The Middle of the Road: A Personal Viewpoint

The Middle of the Road: A Personal Viewpoint

Let’s first briefly recap the diametrically opposed viewpoints about the functioning of the stock market. The view of most investment managers is that professionals certainly outperform all amateur and casual investors in managing money. Much of the academic community, on the other hand, believes that professionally managed investment portfolios of stocks with equivalent risk characteristics. Random walkers claim that the stock market adjusts so quickly and perfectly to new information that amateurs buying at current prices can do just as well as the pros. Thus the value of professional investment advice is nil – at least insofar as it concerns choosing a stock portfolio.

I walk a middle road. I believe that investors might reconsider their faith in professional advisers, but I am not as ready as many of my academic colleagues to damn the entire field. I believe that investors might reconsider their faith in professional advisers, but I am not as ready as many of my academic colleagues to damn the entire field. While While it is abundantly clear that the pros do not consistently beat the averages, I must admit that there are exceptions to the rule of the efficient market. Well, a few. While the preponderance of statistical evidence supports the view that market efficiency is high, some gremlins are luring about that harry the efficient-market theory and make it impossible for anyone to state that the theory is conclusively demonstrated Finding inconsistencies in the efficient-market theory became such a cottage industry during the late 1980s, that I will devote a few word to an analysis of the market anomalies that have been uncovered.

Moreover, I worry about accepting all the tenets of the efficient-market theory, in part because the theory rests on several fragile assumptions. The first is that perfect pricing exists. As the quote from Paul Samuelson indicates, the theory holds that, at any time, stocks sell at the best estimates of their intrinsic values. Thus, uninformed investors buying at the existing prices are really getting full value for their money, whatever securities they purchase.

The secret of getting ahead is getting started (Mark Twain). Photo by Elena

This line of reasoning is uncomfortably close to that of the “greater-fool” theory. We have seen ample evidence that stocks sometimes do not sell on the basis of anyone’s estimate of value (as hard as this is to measure) – that purchasers are often swept up in waves of frenzy. The market pros were largely responsible for several speculative waves from the 1960s through the 1980s. The existence of these broader influences on market prices at least raises the possibility that investors may not want to accept the current tableau of market prices as being the best reflection of intrinsic values.

Another fragile assumption is that news travels instantaneously. I doubt that there will ever be a time when all useful inside information is immediately disclosed to everybody. Indeed, even if it can be argued that all relevant nes for tha major stocks followed by institutional investors is quickly reflected in their prices, it may well be that this not the case for all the thousands of small companies that are not closely followed by the pros. Moreover, the efficient-market theory implies that no one possesses monopolistic power over the market and that stock recommendations based on unfounded beliefs do not lead to large buying. But brokerage firms specializing in research services to institutions wield considerable power in the market and can direct tremendous money flows in and out of stocks. In this environment it is quite possible that erroneous beliefs about a stock by some professionals can for a considerable time be self-fulfilling.

Finally, there is the enormous difficulty of translating known information about a stock into an estimate of true value. We have seen that the major determinants of a stock’s value concern the extent and duration of its growth path far into the future. Estimating this is extraordinary difficult, and there is considerable scope for an individual with superior intellect and judgment to turn in a superior performance.

But while I believe in the possibility of superior professional investment performance, I must emphasize that the evidence we have thus far does not support the view that such competence exists; and while I may be excommunicated from some academic sects because of my only lukewarm endorsement of the semi-strong and particularly the strong form of the efficient-market theory, I make no effort to disguise my heresy in the financial church. It is clear that if there are exceptional financial managers, they are very rare. This a fact of life with which both individual and institutional investors have to deal.

Burton G. Malkiel. A Random Walk Down Wall Street, including a life-cycle guide to personal investing. First edition, 1973, by W.W. Norton and company, Inc.

Anomalies in the Markets

Anomalies in the Markets

While it is clear that evidence in favor of the efficiency of markets remains extremely strong, two other studies published in the late 1980s are disturbing because they cast doubt on some of the key assumptions of the efficient-market hypothesis.

The first, authored by Kenneth French and Richard Roll, examined the key presumption of the efficient-market hypothesis that market moves are precipitated by the receipt of new information. If the major cause of market movements is the receipt of news, then market prices should not fluctuate more over periods when the market is open than when it is closed. French and Roll demonstrated that this is not the case and the asset prices are much more volatile during exchange trading hours. For example, the variability (statistically, the variance) of prices from the opening to the close of trading on an average day is over six times as large as the price variances from Friday’s close to Monday’s opening even though the weekend is eleven times longer.

One possible explanation for this phenomenon is that new public information (new economic data, merger announcements, judicial decisions, new contracts, and so forth) is most likely to arrive during normal business hours. Alternatively, the greater price volatility during periods when the market is open could be caused by the provision of private information (the predictions of market gurus, the recommendations of fundamental security analysts, and so forth), which typically gets incorporated into market prices when the exchange is open.

Security analysts are more likely to work at this time, and the benefits of producing such information are larger when the information can be acted upon quickly and conveniently.

You are never too old to set another goal or to dream a new dream (C. S. Lewis). Photo by Elena

In order to distinguish between these two explanations, French and Roll examined the volatility of prices around regular business days when the exchanges were closed. During the second half of 1968, the major stock exchanges were closed on Wednesdays because of a paperwork backlog. This gave these two men a wonderful research opportunity. Public information could be expected to be generated without interruption on those Wednesdays while the flow of private information would be sharply reduced. Thus, we should expect the volatility of prices from Tuesday’s close to Thursday’s opening (when the market was closed on Wednesday) to be considerably larger than the variability of prices from Tuesday’s close to Wednesday’s opening (during Wednesdays when the exchange was open) if new public information is the major cause of stock price changes. On the other hand, if the production of private information is an important cause of stock price change, the Tuesday-Thursday volatility would be far less when the exchange was closed on Wednesday. It turned out that the two-day volatility numbers were, in fact, quite small. They were only a little larger than the one-day numbers, suggesting that the generation of private information is a principal cause of price variances in the market.

The point is that the market makes its own news. Just as the discovery of an important new source of petroleum can affect the price of an oil stock, so can the publication of a bullish report on the stock from a major brokerage firm. Although this is not necessarily inconsistent with markets being efficient, it does open the possibility of there being additional influences in the market besides the receipt of new public information. Surely the sentiment of the professional investment community is not irrelevant.

Roll has also shown in another study that even with hind-sight, the ability to explain stock price changes is relatively modest. Less than 40 percent of the volatility in stock prices is explained by news events concerning the economy, industry developments, and specific news about the individual companies It appears that security valuations and their changes over time are quite complex and that private information and the sentiments of professional and other investors can play an important role in the valuation process.

Burton G. Malkiel. A Random Walk Down Wall Street, including a life-cycle guide to personal investing. First edition, 1973, by W.W. Norton and company, Inc.

Accounting Concepts

Accounting Concepts

Most BComm and BAdmin programs require two levels of accounting courses. Managerial accounting is traditionally the second level. The course focuses on managerial accounting, which unlike financial accounting, is designed for internal users – managers (vs. external users – shareholders).

Product Costs

In a manufacturing firm, the three main components of production costs are direct material, direct labor and manufacturing overhead (required to compute the cost of goods manufactured and cost of goods sold). In contrast, a merchandiser only has the purchases’ cost. Direct materials and labor are those that can be physically and conveniently associated with the product made, whereas indirect materials and labor are not and are considered part of factory overhead.

Whether variable or fixed, selling and administrative expenses are excluded from the three main components, and are written off as period costs, under both variable and absorption costing. The main distinction between variable and absorption costing is that variable costing writes off the fixed part of overhead as a period cost, whereas absorption defers it in inventory. For this reason, absorption managers could be tempted to overproduce.

POR & ABC

Due to timing requirements, the predetermined overhead rate (POR) is often obtained by dividing the estimated overhead by the expected cost driver (direct labor cost or hours, or machine hours when production is highly automated). Then, the POR is multiplied by the actual cost driver incurred for a given job. A further refinement on the POR is activity based costing (ABC), which subdivides overhead into activity cost pools, and basically repeats the same operation for every cost driver.

Job order costing assigns costs to each job, whereas process costing deals with processes. In process costing, depending on whether the weighted average or the FIFO (first in first out) method is used, the results are different, mainly because of the varying ways of assigning unit costs to beginning inventories.

Economic Market Equilibrium Supply and Demand Graph. Drawing by Elena.

CVP Analysis

Cost volume profit (CVP) analysis starts with rewriting the usual income statement in the CVP format. All variable costs are subtracted from sales to obtain the contribution margin (CM). The CM ratio can be obtained by diving the CM by sales. These operations will be useful in establishing the break-even point (BE). To determine the BE in units, the fixed costs are divided by the CM per unit; to get the BE in dollars one performs the same operation but with the denominator being the CM ratio.

Incremental Analysis

Incremental analysis compares costs and expenses that vary under different alternatives. The items that change are called incremental and are relevant to the decision, all others, such as sunk, joint or common costs, are considered irrelevant.

Budgeting

The master budget is composed, in that precise order, from the following budgets: sales budget ⇒ production budget ⇒ direct materials, direct labor, manufacturing overhead budgets ⇒ selling and administrative expenses budget ⇒ budgeted income statement ⇒ capital expenditures and cash budgets, budgeted balance sheet. An important point to remember is that amortization is excluded from the calculation of the cash budget since it lacks the characteristics of a cash expense.

Accounting and Finance

From a mathematical ability point of view, accounting is somewhat easier than finance. For example, financiers must learn more complicated mathematical formulas than accountants, in general. However, becoming a professional accountant remains far from being a piece of cake… and takes a lot of time in this blogger’s opinion.

In Quebec, Canada, there used to be three designations in the accounting profession: CA, CMA and CGA. Nonetheless, the professional orders are working on simplifying the equation (no pun intended!) to converge on a single certification: CPA.

So you want to be an accountant? What does it take? At least in Quebec, the mostly French speaking part of Canada, becoming an accountant usually requires a combination of completed undergraduate studies and professional experience. A bachelor of business administration (BBA) with an accounting major, plus an internship at a recognized CA firm should fulfill the requirements of the professional order, but one is advised to find out for oneself on the respective regulating bodies’ Websites.

The Falls: A Luna Story

The Falls: A Luna Story

By Ian McDonald (excerpt)

Why should a space probe have emotions? Why would e even need such things? In the early days of exploration, probes were no smarter than insects and they opened up whole new worlds inside the world we thought we knew. No smarter, and with even less emotional freight. They trundled, cold and heartless, across the hillsides of Mars, swung soulless and free from wonder over the methane seas of Titan.

My first answer is, why should an Artificial Intelligence not have emotions? But that is really not an answer, just a rhetorical device, so I follow it with this: since the 2076 Bamako Agreement, it is the right of every Artificial Intelligence to perceive and enjoy specific internal states which are analogous to emotions in human beings. To which you say: this is the Moon. No one has any rights. No rights, no civil law, only contracts between parties.

My second answer is: this exploration is part financed by subscription to live feeds, from within the atmosphere of Saturn. The old national space administrations learned their images from the surface of Mars were much better received when spiced with emotionality, even if that was added by a social media agent on Earth.

Humans love emotionality. Make us feel something; then we understand. Give us the tiniest empathy with what it feels like to drive in the unimaginable wind-shear of Hexagon, the north polar vortex. What it is to be… The essential human question.

The Falls: A Luna Story. Photo by Elena

And I’ll have my third answer ready before you riposte: what is exploration? It is curiosity, the desire to know what is beyond those clouds; over that horizon. It is courage and caution, it is excitement and fear; it is the tension between risk and the desire for knowledge. A probe that knows emotions – its analogues of those emotions, for how can we ever really know what’s in the head of an other, be that bone or plastic – is better able to explore, to risk, to be cautious, to assess risk: to dare.

But it’s my last answer that’s in the end my first and only answer. Emotions are the nature of space probes, of express trains, of helium three extractors and solar sinterers, of the orbital transfer tethers wheeling around the waist of our world. Emotions are an emergent property. You can no more make an artificial intelligence without emotions than you can a baby without tears, a daughter without curiosity. Why should an artificial intelligence have emotions, you asked? And I said, why not? But both of those are wrong. It’s not a why question, or a because answer. Emotions are part of the universe

Meshed

Meshed

By Rich Larsen (excerpt)

What do you mean he’s hot getting meshed? My boss pings me, plus a not unusual torrent of anger/confusion emotes that makes my teeth ache.

“I mean he doesn’t want it,” I say, sticking my hands under the tap. “He says he won’t get the mesh, period.”

I’m in the bathroom, because I couldn’t think up a better excuse. The mirror is scrolling me and advertisement for skin rejuvenation, dicing up my face and projecting a version sans stress lines. The water gushes out hot.

Do they even know what it is? Did you explain?

“They know what a nerve mesh is,” I say indignantly. “They’re from Senegal, not the moon.” I slap some water on my cheeks, because that always help in the movies, then muss and unmuss my hair. The mirror suggests I try a new Lock’n’Load Old Spice sculpting gel. “But year,” I mutter. “I, uh, I did explain.”

Once Oxford’s pa got back to the bleachers, I gave both of them the whole wiki, you know, subcutaneaous nodes designed to capture and transmit biofeedback, used to monitor injuries and fatigue, and muscle movement, and also nervecast physical sensation and first-person visual to spectators. If we get our way, with a little swoosh in the bottom left corner.

Meshed, photo by Elena

It’s not something I usually have to sell people on. Most kids, even ones from the most urban of situations, have saved up enough for at least one classic nervecast of Maker sinking the game-winner for Seattle in the ’33 Finals, or Dray Cardeno dunking all over three defenders back when he was still with the Phoenix Phantoms. Most kids dream about getting their mesh how they dream about getting their face on billboards and releasing their own signature shoes.

The Diallos listened real intent, real polite, and when I was finished Oxford just shook his head, and his pa put a hand of his shoulder and told me that his son’s decision was final, and if Nike wasn’t willing to flex on the nerve mesh, another sponsor would. Atwhich point I spilled some damage control, got both of them to agree to dinner, and bailed to the bathroom for a check-in with by boss.

It’s a zero-risk procedure now, for … sakes. You can do it with an autosurgeon. Change his mind. A procession of eye-rolling and then glaring emotes, all puffing and red-cheeked.

“What if we just put a pin in the mesh thing and sign him anyways?” I say. “We can’t let this one get away. You saw the workout feed. We sign him unmeshed, let things simmer, work it into the contract later on as an amendment.”

If he’s playing at HoopSumm, he needs a mesh. That’s the coming-out party. How the fuck are we sipposed to market him without a mesh? Skeptical emote, one eyebrow sky-high. I thought you could handle this one solo, Vic. Thought you wanted that recommendation for promo. Am I wrong?

“No,” I say quick. “I mean, you’re not wrong.” I yank a paper towel off the dispenser and work it into a big wad with my wet hands. I never effect biofeedback when chatting someone with the power to get me fired; I I did there would be some serious middle-finger emotes mobbing his way.

Figure out if it’s him or the dad who’s the problem. Then use the one to get to the other. It’s not brain surgery. There’s a chortling emote for the pun, then he axes the chat.

I’m left there shredding the damp paper towel into little bits, thinking about the promotion that I do want, that I absolutely do want. I’d finally be making more than my old man, and Wendee would be happy for me for at least a week, and maybe during that blessed out week I would get up the balls to ask her to move in.

But first, I have to get the Diallos t sign off on a nerve mesh. I’m not exactly bursting with ideas. That is, not until I go to toss the towel in the recycler and see a rumpled napkin inked with bright red blood sitting on top. Then I remember Oxford’s pa and his little plastic case. I shove it all down and head back to the gym, only pausing to order a tube of that new hair gel