Monday, September 21, 2009

Why I'm betting on Sweet Briar to trump Wall Street

Sweet Briar is a private, all-female college just north of Lynchburg in the heart of Virginia's wine and apple country. With only 700 students and one of the lowest faculty-to-student ratios in the nation, both the students and faculty alike take pride in their motto of "think" and "do." With that in mind, I'm very pleased that Professor Tom Scott chose my book as a textbook for his finance course. They invited me to speak to the class last Thursday to discuss the book and their grand experiment.

It takes about two hours to get to Sweet Briar from my home in Richmond. When I finally arrived, I was treated to a beautiful tree-lined driveway leading to an impressive campus. You cannot help noticing the large pink flags that hang along the driveway featuring one-word inspirational messages. My favorite was the one that said, "Question."
The Naked Portfolio Manager is an iconoclastic book that questions conventional thinking and dogma on Wall Street. It's central thesis is that empirical rules are more valuable than the training or experience of traditional judgment-based managers when constructing a stock portfolio. The ladies of Sweet Briar are testing this thesis by using the book and other data to construct rules-based methods, or "Naked Strategies," for selecting portfolios. The ladies will be broken into teams of two and each team will have to come up with their own methods of selecting securities. Professor Scott will post these rules to the Internet and then track their performance versus that of some of the smartest minds on Wall Street during 2010.

In order to comply with the book, the ladies' rules will have to be:

1. Empiracally based
2. Clearly defined
3. Broadly diversified
4. Completely transparent
5. Relatively simple

"Naked Strategies" are by definition easy to implement. While constructing the rules may be complex, once the rules have been created, following them should require no specialized expertise. Because the rules are clearly defined, anyone following the rules will make the same choices as Professor Scott will when he implements the methods.

I'm really looking forward to the results of this experiment. I'm betting on the ladies of Sweet Briar to outperform Wall Street. To stay posted on the progress and results of this fascinating experiment, subscribe to my blog by entering your email adress in the box to the right.

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Tuesday, September 15, 2009

Can I stick a needle in your pregnant belly?

I do not have a son named Joshua.

When President Obama said, "I have talked to enough doctors to know that defensive medicine may be contributing to unnecessary costs" in his speech last week, I was flooded with emotions. It reminded me of my family's own experience with "defensive medicine" and a completely unnecessary and risky procedure that is routinely recommended by obstetricians -amniocentesis.

My wife was thirty-nine years old and pregnant with what we thought was a little boy. We were going to name him Joshua. Our obstetrician suggested that because of my wife's age, we should consider doing "genetic testing." Without hesitation we told her we did not want to do this because we would not use the information. For us, terminating the pregnancy was simply not an option.

Undeterred, she continued, saying when the risk of an adverse pregnancy was greater than the risk of testing, she recommended people consider genetic testing. The risk of testing she was referring to is the risk that you lose the pregnancy. Experts estimate that between 1 in 200 and 1 in 400 women will spontaneously abort as a result of having an amniocenteses. These are women who would have delivered healthy babies in most cases but instead have miscarriages. So the risk of the procedure is not insignificant.

Since we were not willing to do an amniocentesis, she suggested we might want to do a test referred to as a "triple screen" test. In this case, the pregnant woman's blood is tested, and from these tests, doctors are able to more accurately estimate the chances of having a baby with Down Syndrome. (Click here for more information on the triple screen and genetic testing for Down Syndrome.) We saw no harm in this simple blood test and consented. When the results came back, we learned that according to the triple screen, the chances of us having a child with Down Syndrome were something like 1 in 1600. This confirmed our earlier decision not to do an amniocentesis.

It did not deter our obstetrician though. She persisted in recommending we at least discuss the procedure with another doctor who would have actually performed the test. Slightly confused, we trusted our obstetrician and were lead to the other doctor's office. When I spoke with this doctor I explained we had the results of the "triple screen" and were confident there was no need to do the amniocentesis.

"The triple screen is not a diagnostic test," she protested.

"Are you saying that the triple screen is not valid?" I asked.

Again she asserted the screen was not a diagnostic test. At this point, Su and I were feeling confused. I explained to the doctor I had a degree in applied mathematics and in my profession, I worked with risk and uncertainty all the time.

"Doctor, we can make a good decision about this if you will just give me the data," I assured her.

I think the assertion that I understood mathematics and statistics made her very uncomfortable. She knew I wasn't going to just cave to her white coat. She suggested we talk to the genetic counselors. We agreed and were sent to another room where two young women joined us and explained everything about genetic testing.

Suddenly I had a horrible thought. Had the doctor seen something on the ultrasound that caused her to think our baby had Down Syndrome? Well yes, the genetic counselors said. She had noticed a "marker." Markers are associated with Down Syndrome, the genetic counselors explained. Of course, the counselors went on, many perfectly healthy babies without Down Syndrome also had these markers.

"How will this change the probability that my baby will be born with Down Syndrome?" I asked. "We don't know," said the genetic counselors. After more frustrating, unanswered questions, the genetic counselors were still unable to convince us to consent to testing. So they asked us to sign a release saying we had declined on the procedures. This whole unpleasant experience left Su and me feeling frustrated and angry.

There is a lot of really sloppy thinking going on with regard to this test. Amazingly, the American College of Obstetrics and Gynecology began recommending that all women, regardless of age, be offered an amniocentesis in 2007. This is a really bad idea.

An amniocentesis does not guarantee you a healthy baby. It just gives you a piece of information you are going to get anyway in about five months. If you intend to act on the information however, it may be worth considering the test. But if you are not going to terminate the pregnancy should you learn your baby has the extra chromosome that causes Down Syndrome, it is irresponsible to expose the fetus to such risk.

When our obstetrician said she recommended the procedure when the risk of testing was less than the risk of an adverse pregnancy, she exercised faulty logic. Down Syndrome is a risk you take when you choose to get pregnant. Having a miscarriage as a result of the procedure is a new and additional risk that you assume when you consent to the test. Shockingly, the genetic counselors told us that some people who had no intention of terminating the pregnancy regardless of the result wanted to take the test just to know their baby was healthy. This is really bad risk management.

I do not have a son named Joshua. This is because when my wife gave birth, he was a she and we named her Hannah. She is six years old now, in the first grade, and perfectly healthy. She plays soccer, dances ballet, and sings the most beautiful rendition of "Jesus Loves Me" you ever heard. I am her dad and I protect her. I make sure she buckles herself into her car seat and wears a helmet when she rides her bike. And I am so happy that six years ago I did not let some lunatic doctor stick a needle in my wife's belly just to see if my child would be born mentally retarded. Sure, it was only a 1 in 300 chance that I would have lost her as a result, but she is exposed to far less risk each time she gets in a car or gets on her bicycle, and I would not think of letting her ride a bike without a helmet or not buckle her in when she gets in the car.

Decision-Making Best Practice #19: Obtaining additional information can expose you to new risks and costs. If you are not going to use the information, do not expose yourself to the additional risks.

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Sunday, September 13, 2009

Naked Portfolio Manager Update

This is a very busy week for me. On Monday I am going to address a group of financial advisers to discuss the book. Tuesday I am scheduled to be on the Jack Gravely show at 1040 am (http://www.jackgravelyshow.com/). I will try to provide a podcast here for those that are unable to listen to the live broadcast. Thursday, I will be speaking to Professor Tom Scott's finance class at Sweetbrier college. These young ladies are using The Naked Portfolio Manager as a text book. As part of the course, they will be constructing their own Naked strategies that are going to be contrasted to the best mind's on Wall Street. Professor Scott intends to post these results on the Internet. I am betting on the young ladies from Sweetbrier! You can follow the results of this experiment by subscribing to the blog.

Please note, this week I added a feature that will allow you to get the blog delivered directly to you by email. Please take advantage of this by clicking onthe button on the right. Thanks for following!

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Tuesday, September 8, 2009

Obama demonstrates the need to think about thinking

President Obama's plan to deliver a talk to school students today has triggered yet another controversy. According to The New York Times, many parents opposed his speech, saying they didn't want the President to "indoctinate their children" with his "socialist ideas."

Brett Curtis, an engineer in Pearland, Texas, said he is keeping his three children home, according to the Times article. "I dont want our schools turned over to some socialist movement," Curtis said. Although the talk has been on the schedule for weeks, conservative talk show hosts began fuming about it just last week. On "The Rush Limbaugh Show," conservative political commentator Mark Steyn accused Obama of creating a "cult of personality" and compared him to Saddam Hussien. Jim Greer, the Republican Party Chairman in Florida, said he was "appalled" Obama was using taxpayer dollars to further his "socialist ideaology."

Could Greer, Steyn and Curtis please grow up? Let's let the President talk to the children. If he makes the mistake of using the talk to "spread his socialist agenda," we can address that later. What we need to teach our children is they need to critically examine what they are told themselves, even if it comes from a high authority - even the President of the United States.

Thinking and decision-making are skills that can be learned, and the President's talk gives a great opportunity to teach children about these skills. Teacher's can use Obama's talk to stimulate conversation about the great policy debates of the day, to teach our children to think criticallly, and to respectfully challenge what they are told by high authority figures.

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Monday, September 7, 2009

Congress repeals gravity; objects float in the air

The New York Times reported on Friday that teenage unemployment has hit all-time high record levels. In August, unemployment among teens was at 25.5%, the highest since 1948 when the government started keeping data.

Citing one such example of teen joblessness, the Times reported that unemployed and frustrated 18-year-old Ronnie Bonilla of Miami had put in applications at Walgreens, Kmart and Chuck-E-Cheese, among other places. " I am looking for anything to pay the bills, "Bonilla lamented. "You name it, I applied. And I never even heard from them. "

Congress allocated 1.2 billion dollars from the stimulus package for youth jobs and training, yet clearly, one in four teenagers still can't find a job. According to the article, economists say there are a multitude of reasons for teenage unemployment which the stimulus money is/was supposed to address.

Marvin Kosters, a resident scholar at the American Enterprise Institute, suggested increases in the minimum wage may have made employers reluctant to hire teenagers. Well, give that man the Noble Prize for Economics! Of course the increase in the minimum wage is causing business owners to be hesitant to hire teenagers! If you make something more expensive, you will get less of it.

Congress could have saved the 1.2 billion dollars and deferred the minimium wage increase until sometime in the future. Better yet, they could have repealed recent increases to allow struggling businesses to profitably hire young people with minimal skills. Then thousands of people like young Bonilla would have jobs now. Win-win. Why can't politicians understand that?

Decison-Making Best Practice #18: Remember Occam's Razor. The simplest solution is frequently the best.

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