Zero Beta

Remember this Book?

I was at Barnes and Noble's the other day and saw this book on display.  It definitely made me chuckle.

Please note that the customers at Amazon who also bought this book bought this one as well. 

Interesting Excerpt from an "Econophysics" Book

I am currently reading Mandelbrot’s The (Mis)Behavior of Markets, and although a few years old, I came across two pages on his market “rules” that I felt inclined to share.  Hopefully this will not be a repeat for some of you as I am a bit late to the game.

Mandelbrot’s Market Rules

Rule 1 – Markets are risky

“Extreme price swings are the norm in financial markets – not aberrations that can be ignored.  Price movements do not follow the well-mannered bell curve assumed by modern finance; they follow a more violent curve that makes an investor’s ride much bumpier.  A sound trading strategy or portfolio metric would build this cold, hard fact into its foundations…”

Rule 2 – Trouble runs in streaks

“Market turbulence tends to cluster.  This is no surprise to an experienced trader.  In financial dealing-rooms across the world, the first fifteen minutes of trading each morning are critically important; it is when experienced traders, staring at their screens, take the temperature of the market.  They know that when a market opens choppily, it may well continue that way.  they know that a wild Tuesday may well be followed by a a wilder Wednesday.  And they also know that it is in those wildest moments – the rare but recurring crises of the financial world – that the biggest fortunes of Wall Street are made and lost….”

Rule 3 – Markets have a personality

“Prices are not driven solely by real-world events, news, and people.  When investors, speculators, industrialists, and bankers come together in a real marketplace, a special, new kind of dynamic emerges – greater than, and different from, the sum of the parts.  To use the economists’ terms: In substantial part, prices are determined by endogenous effects peculiar to the inner working of the markets themselves, rather than solely by the exogenous action of outside events.  Moreover, this internal market mechanism is remarkably durable….”

Rule 4 – Markets mislead

“Patterns are the fool’s gold of financial markets.  The power of chance suffices to create spurious patterns and pseudo-cycles that, for all the world, appear predictable and bunkable.  But a financial market is especially prone to such statistical mirages…bubbles and crashes are inherent to markets.  They are the inevitable consequence of human need to find patterns in the patternless.”

Rule 5 – Market time is relative

“There is what one may call a relativity of time in financial markets.  Early on, but mostly when developing the multifractal model, I came to think of markets as operating on their own ‘trading time’ – quite distinct from the linear ‘clock time’ in which we normally think.  This trading time speeds up the clock in periods of high volatility, and slows it down in periods of stability….”

Anyways, I’m still reading but its great so far so if you haven’t read it I recommend you pick it up. 

A Note on Biases

Lately I have been thinking a lot of Media and biases.  Therefore, before I post again, I want to digress a moment on biases.  I think the biggest problem in our Media is the lack in disclosure of biases.  This causes a dangerous polarization of our citizens into two extreme groups: 1) the cynics who see the bias but resent that someone is blowing smoke in their face – further fueling their cynicism. 2) blanket believers who don't look for biases and are in turn "brainwashed" by those who wish not to disclose them.  I believe the biggest idea or development that has emerged from the advent of Google is the classification of information as an Asset.  Media is simply information and its higher orders – knowledge and wisdom.  As information begins to be recognized as an asset, Media Professionals and their Outlets become less like Reporters and more like Portfolio Managers – with the "fiduciary" responsibility of managing their "clients" (or readers/subscribers/viewers/listeners) informational assets.  Financial Professionals should know that any conflict of interest should be disclosed when acting as a fiduciary, therefore any media outlet should disclose biases beforehand so that "investors" are neither tricked nor disenfranchised – enabling a "market" for information to exist. 

As a realist, I know that it is impossible to eliminate biases from Media – especially blogs.  I believe bias is very dangerous in New Media (financial or otherwise) because it always exists and can be assigned an intangible but real dollar value.  The idea of personalization of one's informational sources inherent to New Media allows biases to thrive and grow.  A blog or website that vows to go against Media Bias introduces a new one.  This doesn't help matters but only makes them worse. Even the blogger who is simply posting news stories transmits an inherent survivorship bias in what stories get chosen (See Drudge Report and Huffington Post).  Bloggers have the advantage of simultaneously being their own editor and self employed (in most cases), therefore they have a much greater opportunity to break down the wall of biases than "old" media journalists.   I have already disclosed that I am a 24 year old – which I hope does not take anything away from my ideas because I believe they are much more sophisticated than some people twice or even thrice my age, and a voice for my generation is a relatively scarce asset.   Instead I disclose my age to reveal the biases that come with that number and are unavoidable – naivety, lack of experience, and a tendency towards idealism. 

That being said I plan on disclosing any biases I believe I may have before my posts in hopes of more widespread acceptance of this idea.  Although it may take something away from the "journalistic experience" – I believe the rampant existence of biases along with the widespread ability to choose one's source for information threatens Media and Society as we know it.  Although the disclaimer on a pack of cigarettes may take something away from the smoker who has to glance at it every time he/she lights up – society as a whole is much healthier and now thinks about what they inhale.  I hope that my choice to disclose biases up front in a blatant manor will be accepted more widely and have similar effects.

That being said, I will list what I believe to be my informational biases and COI's below. In addition before any future post I will include a reference to this post and any other biases that I feel are specific to that discussion – in hopes that other "Informational Asset Managers" (aka bloggers, reporters, newspapers, television stations, magazines, data sources, publishers, etc.) follow suit.  If you ever read this blog I encourage you to read all of these things.  It may seem like an arbitrary list and some items may appear to be unimportant or superfluous but I assure you that I took great care in the scrutiny of myself in order to make certain that any bias that may come through in my work is fully disclosed.

 

Biases inherent to my posts

1. I am a 24 year old male with less than 3 years in finance.  I have primarily witnessed a historic bull market and grew up in the time of MTV, the internet, hip-hop, Wal-mart, and "bling".   
2. At the core, I am very bearish on the Economy right now and on the future of this country as a whole.  I believe that demographics was the cause of our prosperity but people in general don't want to believe that something so great but at the same time uncontrollable explains this phenomenon.  Instead the existential desire to find meaning causes misplaced ideas and money.   
3. I work in Private Wealth Management managing client's assets. I do not believe my blog is a conflict of interest as I am not widely read enough nor is there a disparity from what I write here and what I tell clients (for the most part).  Any ideas that I have are not a recommendation for investment but rather an idea that I have on the economy and markets.  I understand the implications of this fact but I dislike the fact that the financial industry is legislated based on what a few "bad eggs" have done.  In the end of the day it hurts the investor as he or she can no longer be told what is or isn't true.  Instead disclaimers, broad language, and lack of ability to convey ideas skew and distort the important facts that they must receive.
4.   I believe in conservative asset allocation and focus on managing risk over return.  I believe that passive management should be coupled with active management and believe the most important decision an investor could make is their percentage allocation of equity to fixed income – the rest creates limited alpha for your client and does more to satisfy their "emotional" financial needs – which still are important.  A client who is happy that you put him in an interesting or new investment for part of his/her equity allocation (and has something to talk about with his/her friends) is much less likely to question his/her actual allocation to equity – which is much more important and will do them better over time.  Although for most individuals an indexed portfolio is the best and most cost efficient way to ensure they meet their financial goals – money is a very emotional object and active allocation is at times necessary to prevent boredom and the subsequent bad decisions that it causes the common investor to make.  I believe someone is much more likely to move the majority of their money from a conservative indexed portfolio to a speculative fund or company if they don't have a new idea or something to talk about on the golf course or the cocktail party.  I would much rather choose that "risk' than have them blindly throw money in an emotional "trade" taking the chance that they do not realize their intended return to the mean. 
5. I went to the University of North Carolina at Chapel Hill and majored in Economics and minored in Mathematical Decision Sciences.  I did not go through the Undergraduate Business program because I was not accepted.  I take it as a blessing as I have since come to believe that undergraduate Business Programs are nothing less than cookie-cutter Vocational School where nothing important is actually learned.  It is causing homogeneity of beliefs and ideas in the business community and the ignorance of sciences and humanities such as Mathematics, Psychology, Economics, History, and Philosophy.  You may interpret this as spite but I urge you not to employ that skepticism in this instance. I disclose this information as I am very skeptical of the education received by my generation – and this is where the skepticism derives from.
6. I come from a middle class family and a middle class town 50 miles north of NY.  I went to a public school and graduated from a class of about 500.  I played sports, enjoyed an active social life, and did well academically.  I hung out with the "popular" kids on the weekends and had classes with many of the "nerds" (I use this term with a hint of sarcasm).  I disclose this only because I believe it lends light on some of my views on my generation and society – not to brag or to show that I was some sort of jack-of-all trades. 
7. I come from a very liberal background.  My parents are both educators and staunch Democrats.  I am very middle of the road in my political beliefs.  I would consider myself a Libertarian and believe in free markets and small government.  I am very dissatisfied with our current political situation which includes the Bush Administration and the majority of the Republican and Democratic parties.   I believe that our political system is broken and our leaders are corrupt, incompetent, and puppets to their corporate and wealth donors on hand and their extremist voting bases on the other hand.  Please do not take any criticism of Bush or the Administration as a liberal bias but as this type of political bias.  Remember correlation does not mean causation.
8. I grew up without a religion.  My mother was Jewish and my father Catholic.  I did not go to church and quite frankly do not like organized religion at all.  I could care less what people believe in as long as I am not forced politically, socially, or otherwise to go along with them.  I would not want to force anyone to live my empty life devoid of Faith and God and in turn do not want to be forced to live someone else's life filled with what I see as Blind Faith and Ignorance.  I do not mean to offend anyone by this admission but rather to allow them to understand my ideas more clearly and without obscuring fact for belief.
9. Beginning college in 2001, I was forced with the problem of what I thought to be my college savings gone.  I do not blame my parents for this as I know that it happens.  Instead I have set out to educate those who may make the same mistake and encourage wise financial planning.  You can say this has left me very biased towards avoiding bubbles – admittedly probably too biased.
10. That lack of college savings along with some past foolish financial decisions has left me with more debt than I would like to have at this age.  Although I have a good job that pays well – the amount of debt I have sickens me and this bias will be evident in any posts on credit.  Take this however you wish.  I know my mistakes are not universal but also understand debt more than people who have none.
11. I have a tendency to believe that I am smarter than other people and have everything and everyone figured out. It is a curse of intelligence and an awful way to live.  I know that this is something I can not change and rather than live in a state of denial, I confront the fault.  Sometimes I am correct, most times I am not.  Instead of coming off pretentious and condescending I choose to disclose this instead of having it bleed through my ideas and be criticized for it.  I believe that most people of high intelligence have this problem in one form or another, but without recognizing it and working around it they are never fully able to realize their full potential. 
12. I believe markets are largely inefficient but that our lack of understanding of what efficiency is limits our ability to capitalize.  The lucky who take a stab and succeed in turn believe that their success is indicative of their understanding.  Without understanding what efficiency is or equilibria exist any attempt to capitalize on them is a random crapshoot where the winners are deemed experts.  It both as abstract and, in turn, useless a term as heaven, hell, love, hate, freedom, or hope.  I believe efficiency is defined post-facto by those who believe they uncovered it's opposite "inefficiency" and defining something by something it is not proves utterly useless.  Markets are always inefficient. 
13. I believe that little real value can be obtained through P/E ratios, ROE, Gordon Growth Models, and other financial measures on their own.  The only value is in the market's perceived reaction to some value but a stock is not "cheap" because it is trading at 7x earnings, it is cheap because you believe there will be increased demand and a higher price for that asset later – period.  Whether the P/E ratio justifies this is up for debate.  I would argue that looking at its business, future market conditions, economic outlook, and growth opportunities are much more important.  Since these ideas are difficult to quantify we rely on such numbers as a crutch.  Since we have no idea what will happen in the future, I would much rather invest in something that is logical than lean on estimated numbers in an imperfect formula or model to reaffirm my beliefs and add to my bias. 
14. I chose to write this blog primarily as an outlet for my thoughts and my desire to convey ideas to others.  I would be remiss if I failed to also recognize my opportunistic and egotistic to be noticed.  I am a young adult beginning a career in Finance.  I believe that I know much more and have greater ambition and love of Finance than many of my colleagues who have better jobs that I would kill for.  Since I chose not to go the B-school route and graduated with a less than stellar GPA I have been forced to work my way up.  Since I don't have the pedigree that is necessary for what I really want to be doing, I believe I must have something that shows not only my mind but my dedication, sophistication, and general interest in this subject.  Although this is primarily academic in nature to fail to disclose my opportunistic intentions would be negligent and wrong.

-β

Talkin 'Bout My Generation: The Dow Jones Deal and Old vs. New Media

As I mentioned earlier, News Corp's bid for the Dow Jones is big news and will be talked about some time.  I believe it is a sign of a market top in the Financial Bubble.  But unlike its Tech Bubble counterpart, Time Warner, this doesn't mean it was the wrong move.  Before my 21st century brain forgets it forever, drives to my friends house in a Hummer to watch American Idol on his new Plasma (<--written in Arial Sarcastic font - that's actually a great idea), I would like to address the deal and what it implies about Old vs. New Media. 

Howard Lindzon points out how this deal shows that Old Media is not dead.  I agree - it is still alive.  However, that doesn't mean that it isn't bound for the grave.  Yet they are all very undervalued.  How could companies that are destined for failure be so cheap?  Let's explore.

As it stands, Old Media is headed for the grave.  This is the case for two reasons.  First and foremost, because of the drawn-out explanation of the Information Age (very High Beta topic - not for this blog).  More subtle and I believe more important is because of my generation.  As a 24 year old, I don't have as much experience as the next guy but I have some deep insight into the future media subscribers of the future.  My generation falls into two camps, The Intellectually Active and their counterparts the Intellectually Passive.  Using generalizations, and trying not to come off arrogant or pretentious, allow me to explain them both. 

• The Intellectually Active (25% - 35% of the Population and falling) - A dying breed, the Active are characterized by curiosity, healthy skepticism, and lack of stimulation.  They are the members of my generation who seek information.  This group grew up on Old Media.  They used to (and some still do) read the NY Times, enjoy a good book, and watch the news (not just the Daily Show).  There is a high correlation between Readers and the concept of "Giving a Sh*t".  They are liberal, they are conservative, they are black, white, Asian, and albino.  These people usually shun The New York Post for the New York Times - but enjoy the Post because of its absurdity.  There is also a high correlation between these people and their distaste for MTV (when did they stop playing videos?), Reality TV, and BS.  Being younger, they already have to deal with enough of smoke blown in their face, but also have to deal with the rest of their counterparts the Passives.  Therefore they value the ability to get what they want when they want along with the company and recommendations of other Actives.

• The Intellectually Passive (65% - 75% of the population) - The Passives are not stupid, may be well-educated but are a victims of the times.  They grew up during one of the most prosperous times in history, and are used to things being handed to them.  This sense of entitlement has made not only vain but apathetic and lazy.  Although they may not be outwardly lazy, they are the intellectually immobile and would rather be "fed" information than "eat" it.  They accept whatever their parents told them, their friends say is so, and whatever they see or read on the popular media.  They may be enormous consumers of Old Media, but not the type of people you want to bet the house on.  These are not the people who found MySpace (it was actually a website for indie bands and their fans), they joined after their friend sent them a link well after News Corp bought it.  The Passives are people who, to use a play on words, "do as they are sold". 

One would think that with such a large market out there, Old Media would not be dying but flourishing.  The problem is that there is such a difference between the two groups, that by not catering to the Actives, Media outlets are vulnerable.  The Actives are so active and the Passives so passive, that it is much more economically efficient to put out Media for the Active Group and let them do the marketing.  It is not worth the cost putting out a Newspaper catering to the Passive, only to see them absorbed by the New Media the Actives have sought out and shared online with the Passives.  Also, the Passives are so apathetic that you may not rely on them watching your channel or buying your newspaper because they simply may not care enough to do so. 

Now that we have seen why Old Media will soon be pushing up tulips, then why are they so undervalued?  The Passive Information absorber is much likely to consume a brand of media that he or she is familiar with.  Remember, they are intellectually lazy, so they don't want to spend time experimenting with the unfamiliar - that is the Active group's job.  Therefore, the perfect business model for the industry is to consolidate, maintain brand recognition, and then completely cannibalize themselves - while keeping the only name and brand alive.  Therefore media companies with relatively large market shares, strong brand recognition, wide circulation, and diverse subscriber bases are very attractive.  Companies can buy a New Media firm that the Active's frequent, or create a new brand to attract them, then repackage it and sell it to the Passive set.   It is the large scale re-branding of information, which if you haven't been paying attention - is what Google, Amazon, Yahoo, Digg, blogs, etc. have been doing for some time now. 

Even though I agree with the motivation and necessity of News Corp's bid, I still believe the deal that happened today was a sign of a top of the financial bubble.  Although Media companies are undervalued, they are not THAT undervalued.  Also, even if my explanation above seems logical to the point of inevitable (I highly doubt that), there is a huge amount of business risk involved in the future of this industry.  Aside from the DJIA metaphor, the deal still wreaks of excess liquidity, ignorance of risk, and investment in the financial business.  Yet, Murdoch knows what the future will bring if he stands idle and the idea of News Corp going the way of the OC is much scarier than overpaying for the future.   

Welcome

Welcome to Zero Beta.  This will be a place for thoughts, ideas, and discussions that do not move with the overall market.  Much like an stock's beta is determined by it's correlation to the broad market, this site's ideas are determined by their correlation to the mainstream media.  Hopefully this page will provide visitors with a diversifier for their portfolio of knowledge and a realization of some form of alpha.