lee's double (34 percent) and Mike Mordecai's double (more than 20 percent). "The 3 percent effect of the fan was small potatoes,'' said Polak, who got his masters degree in history at Northwestern. If you add the fact that the Cubs still had a 50 percent chance of winning Game 7, the fan's interference affected their chance of going to the World Series by only 1.5 percent. By the end of the Marlins' eight-run inning, the Cubs' chance of winning Game 6 had plummeted to 3 percent. Numbers aside, what about a momentum swing after the fan's fluff? "We are not buying,'' Polak said. "Professional athletes should be able to cope with a 3 percent change in their fortunes.'' Unless they are the Cubs -- with a much larger history of failure to cope with."
Experts express doubt in 'buy and hold' Chris Serres, Raleigh News & Observer, October 16, 2003
"Buy stocks, stick with them through a market's ups and downs, and you will make more money than in any other asset class. For years, this was the advice that brokers doled out to investors who worried about losing money in the stock market. Now, however, this buy-and-hold strategy is considered suspect. In response, a widening circle of investment professionals and respected academics has criticized buy-and-hold as an outdated and precarious investment strategy. In a poll taken over the summer, 84 percent of investors agreed with the following statement: "The stock market is the best investment for long-term holders, who can just buy and hold through the ups and downs of the market," according to a survey of 300 individual investors by the Yale School of Management in New Haven, Conn. Just 5 percent of investors said they "strongly disagreed" with that statement. The concept of buy-and-hold investing is not new. But it was not until mid-1995 and early 1996 that the term, "buy and hold," began to appear regularly in personal finance magazines and investment journals, said Robert J. Shiller, a professor of economics and author of "Irrational Exuberance". Shiller has compared the buy-and-hold concept to a "thought virus." If people understood the risks that companies face - from competitors and the economy - they would never buy stocks and plan to hold onto them for longer than a year, he said. "This 'buy-and-hold' idea came out of nowhere and became conventional wisdom," said Shiller, who sold his stock holdings in 1999 and invested the proceeds in bonds and real estate. "It's time that people sit down and determine whether it's really the right strategy."
Cracking the Fair Value Pricing Conundrum Kevin Burke, October 13, 2003 , Money Management Executive
"The recent market timing and late trading allegations brought forth by New York Attorney General Eliot Spitzer have sparked a renewed interest in how mutual fund firms determine fair value. Prudently, a group of investment managers, independent auditors and academics met in New York last week to discuss current best practices for fair valuing international securities at a conference hosted by Investment Technology Group. "Daily pricing of mutual funds provides liquidity to investors but is subject to valuation errors due to the inability to observe synchronous, fair security prices at the end of a trading day," said William Goetzmann, a finance professor at Yale School of Management and co-author of a research paper on day-trading international mutual funds. He noted that using stale prices to calculate daily NAVs creates predictability in fund returns. "When inaccuracies are forecastable, that is a problem," he said. Goetzmann argued that when arbitrageurs exploit time-zone differentials, it has an adverse effect on the other shareholders in the fund because it dilutes the overall holdings. While these inaccuracies may be relatively small on a daily basis, over the long haul, it could mean billions of dollars in lost profits. And individual investors are largely in the dark when it comes to these trading practices. Cracking down on the use of stale prices has been the cause for much debate over the years but even more so now, in light of the rash of illegal trading allegations. Determining which investors are engaging in arbitrage is not an easy task, Goetzmann said. Examining net fund flows is one tactic used in his research to screen timing ability at the individual fund level."
Canada tops inside trade list Profits made by corporate insiders highest of 52 countries, "disturbing" report shows Theresa Tedesco, September 30, 2003 , Financial Post "Profits made by informed corporate insiders in Canada prior to the public announcement of deals are the highest among 52 countries surveyed, according to a U.S.-based study on the effectiveness of insider trading laws to be discussed at the Bank of Canada later this week. The study, titled "Do Insider Trading Laws Work?" concluded that total takeover gains enjoyed by insiders in Canada who purchased shares in the five to 30 days preceding the public announcement of a takeover is 13.7%, compared with gains of under 1% in the United States, the United Kingdom, countries in Asia, Eastern, Western and Northern Europe, Africa and Latin America. That Canadian profit figure almost triples to 35.18% when the time frame is extended to 60 days -- more than 10 times greater than Hong Kong and Norway, which follow at 3.44% and 2.33%, respectively. "There is overwhelming evidence showing that illegal stealth trading by corporate insiders persists," concludes the 48-page study by Arturo Bris, a professor at Yale University in Connecticut. The paper, which is dated February, 2003, examined 4,541 acquisitions in 52 countries from January, 1990, to December, 1999. He is scheduled to address a group of Canadian securities regulators and economists at the Bank of Canada in Ottawa on Oct. 2."
Confirmation inside trading runs rampant: Another report shows depth of Canadian problem October 4, 2003 , National Post's Financial Post & FP
Investing (Canada) "Apparently, Finance Minister John Manley's mandarins are very interested in insider trading. This week they were among the lot clamouring to get copies of a damning report on the state of Canada's securities industry delivered in a research paper by Prof. Arturo Bris at Yale Univeristy. Because Canadians seem to revere all things American, Prof. Bris's indictment of this country's securities regulatory regime, more specifically, that its "regulation does not work well," attracted standing-room only during a speech at the Bank of Canada As grim as Bris's findings were, a new report has come to our attention and it's bound to continue to stir the pot. In a study published by the Canadian Public Policy Forum, titled Do Insiders Play by the Rules?, professors William McNally and Brian Smith deliver the first ever assessment of compliance with insider trading laws in Canada. Using statistical data from 1987 to 2000, the paper's authors conclude -- not surprisingly -- that "we find large-scale evidence of insider trading and reporting violations." At the same time, the report declares that "suspicious trading by corporate insiders not being investigated." In fact, Prof. McNally says that insiders "are allowed to run rampant in Canada because they enjoy a huge institutional advantage." In fact, there's such a "small likelihood of being prosecuted" for illegal insider trading in Canada, they say, that on average there's been less than one conviction a year since 1980 -- and only two cases where insiders were charged with failure to report their trading activity. One of the paper's findings reveals that about 50% of firms involved in stock buybacks do not disclose their trades to the Ontario Securities Commission even though companies that repurchase their shares are required to report these transactions to the provincial watchdog and the TSX. "There is clearly a sizeable reporting deficiency for the OSC," the authors say, and yet there has been no prosecution on record by a provincial securities commission for failure to report buyback activity."
SOM professors' study on mutual funds gets renewed notice October 3, 2003, Yale Bulletin and Calender "New York Attorney General Eliot Spitzer's investigation into fraudulent practices in the mutual fund industry -- and the resulting interest in fair value pricing as a means of combating arbitage -- has focused renewed attention on a study originally released by two professors from the Yale School of Management (SOM) in 2000. The SOM study was the first to propose the fair valuation method that fund companies and regulators can employ to substantially reduce the opportunity to exploit the market timing and enable mutual funds to calculate more consistent and accurate daily net asset values (NAVs). The study was cited in Spitzer's formal complaint as one of the examples of academic research showing that trading abuses cost shareholders billions of dollars annually. Titled "Day Trading International Mutual Funds: Evidence and Policy Solutions," the study was authored by SOM professors William Goetzmann and K. Geert Rouwenhorst along with Zoran Ivkovich, professor of finance at the University of Illinois. "Our research estimated that trading on stale prices in our sample mutual funds led to wealth transfers of about $1 billion per year between traders and long-term fund shareholders," according to Rouwenhorst, professor of finance and deputy director of the International Center for Finance at SOM. When we originally wrote the paper in 1999, we sat on it for almost a year because we didn't believe it was ethical to release research that explains how to take advantage of the market," says Goetzmann, professor of finance and director of the International Center for Finance."
Analysis: Mood of the markets going into the fourth quarter Bertha Coombs, September 30, 2003, CNBC: Business Center
"Well, today marks the end of the month and the quarter. But instead of a big finish, September and a third quarter have gone out with a string of red-ink sessions. Bertha Coombs sizes up the mood of the markets as they move into the fourth quarter. For three years economists and analysts have predicted economic recovery was just around the bend. Their forecasts seemed to have finally turned the corner this last quarter. Mr. ROD SMYTH (Wachovia Securities): I think the third quarter was very important because it was during this quarter that the fears about deflation and a double dip in the economy were really put to rest. COOMBS: Investors anticipating better earnings pushed the S&P 500 to its second straight quarterly gain in the third quarter, the first time it's happened since 2000. With fewer earnings warnings so far, third-quarter earnings for the S&P 500 are now expected to be nearly 16 percent better than the same quarter last year. First Call's Chuck Hill says the quality of earnings should also improve with companies finding growth beyond cost cutting and currency benefits. Mr. CHUCK HILL (First Call): Currency, as far as the S&P 500 earnings go, probably added about 2 percentage points in the first and second quarter. It's going to be more like only 1 percentage point in the third quarter. So these are good numbers. No matter how you slice it, we're headed for a good quarter. COOMBS: The prospect of an earnings recovery has led investors to feel more confident about the market than they have in years. The Yale investor confidence index, which has measured individual and institutional investor confidence dating back to 1989, is now near all-time highs, with both Wall Street and Main Street expecting the markets to break their three-year losing streak and climb higher. Professor ROBERT SHILLER (Yale School of Management): And I think it's about time that the markets should go up. So that, with strong earnings and a--and an improving economy, I think that that's pa--a good part of the picture."
Reports Offer Mixed Economic Signals Rob Varnon, October 1, 2003, Knight Ridder/Tribune Business
News "The lackluster labor market was blamed for a national drop in consumer confidence Tues-day, the same day a Yale University study said stock market investor confidence is up from a year ago. The Conference Board's Consumer Confidence Index fell 4.9 points from 81.7 in August to 76.8 for September. That's down 16.9 points from the September 2002 level of 93.7." The Yale report is based on a survey of approximately 100 investors while The Conference Board surveys 5,000 households. Economist Robert Shiller, a Yale faculty fellow at the School of Management's International Center for Finance, said investor expectations won't necessarily translate into long-term increases because investors are still smarting over losses in 2002. The Yale report found a drop in long-term sentiment toward stock investment, with only 40 percent of survey respondents agreeing that "the stock market is the best investment for long-term holders, who can buy and hold through the ups and downs of the market." In the previous year's study, 60 percent of respondents agreed with the statement. " Yale's Crash Confidence Index found that investors are less worried about a stock market crash than they were last year. The report found that 44 percent of individual investors and 51 percent of institutional investors attach little probability to a stock market crash in the next six months. Yale reported that market increases dating from the Dow Jones industrial average 52-week low of 7,178 on Oct. 10, 2002, have allayed some fears of a crash. Shiller, who authored "Irrational Exuberance," a book about the stock market, said in a prepared statement "at a rational and quantitative level, everything appears to be all right among investors." The Market's Most Valuable Stock Is Trust Robert J. Shiller, 26 September 2003,The Asian Wall Street
Journal "New York State Attorney General Eliott Spitzer's charges of improper trading practices by several leading mutual fund families are another blow to public trust in financial institutions. Mutual funds have been the place you would advise the most unsophisticated investors to go: Mutual funds were designed for grandpa and grandma, and repeatedly recommended to them by all kinds of benevolent authorities. Thus scandals in the mutual fund sector are potentially much more damaging to public trust in financial institutions than are scandals in other sectors -- such as the one playing out in the New York Stock Exchange right now." " After the stock market crash of 1929, and after the sequence of financial scandals revealed from the 1920s, most U.S. investors appeared to put stocks totally out of their mind, and just forgot about them for decades. We do not want more people to sink back into such a backward financial state of mind in the future, but that is the direction of tendency now." "At a rational, quantitative level everything appears to be all right among investors. According to the Yale School of Management Stock Market Confidence Indexes for February through July of this year, 89% of individual investors and 87% of institutional investors expect the stock market to go up in the succeeding year. These are at close to the highest levels of optimism observed since we started collecting these data in 1989." Alternative strategy fed endowment growth Bridget Kelly , September 19, 2003, Yale Daily News "While Yale's endowment increased by nearly 5 percent this year, largely the result of alternative investment stategies that play down the role of traditional equities, other Ivy League schools reported mixed results this fall." "Despite the stagnant American economy, Yale recorded an all-time high as its endowment grew to $11 billion during the 2002-03 fiscal year, reversing last year's slight decline. The increase was a result of using investment strategies that placed less emphasis on stocks and bonds, Yale School of Management professor William Goetzmann said. Meanwhile, the University of Pennsylvania and Brown University also saw increases in their endowments, while Princeton University and Dartmouth College experienced decreases this year. The Massachusetts Institute of Technology has not yet released its endowment figures, but announced that it would cut next year's operating budget by $70 million." "Yale School of Management professor Roger Ibbotson said Yale's endowment does not closely follow the overall equity market, which means that it was better equipped to weather the economic downturn. Goetzmann said other schools have started following Yale's innovative investment strategies, and attributed much of the success to Yale's Chief Investment Officer David Swensen -- an expert in alternative investments." Litigators Take Aim at Timers, Funds Kevin Burke, 15 September 2003, Mutual Fund Market News
"It's open season on the mutual fund industry, as New York State Attorney General Eliot Spitzer's probe of mutual fund trading practices has triggered a barrage of investor lawsuits. Even a single trader, using the simplest market timing strategy on international funds, could generate a neat profit of $3 million a year, said Geert Rouwenhorst, a professor of finance at the Yale School of Management. The way it works is if the markets are higher now than they were yesterday, based on these prices, a trader could buy a mutual fund and sell Japanese stock to lock in the profit, thus capitalizing on time-zone differences. Any downside risk in his mutual fund portfolio would be offset by his futures position. " "Using such a strategy, an international arbitrageur could outperform the other investors in an international fund by 30% or more a year, he said. "Although there are relatively small pricing errors each day, say a dime off each day, over a year's time, that's a lot of dimes," he said. " Boy, oh, boy is the stock market expensive. Justin Lahart, July 8, 2003, 2003, CNN "Thanks to its 18.4 percent rally since the end of the first quarter, the price-to-earnings ratio on the S&P 500 has jumped to 20.3 from 17.6. So it's time to sell, right? Not necessarily. "The market does have a valuation problem," said First Albany chief investment officer Hugh Johnson. According to research from Yale School of Management professor Matthew Spiegel, if you only invested when the S&P's P/E was below its historical mean you would have only been in the market for 19 of the past 77 years. Nor were those the "right" years to invest. At the end of 1973, for example, the P/E was 13.5, its lowest level in years. Yet the market dropped almost 28 percent. The problem is that P/Es have risen over time, meaning that the market has tended to look overvalued relative to its history. "You always see people saying the market's P/E is high relative to history so the market must be expensive," said Spiegel. "It's sort of taken as an article of faith that P/Es are good to look at." The error people are making, thinks Spiegel, is that they are looking at P/Es with the benefit of perfect hindsight. We think the S&P's P/E of 15 at the end of 1994 was cheap because we're comparing it to what we've seen since then. But investors back then didn't know what would come next."
Portfolio With Cachet, and Costs Eric Baum, June 01, 2003, New York Times "Private money management, once reserved for the wealthy, is being offered to thousands of mutual fund shareholders with $50,000 or less to invest. But many financial advisers warn that the private management of assets, in what are often known as separately managed accounts, may not be appropriate for people of modest wealth. Many smaller separate accounts are not well-rounded portfolios, but instead stress a particular strategy - like large-cap value or small-cap growth - which can be extremely volatile. Roger G. Ibbotson, the chairman of Ibbotson Associates, a financial research firm in Chicago, and a professor at the Yale School of Management, said that most accounts in the $50,000 range do not provide adequate diversification. "If all you have is $50,000, this is probably not the right type of account for you," he said."
Analysis: Art becoming a tough sell in these uncertain economic times Bertha Coombs, 27 May 2003 , CNBC Business Center "When financial markets boomed, shareholders didn't seem to mind or may not have noticed that corporations and high-flying CEOs used company money to buy art. With auction season now in full swing, a number of those former high fliers are selling their collections this spring into a market in which top-of-the line masters remain hot, but anything else is a tougher sell. Patience is an apt description for the mood of art collectors this spring. Corporations were big buyers of art in the '80s and '90s. Now some are more apt to be sellers. Yale economist William Goetzmann says "There is very high-end, high-quality stuff that is likely to fetch pretty high prices, and then there is everything else, which there doesn't seem to be a lot of support for". Goetzmann says the days of major corporate art acquisitions may be over. I think the whole shakeup in the world of corporate governance and so forth makes it difficult for companies to invest in something that is not focused on its real comparative advantage."
A fragile canvas May 19, 2003, The Economist Global Agenda "Art dealers like to claim that the art market is different. But the art market is also vulnerable to fashion and to the spending power of a relatively small group of buyers. In the past couple of years, with the world's main stockmarkets falling by up to 50% from their peaks in 2000, art lovers' spending power has declined dramatically. During the early 1990s, the art market's nadir came well after economies had turned down. The harsh economic climate has forced Christie's and Sotheby's, to try harder to woo customers, whether vendors or buyers. So far the art market has defied the doomsayers who predicted a collapse at the top end. Perhaps it is true that art, because of the emotional attachment, is the last thing the financially embarrassed rich will sell. But some believe that it is a only matter of timing. William Goetzmann, a finance professor at Yale, has studied the art market's relationship to other investment markets. He asserts that the art market has a high "beta" when correlated with the stockmarket: in other words, art goes up by more than shares-and down by more, when shares fall. If he is right, the art market could become a lot more "discriminating" yet."
Predicting the Path of a Submarine (or a Mutual Fund) Mark Hulbert, May 18, 2003, New York Times "Researchers at Yale appear to have solved a big problem for mutual fund rating systems. The rating problem has to do with the classification and evaluation of funds that don't stick to a single investment style. The challenge is significant because most funds change styles at one time or another. The Yale researchers -- Matthew Spiegel, a finance professor, Harry Mamaysky, an assistant professor of finance, and Hong Zhang, a doctoral fellow in finance -- believe that they have solved this problem. The researchers relied on a statistical tool that has primarily been used in navigation and rarely in investing. It is known as the Kalman Filter, named for Rudolf E. Kalman, an emeritus professor of engineering at the Swiss Federal Institute of Technology in Zurich. Mr. Kalman introduced his technique in 1960 in research supported by a grant from the United States Air Force, and the technique has been used to track moving targets like submarines. Services that rate mutual funds do not know where a mutual fund manager is taking his portfolio at any given moment. But they do know how the portfolio is performing. The Kalman Filter uses a fund's raw returns to continuously update a forecast of the fund's future performance."
Harvard war stocks elicit concerns Yale stocks unlisted, but some worry about ethics of defense investment Jessamyn Blau, April 22, 2003, Yale Daily News "Faculty at Harvard have recently raised ethical concerns about the university's holdings in war-related stocks. Harvard faculty members recently found that the university invests approximately 0.5 percent of its endowment, in top defense contractors .Because most of Yale's $10.5 billion endowment is managed by outside firms, the exact content of the University's portfolio is unknown. Yale's Advisory Committee for Investor Responsibility chairman William Goetzmann, a School of Management professor, said "There's no policy that Yale has either for or against military stocks," Goetzmann said. But Yale President Richard Levin said Yale's policy of outsourcing investments has been beneficial for the endowment. "The lack of disclosure hampers the application of the ethical investment policy," David Corson-Knowles '03, a former ACIR member said. Goetzmann said the subject of war investments as an ethical issue has never come up during his time at the head of the ACIR. "The ACIR has not discussed Iraq with regard to investments decisions. If members of the community have concerns they should raise it with ACIR. We certainly want to be open and responsive," Goetzmann said."
Unreal Expectations? Sure, stocks give you 10% a year -- provided their yields and P/Es add up Michael Santoli, April 21, 2003, Barron's "During three years' worth of anxious nights since the stock market turned ugly, one soothing notion has helped comfort investors: that over the long term, stocks have returned about 10% a year and have always rewarded the patient portfolio. But the expected returns from stocks are likely to be lower in the years to come. From 1926 through 2000, the Standard & Poor's 500 and its predecessor indexes generated annualized profits of 10.7%. According to Ibbotson Associates, 4.6 percentage points of the 10.7% return through 2000 came from dividends. Another 3.1% of equity market gains can be attributed to inflation, which is captured in corporate profits to the benefit of shareholders, says Ibbotson . Together, then, dividends and the salutary effect of inflation on earnings delivered more than 70 cents of every dollar of wealth produced by stocks in the 75 years through 2000. "
Dimensional Fund Advisors' Mutual Fund Board Elects Nobel Laureate Robert Merton April 08, 2003, Business Wire "Robert C. Merton, a recipient of the 1997 Alfred Nobel Memorial Prize in the Economic Sciences, has been elected to the board of directors of the mutual funds advised by Dimensional Fund Advisors (Dimensional), a leading global manager of equity and fixed income securities. Known for its focused approach to asset class investing. Dimensional's affiliation with the leading financial economists in the nation includes Myron Scholes, a long-time colleague of Merton's and joint recipient of the Nobel Prize with him. In addition, Dimensional's other key academic relationships include George Constantinides, Eugene Fama, John Gould, Abbie Smith, all of the University of Chicago, as well as Kenneth French of Dartmouth, Roger Ibbotson of Yale, and Donald Keim of the University of Pennsylvania. Fama has served as Dimensional's Director of Research since the firm's inception, while French serves as the Director of Investment Strategy."
Yale presents a timely series -- The War in Iraq -- Yale University Teach-Ins April 07, 2003, M2 Presswire "Fulfilling a principal mission of a great teaching institution and reflecting the highest values of a free and open society, Yale University President Richard C. Levin initiated a series of faculty-led discussions on the many ramifications of the Iraq war. The discussions, or Teach-Ins, focus on different aspects of the war from a range of perspectives. The War in Iraq: Yale University Teach-Ins" began on March 26 . In a lecture on April 3, Pacifica Radio's national affairs correspondent Larry Bensky talked about the challenges of covering the progress of the war for public radio. On April 4 Professors Arjun Appadurai, Bruce Ackerman, Seyla Benhabib, Paul Gilroy and Gaspar Tam-representing a range of disciplines, from political science and anthropology to African American studies and philosophy-discussed some of the ethical and economic ramifications of the war. The following events in the Teach-In series will take place in the future. On April 6, William Nordhaus, the Sterling Professor of Economics, will discuss the economic cost of the war. His analysis of how much the war will cost, based on several potential outcomes, has arguably been quoted by the media more often than any other. Professors Roger Ibbotson and Douglas Rae, who teach in the Yale School of Management, will provide commentary at Sunday's discussion."
Dow 21,000 by 2010: It's not as outlandish as it sounds Paul B.Farrell, April 03, 2003, CBS.MarketWatch.com "That's right, 21,000. Sure, we'll have to jump over huge hurdles and through harrowing hoops .Here's how Bruce Courage, a reader applied some Positive Mental Attitude to the stock market: A Dow of 11,500 in 2000 should be worth 21,000+ assuming only 6 percent yield 10 years later. To go from today's 8,100 to 21,000, you would need a yield of about 14 percent annually. America would be back on track. I admit I don't know whether the numbers will pan out. Three years ago, at the peak of the bull market, I collected 10 long-term market predictions. Two in particular stood out. One was Sheldon Jacobs's Dow at 21,200 by 2010. The publisher of the respected No-Load Fund Investor newsletter said realistically: "But it won't be smooth sailing". The other one that stood out was Yale Professor Roger Ibbotson's 120,400 for 2025. Why? Back in 1974, when the economy was in the doldrums, when the bear was mauling the market, when the oil crisis was draining America, when the Vietnam war was still haunting us, and when Dow was only 600, a brave Ibbotson stood up and predicted the Dow would hit 10,214 by 1999. Imagine the positive mental attitude Ibbotson must have had in the dark days of 1974 to make that prediction."
Risk Management for the masses March 22, 2003, The Economist ""We have the financial technology to cope with growing economic risks" , says Robert Shiller. "Lately, a lot of attention has been focused on the stockmarket bust after the 1990s boom and on the short-term state of the economy, now teetering in and out of recession. Look ahead, though, and there is every reason to think that there are bigger,equally unpredictable economic risks on the way. Perhaps the biggest such issue in the next ten years will be the quick pace of change in the economic status of individuals. Advances in technology, in particular, have increased the chances both of striking it lucky, and becoming very wealthy - but also of being unlucky, and becoming very poor.The likely outcome is both greater economic uncertainty and greater inequality. But there is good news too: the financial tools that will allow ordinary folk to cope with increased uncertainty, and to insure against adverse economic events, are already being developed."
Got a Big Mortgage? Buy More Bonds.; Buy bonds, hedging your home. Ira Carnahan , March 17, 2003, Forbes Magazine "Wharton School's Christopher Mayer says "When you take out a fixed-rate mortgage for $400,000, you're taking the equivalent of a $400,000 short position in bonds" . Do you want to short the bond market? This risky bet would lose money if interest rates fell, but pay off if rates went sky-high. Rates are high (probably) because inflation has picked up, meaning you can repay the principal with cheap dollars. So if you've got a big mortgage, consider holding more bonds than you otherwise would as a hedge against the short position represented by your mortgage. What if you don't have a 15- or 30-year fixed mortgage? Say your loan adjusts in five years. Then pick a shorter-term bond fund, like Vanguard's Limited-Term Tax-Exempt Fund, with an average duration of 2.6 years (yield: 2.1%). Finally, what about the mansion that mortgage is paying for? A collapse in home values would wreck your net worth. Should you hedge the house, too? That's not easy to do, says Yale School of Management's William Goetzmann. The best protection here is to lessen your overall level of financial risk. Have plenty of cash and buy some life insurance."
The Heady Daze of March 2000 Harriet Johnson Brackey, March 10, 2003, The Miami Herald "March is the month when, three years ago, some markets reached their all-time highs. The Nasdaq Composite Index hit 5,048.62 on March 10, 2000.Today, it's at 1,305.29. The S&P 500 peaked on March 24 at 1,527.46. It's 828.89 today. The Dow, meanwhile, led the pack by reaching an all-time high of 11,722.98 on January of that year. Today it's at 7,740.03." "Between 1991 and 2000, stocks were returning 17.5 percent a year and inflation was a tame 2.7 percent, according to Ibbotson Associates. Roger Ibbotson, a Yale University professor and head of his own research firm, makes long-range forecasts and is known for having correctly predicted, in the mid-1970s, the bull market in large-company stocks of the 1990s. His prediction for the next 20 years: an 8.1 percent annual return on large company stocks, 9.9 percent on small company stocks and 4.6 percent on bonds. And some would call even those figures optimistic."
Long-term faith in stocks wavers David R. Francis, March 10, 2003 Christian Science Monitor
"Wall Street pretty much agrees that a successful invasion of Iraq by the United States and whatever allies it can round up would be good for the stock market. The financial community is divided and undecided on the course of stock prices. Three years ago, Yale economist Robert Shiller's book, " Irrational Exuberance," was published. In it, he argued that stock prices in the 1990s displayed the usual features of a speculative bubble - "wishful thinking on the part of investors that blinds us to the truth of our situation." If Mr. Shiller is right, prices still have a long way to tumble, warns Wohar, an economist at the University of Nebraska, Omaha. "What is kind of amazing with the United States market is that historically, its returns have been pretty robust," notes William Goetzmann, an economist at the Yale School of Management in New Haven, Connecticut. Maybe, investors need to reduce expectations for the market "a little bit," he speculated. "Nobody can predict when the market is going to turn around," says Goetzmann.Stock-market forecasts are notoriously inaccurate. "
Just the two of us March 1, 2003, The Economist Newspaper Ltd. "ALFRED TAUBMAN is still in jail in Rochester, Minnesota, but he is already planning life after his release. After serving his sentence, reduced from a year and a day to ten months and two weeks, for his part in a price-fixing scandal, Mr Taubman former chairman of Sotheby's will be free in May. Mr Taubman controls 22% of the company's capital and 63% of the voting rights. In 2000, Christie's and Sotheby's agreed to pay $256m apiece to compensate clients for illegally co-ordinating the commissions they charged on sales. Mr Taubman paid $156m of Sotheby's bill.Sotheby's was also fined $45m by America's Department of Justice (DOJ) and $20m by the European Commission. Christie's won exemption from the DOJ and EU fines by spilling the beans on the price fixing. Moody's, a credit-rating agency, continues to regard Sotheby's debt as junk. William Ruprecht, chief executive of Sotheby's thinks that high-quality art tends to be more stable than most financial investments. William Goetzmann at Yale School of Management has subjected the art market to econometric analysis, and found that the art market's "beta"--its synchronised movement with the stockmarket--is higher than one. This means that in boom times art moves up more, and in crashes art drops lower.But the effect is lagged, he says; so the real pain in the art market may still lie ahead. "
Is it wise to like art for profit's sake? Jessica Guynn, February 24, 2003, Contra Costa Times "In the most wrenching bear market in decades in which paper wealth has vanished overnight, investors are searching for something more tangible than a ticker symbol. A growing number are putting their money into real estate, gold -- and, like Close, fine art. A study by New York University professors Jiangping Mei and Michael Moses found that a selection of Impressionist, Old World Master and American paintings appreciated an average of 8.2 percent a year in the second half of the century, taking into account inflation. That is comparable with the performance of the Standard & Poor's 500 index in the same period. Art experts warn that speculating on art can be as -- if not more -- risky than buying stocks. Investors can outperform the S&P and the Dow Jones industrial average over time if they are judicious. "Returns in art are something between stocks and bonds over the long term," said William Goetzmann, a finance professor at the Yale School of Management. "But art is a risky and volatile market, much riskier than the stock market in my opinion. Art is not a good hedge against drops in the asset markets."
Preserving Your Home's Value: Worried that you bought your dream house at the very top of the market? Relief may be on the way. Gallagher Polyn, February 2003, Business 2.0 “Enter two Yale Business School professors, Will Goetzmann and Barry Nalebuff, and one from NYU, Andrew Caplin. The economists had done groundbreaking research on real estate price indexes, game theory, and the pricing of derivatives, including options, which gave them confidence that they could create a market for options on real estate. The professors got together with a community-development nonprofit organization in Syracuse, where home equity declines have been a serious problem -- in some neighborhoods, home prices fell 30 percent during the booming 1990s. Arguing that price insurance could help stave off urban blight, the community group won a $5 million federal grant last year to set up a test program. Goetzmann, Nalebuff, and Caplin formed Real Liquidity to roll it out.” “Back in 1990, Yale economics professor Robert Shiller, of Irrational Exuberance fame and a pioneer in calculating home-price risk, pitched futures contracts based on real estate indexes to several Chicago exchanges, which currently sponsor contracts on indexes like the S&P 500.”
Asia-Pacific & International Economy - Creditors in US see red over Chinese bonds. Betty liu, January 30, 2003, Financial Times "Standing amid the cattle ranches in the Tennessee countryside, you might find it hard to imagine you were at the locus in the next rift in US-China relations. But if the American Bondholders Foundation, based in Lewisburg, Tennessee, has its way, that may well be the case. The group, headed by Jonna Bianco, a cattle rancher, has been stepping up efforts to force China to repay thousands of bonds from before the second world war held by US citizens worth, they claim, more than $89bn ( £54bn) with interest. The bondholders' group has won support from various organisations. A Chinese embassy spokesman in Washington said: "The bonds are from before 1949 (when the communists overthrew the nationalist regime). We are not responsible for them." Geert Rouwenhorst, professor of finance at Yale University's School of Management. says the group has little chance of redeeming the bonds, especially as Washington is disinclined to upset US-China relations. There is even debate as to whether the bonds are worth anything. "Almost every country has bonds outstanding. We have a collection of them here on our wall," he says . "The reason they're hanging on our walls is that they're worthless."
Betting to Win, Place -- and Grow; When scolds and sermonizers denounce "gambling" on the stock market, pay no heed. A little responsible risk-taking is a good thing Christopher Farrell, January 17, 2003 BusinessWeek Online "Stock speculation is getting slammed harder than it deserves these days. It's fun to bet on the stock market, matching wits against some of the brightest minds going, trying to come out ahead in the world's most competitive open bazaar. As University of Chicago economists Milton Friedman and Leonard Savage noted in a classic 1948 paper, while people buy lottery tickets because they aspire to be rich, they purchase insurance as protection against falling into poverty. William Goetzmann and Alok Kumar, economists at Yale University and Cornell University, respectively, looked at 44,000 stock accounts at a large discount broker from 1991 to 1996. They found that more than a quarter of investor portfolios contained only one stock, more than half fewer than three, and, in any given month, a mere 5% to 10% of portfolios held more than 10 stocks. Even more striking: On average, the value of the portfolios was 79% of the owner's annual income."
SOM professors find benefits in globalization Gabriel Arana, January 15, 2003, Yale Daily News “Other market watchers warned that investors could remain on the sidelines for a decade, based on relatively recent history. “When a firm in a country with better corporate governance takes over a foreign firm, the nationality of the foreign firm changes, along with the commercial codes that govern it. Increased investor protection, provided by these changes in commercial codes, increases the value of the foreign industry in which the target firm operates and does not significantly affect domestic industry, Bris and Cabolis said.”
Many investors lose faith in stock market George Avalos, January 2, 2003, CONTRA COSTA TIMES “Other market watchers warned that investors could remain on the sidelines for a decade, based on relatively recent history. "After the bear market in the 1970s, people were wary of the stock market and stayed out for five years, even 10 years," said Roger Ibbotson, a professor at the Yale School of Management and founder of Chicago-based investment firm Ibbotson Associates. Even worse, some bad news may continue to surface that can spook investors who might otherwise consider jumping back into stocks.”
Going: Stocks Look Less Risky (and Less Rewarding) Jonathan Clements, December 22, 2002, The Wall Street
Journal “The U.S. stock market's performance has been impressive.
But it may also be a bit misleading, according to a study by William Goetzmann
and Philippe Jorion published in the June 1999 Journal of Finance.
Supreme Court to issue guidelines on shareholder lawsuits Nailene Chou, December 16, 2002, South China Morning
Post "China's Supreme Court will release as early as next week a paper on the interpretation of how small investors may file lawsuits against domestically listed companies in order to seek compensation for losses due to corporate fraud. The lower courts were at a loss on how to handle the thousands of lawsuits from angry frustrated investors." "Chen Zhiwu, a securities market expert at the Yale School of Management in the United States who is a visiting professor at Tsinghua University, said the civil compensation issue runs against the intractable problem of state ownership of controlling interest in most of listed companies. The interpretation is likely to lay down a formula of calculating the "actual loss", instead of letting the lawyers of the plaintiffs and the defendant work out a scheme. Investors who bought shares on false information and subsequently sold at a loss before the regulator's censure are likely to be left out in the cold. "The Supreme Court will not be inclined to put too much financial pressure on the listed companies and harm state interest," he said."
Online Sales Offer Fresh Look at Economy Hal Varian, December 19, 2002, New York Times “Judith A. Chevalier and Austan Goolsbee, professors at the Yale School of Management and the University of Chicago Business School, respectively, have looked at a particular case of online competition: Barnesandnoble.com versus Amazon.com. Each seller ranks titles by total sales on its Web site and reports actual book sales to publishers. Some publishers, like the computer book publisher O'Reilly & Associates, have used these reports to determine the relationship between rank and actual sales. Professors Chevalier and Goolsbee draw on such estimates, as well as other sources, to determine actual sales for particular books at the two online booksellers. The data on actual sales can be used to estimate how demand responds to price changes. The authors find that a 1 percent price increase at Amazon reduces sales there by about 0.5 percent, but a 1 percent price increase at Barnes & Noble means a 4 percent sales decline — eight times as large.”
Insider Information, Does the law work? Arturo Bris, December 13, 2002, El Mundo “Regarding insider trading, most countries have passed laws to limit its abuse in the last twelve years. The results have not been uniform across countries, but experience has demonstrated two things: first that laws have worked better the harsher its enforcement has been. [...] The second lesson is that in some cases, like in Russia for instance, the solution has been worse than the problem, and it would have been better not to pass any law. Because investors trusted their regulators and their markets, invested their money in stocks, and only a few have benefited from it.”
A Hope Chest Full of Bonds November 11, 2002, News Analysis " A lobbying effort to have Beijing's present-day rulers honor notes issued by China's long-gone Nationalist government is gaining allies The American Bondholders Foundation (ABF) certainly hopes so, because it has been raising a growing ruckus in an effort to redeem thousands of Chinese bonds issued before Mao Zedong's Communists came to power and repudiated debts to foreign investors. The ABF, which represents about 350 families holding Chinese debt issued from 1913 to 1942, admits it has no legal leverage to collect the $89 billion it says the bonds are worth. The British government which resolved a similar dispute in 1987. The full terms of the settlement weren't disclosed, but bondholders are believed to have received about $23 million, or 62% of the bonds' face value. "The best you can ever do is get the face value of the bond back," says Geert Rouwenhorst, a finance professor at the Yale School of Management. In the case of U.S. bondholders, that would amount to a scant $730,000 -- a far cry from the $89 billion the ABF is seeking."
Getting to know your risk profile; Ensuring an investors whole portfolio reflects an individuals risk profile and return needs is crucial David Gasparro, November 4, 2002, Financial Times Asset allocation is the key element in the construction of any client portfolio. Earlier this year, Ron Sandler, in his report to the Treasury, said it was crucial for financial advisers to have a clear, in-depth understanding ofasset allocation and how the various classes worked together, and that further education was needed. Indeed, he rated this more highly than detailed product knowledge. Analysis by Roger Ibbotson, professor of finance at Yale School of Management, backs this up. Ibbotson examined 10 years worth of monthly returns of 94 balanced mutual funds and five years of quarterly returns of 58 pension funds. He found that 90 per cent of the variability of a funds returns over timeis explained by asset allocation choices. Individual investors need to take a holistic approach to their portfolio when making each investment decision. Individual fund selection is important but ensuring that the investment choice fits with the rest of the asset mix and thatthis stills suits their risk/return profile is fundamental.
Investors face lower returns in real estate Ray A. Smith, November 3, 2002, The Milwaukee Journal Sentinel With stocks plunging, investors have poured billions of dollars into properties over the past year, gobbling up real-estate stocks and mutual funds or buying rental units. So far this year, some $3.46 billion have flowed into real-estate mutual funds, up from $302 million in the year-earlier period, according to AMG Data Services. Now, however, there are signs that the run might be over. After two years of increases, returns on real estate investment trusts are falling. If the real-estate bubble is pricked, don't expect it to re- inflate again anytime soon. When real estate prices crashed in the late 1980s and early 1990s, they didn't rebound for years. "We have seen long stretches of time when real estate is sort of a neglected asset class," says William Goetzmann, professor at the Yale School of Management. "It's certainly possible for that to happen again."
Overseas, Underpriced When the world turns away from this lingering bear market, foreign stocks may finally get their day in the sun. Donald Jay Korn, November 1, 2002, Financial Planning "Major U.S. companies aren't the only ones battered by bad news and bankruptcy warnings these days. Paris-based Vivendi Universal just announced the resignation of six high-profile board members and plans to sell v12 billion euros worth of assets to decrease its debt. So what is David Herro doing now? Buying Vivendi. "We think this is an excellent opportunity," says Herro, manager of the Oakmark International Fund. "Our analysts went to see the new management team over there and came away highly impressed" says Herro." "A true global citizen would have an equity allocation of nearly 50% to non-U.S. stocks," says Roger Ibbotson, chairman of Ibbotson Associates in Chicago and a professor at the Yale School of Management. "However, nobody I know invests this way. There's a home-country bias. People are more knowledgeable about their own market, so that's where they tend to invest. Therefore, most U.S. investors are underweighted in foreign stocks. I think a 30% allocation would be appropriate for many people." "
Yale’s Jonathan Ingersoll Receives the 2002 IAFE/SunGard Financial
Engineer of the Year Award. New Haven, CT, October 31, 2002 SunGard Trading and Risk Systems, an operating group of SunGard, and the International Association of Financial Engineers (IAFE) announced that Jonathan Ingersoll, Adrian C. Israel Professor of International Trade and Finance at the Yale School of Management (SOM), has been named the 2002 IAFE/SunGard Financial Engineer of the Year. The award will be presented to Professor Ingersoll on February 4, 2003, at the United Nations in New York City during IAFE’s annual Financial Engineer of the Year awards dinner."
Money & Investing: Assess Your Risk; How's that new fund you're considering going to affect your portfolio's volatility? Ira Carnahan, October 28, 2002, Forbes Magazine Yale School of Management professor William Goetzmann suggests using Treynor
ratios this way: Look at funds category by category (small-company value,
small-company growth, large-company value, etc.), and go for one of the high
scorers in each category. A further refinement is to avoid expensive funds,
no matter how nice their performance measures. The table shows high Treynor
scorers with reasonable expenses in various categories.
China's Future Leaders Lack Economic Record By Kathy Chen, Charles Hutzler and Susan Lawrence, October 28, 2002,
The Asian Wall Street Journal "The world's most dynamic economy, exerting a growing impact on world trade but facing potentially serious internal pitfalls, is about to be turned over to a group of men little known to foreign investors and with little visible experience in running economic affairs. As China prepares for a key Communist Party meeting next month, the new leadership expected to emerge almost certainly won't possess the breadth or depth of economic experience of current leaders. But if China's leaders-in-waiting aren't known for their economic experience, they are likely to tap the cream of the current cabinet for key jobs. Zhou Xiaochuan, key economic player likely to emerge over the next year to help guide China's economy in the years ahead has won high marks as head of the country's securities watchdog. He has pushed for better corporate governance at China's listed companies, encouraged the local financial media to help with aggressive reporting, and brought in Western-trained experts, including former Hong Kong regulators, to work at the China Securities Regulatory Commission. "Because of him, the CSRC has been, by a wide margin, the most efficient and most professional ministerial-level agency in the Chinese government," says Chen Zhiwu, a professor at the Yale School of Management."
Time to Cash Out Of Real Estate, Too? --- Pros Start to Shed Property Holdings, Fearing A Correction; Timing When to Sell the House Ray A. Smith, October 10, 2002, The Wall Street Journal "If the real-estate bubble is pricked, don't expect it to re-inflate again anytime soon. When real-estate prices crashed in the late 1980s and early 1990s, they didn't rebound for years. " " We have seen long stretches of time when real estate is sort of a neglected asset class," says William Goetzmann, professor at the Yale School of Management. "It's certainly possible for that to happen again."
Quarterly Mutual Funds Review --- For Some Big Stock Portfolios, Third Quarter Capped the Worst of Times --- The Latest 5-Year Period Saw Many Funds Reach Their Lowest Points Ever Karen Damato, October 07, 2002, The Wall Street Journal
United we fall September 28, 2002, The Economics “Financial markets are another important channel for transmitting shocks across borders. Stockmarkets in Europe have fallen by just as much as Wall Street over the past two years. William Goetzmann, an economist at Yale School of Management, calculates that in recent years the correlation between the markets of America, Britain, France and Germany has been closer than at any time in the past century (see chart 12). The cost of capital for European firms may therefore be more sensitive to ups and downs in America than in the past. A collapse of share prices on Wall Street will also have a bigger effect on wealth and spending all around the globe.”
MONEY REPORT: Diversify more, but tactically Portfolio theory You can run, but can you hide? Rick Smith, September 28, 2002, International Herald Tribune "There are tremendous advantages of being a global investor because there is no real way to predict global trends in the long term," said Roger Ibbotson, chairman of Ibbotson Associates in Chicago and a professor at Yale School of Management.” “"Think of those Japanese investors who have been internationally diversified for the past 20 years and those who weren't," said Ibbotson, the Yale professor, "and where their portfolios are now."
MONEY: Behind the Numbers Does Global Diversification Pay? Stephen Foerster, September 27, 2002, The Globe and Mail “Lingfeng Li of Yale University and William Goetzmann and K. Geert Rouwenhorst of Yale School of Management examined world equity markets from 1872 to 2000. They focused on correlations between markets-the extent to which stock price changes in one country coincide with price changes in another. Correlation can range from -1 to 1. Negative correlations suggest markets tend to move in opposite directions. In general, lower correlations mean reduced risk.”
Yale University to Debut First Hedge Fund Class Next Semester Pete Gallo, September 18, 2002, Hedge World "As hedge funds gain allure with MBA students Yale University plans to debut its first course on hedge funds next semester. The Yale School of Management's new elective course entitled MGT-647 Hedge Funds, will be taught by Professor William Goetzmann and Caxton Associates Director Tanya Styblo Beder, who is also a member of the advisory panel for the Professional Risk Managers' International Association. The curriculum for the new course is an outgrowth of a six-year-old hedge fund research program by the Yale School of Management International Center for Finance, according to Professor Goetzmann. In addition to Professor Goetzmann, participating scholars in the Yale Hedge Fund Research Initiative have included Judith Chevalier, Roger Ibboston, Jonathan Ingersoll Jr., K. Geert Rouwenhorst and Ivo Welch. Outside scholars have included Stephen Ross of Massachusetts Institute of Technology, Stephen Brown of New York Univerisity's Stern School of Business, Evan Gatev of Boston College, Zoran Ivkovitch of the University of Illinois."
ValuEngine Inc. Reports Stock Forecast Breakthrough September 10, 2002, Business Wire "Connecticut based stock valuation and forecasting firm ValuEngine Inc. successfully completed testing of a new investment strategy that produced portfolio returns of over 30% annually during the recent bear market, VE president Paul Henneman announced today. He said the new strategy is now available to both financial professionals and individual investors."We were able to correlate the functions of two of our proprietary models, ValuEngine's valuation model and forecasting model, with conventional valuation fundamentals," said Henneman. "The result was a stock selection and price forecasting system that produced outstanding results." The valuation model was first made available in early 1999 after four years of research in asset valuation by Dr. Zhiwu Chen, professor of finance at Yale University's school of management. Thus far, it is the only valuation model in use that shows how much the market is mispricing a given stock in real time. The econometric forecasting model was developed later that year, using the mispricing measure and seven other variables. "
Real estate becoming more appealing as an investment Judy Martin, September 9, 2002, Minnesota Public Radio "Home sweet home is becoming even nearer and dearer to many investors. Rising home values fattened Americans' wallets by about $620 billion in the first eight months of this year, helping to take the edge off but not completely offset the stock market downturn. According to The Wall Street Journal, grow to more than $900 billion by the end of the year, according to The Wall Street Journal if interest rates stay low and keep making real estate look like a good deal. Some market analysts say it's the fallout of what they've been warning about for years, that stocks were overvalued. But that may no longer be the case . Over 15 percent, that's the dip the Dow has taken since the beginning of the year. The Yale School of Management Stock Market Confidence Indexes suggest that investor confidence is also steadily sliding, but this cloud has a silver lining. "The valuation index, that measures investor faith in a fairly priced market, has risen 5 percent since January" says Yale Professor Robert Shiller. That valuation confidence was declining for years and bottomed out right around the time of the peak in the market. Because right when the market was at a peak, people had the lowest opinion of the valuation of it. So as the market falls, Shiller says individual investors are starting to look at stocks as being more fairly priced."
NO QUICK FIX: CalPERS CIO calls scandals `terrorism' : Woes at Enron, WorldCom killing equity risk premium Joel Chernoff, September 2, 2002, Pensions & Investments
"Corporate America's accounting scandals are "a new form of terrorism," said CalPERS' investment chief Mark J.P. Anson. Mr. Anson said the lack of confidence investors have in corporate America's financial statements has heightened the risk premium they expect to earn from stocks, thus depressing stock prices. "If you cannot trust the accounting statements, that goes to the very heart of fundamental equity analysis and fundamental bond analysis," states Mr. Anson." "The size of the equity risk premium has become a huge subject of debate within institutional investment circles. In late 2000, Robert D. Arnott, managing partner of First Quadrant LP, Pasadena, Calif., and Ronald J. Ryan, president of Ryan Labs Inc., New York, projected that the premium could be zero or negative in coming years . In response, Roger G. Ibbotson , the highly regarded finance professor at Yale University's School of Management, New Haven, Conn., and chairman of Ibbotson Associates, together with Peng Chen, Ibbotson 's vice president-research, said the equity risk premium was alive and well. However, they projected the premium would be 3.96 to 4.25 percentage points over bonds, about 1 to 1.25 percentage points below the historical average."
Falling Stock Prices:Future of 401(K) investments Paul Kangas, Susie Gharib, September 2, 2002,Nightly Business
Report "Stocks, over the long term they were the one investment one could count on for reliable double-digit returns. But now that assumption is being questioned. So if you're putting your money away for retirement, should you be concerned that your retirement account may not grow enough in the coming years to meetyour needs ? And if you're already retired, is there anything you can do to boost your returns." "In light of the market's negative performance over the last few years, is it time to revisit that assumption and change the model for retirement investing?. Roger Ibbotson, professor at the Yale University School of Management and chairman of Ibbotson Associates, and Harold Evensky, chairman of Evensky, Brown & Katz, a leading wealth manager are joining us to discuss this. Their prediction is that the basic range of total return for equities will be around 9 per cent in the future. "And you would have it - if you wait long enough, I think the markets are going to prove us right and that we're going to have very good returns, that stocks will beat bonds" says Prof. Ibbotson. "
The Search for Profits Steven T. Goldberg, September 1, 2002, Kiplinger's Personal
Finance "The devastation of the stock market at first glance seems complete and pitiless. But look again--you are not without choices. Some mutual funds have navigated the 28-month bear market with amazing agility. Standard & Poor's 500-stock index plunged 38% from the March 24, 2000. The technology-laden Nasdaq Composite index plummeted 72%. In terms of the degree of the S&P's decline, this is the second-worst bear market since the Great Depression. In terms of duration, it's the longest. Stocks of large companies with rapidly growing earnings, probably won't pace the next upturn. Instead, the winners will be tucked in the market's neglected nooks. Here you'll find stocks of small companies and midsize companies that are cheap in relation to earnings, asset value and other fundamental measures. Tweak your portfolio to add more weight to funds that look especially promising over the next year or two." "Once small stocks start beating large stocks, the pattern usually persists for years. Since World War II, periods during which small stocks outpaced large ones have averaged five years. "Most things in the market are totally random," says Roger Ibbotson, a professor at the Yale School of Management and founder of the investment-research firm that bears his name."
Why Not? Price-Protect Your Home August 28, 2002 , Forbes " More than half the home owners who bought in the early 1990s lived in markets that declined over the subsequent five years. Normally, if prices fall, |
