Potential fly in the index fund ointment: special access for some investors


My basic investing article cheerleads for index funds, largely based on Burton Malkiel’s 1973 research (subsequently updated and currently available as A Random Walk Down Wall Street (11th Edition)). “How Some Investors Get Special Access to Companies” is a September 27, 2015 Wall Street Journal article that should encourage a little doubt among the indexing believers.

Public companies are allowed to meet with favored investors privately:

The result is a booming back channel through which facts and body language flow from public companies to handpicked recipients. Participants say they’ve detected hints about sales results and takeover leanings. More common are subtle shifts in emphasis or tone by a company.

Access usually is controlled by brokers and analysts at Wall Street securities firms, who lean on their relationships with companies to secure meetings with top executives. Invitations are doled out to money managers, hedge funds and other investors who steer trading business to the securities firms, which in turn provide the investors with a service called “corporate access.”

Investors pay $1.4 billion a year for face time with executives, consulting firm Greenwich Associates estimates based on its surveys of money managers. The figure represents commissions allocated by investors for corporate access when they steer trades to securities firms.

A recently published paper in the Journal of Law and Economics analyzed the trading behavior of dozens of investors who met during a 5½-year period with senior management of a company listed on the New York Stock Exchange.

While the paper doesn’t identify the company or investors, researchers concluded that the investors who got face time with management made better trading decisions. Several large hedge funds met the company as frequently as once a quarter.

Brian Bushee of the University of Pennsylvania’s Wharton School and two other academic researchers concluded that trading volume picked up around the time of the private meetings. Trades made then were more likely to be profitable than trades made at other times.

Along the same lines, but not obviously actionable for the typical investor… “Insiders Beat Market Before Event Disclosure: Study” (WSJ, September 14, 2015):

Corporate executives and board members regularly make market-beating returns from buying and selling their companies’ stock in the days before disclosing a significant event, according to a study that says it has found a link between insider knowledge and investment profits.

On average, the officials netted about 0.4 percentage point over a broad market index between the time of their trades and the market close after the disclosure. These gains, realized over the span of a few days, would be much larger on an annualized basis.

When officials bought shares outright—rather than by exercising options received as compensation—the gains were even better, at about 1.6 percentage points over the index.

The longer companies waited to make disclosures, the better the returns, according to the study. When companies used the full four-business-day window, the average excess profit rose to 1.95 percentage points.

What does it look like in practice? “Towers Watson CEO Sold Stock Before Big Deal:
John Haley netted nearly $10 million on preannouncement sales” (WSJ, September 23, 2015):

In early March, when merger talks were under way between Towers Watson and insurance broker Willis Group Holdings PLC, Mr. Haley exercised 106,933 stock options and sold the underlying shares for a $9.7 million profit, according to regulatory filings. The sale was Mr. Haley’s first in more than a year and shed 55% of his stake in Towers Watson…

When the roughly $9 billion deal was announced on June 30, Towers Watson shareholders criticized it, sending the Arlington, Va., company’s stock down nearly 9% that day. Their beef: the deal’s price tag, which valued Towers Watson at $125.13 a share, or about 9% less than the prior day’s close.

Maybe the future of efficient investing has to include some managed funds that are big enough to pay for and acquire access to inside information?

Clojure: If Lisp is so great, why do we keep needing new variants?


The one thing that Lisp programmers can agree on is how much better Lisp is than C and similar languages. I was talking last week to some programmers who use the Clojure version of Lisp and it made me wonder “If Lisp is so great, why did this guy have to build a slightly different version instead of building a popular application program in an existing version of Lisp, such as Common Lisp?”

What do readers think? We accept the proposition that C is feeble and yet there are only three major variants of C: C, C++, and Objective-C.  Over the same period of time there have been at least the following: MacLisp, Interlisp, Lisp Machine Lisp, Common Lisp, Scheme, Emacs Lisp, AutoLisp, Clojure (perhaps readers can think of others). Yet Lisp has fewer programmers and completed programs. Thus the ratio of popular installed computer programs to versions of the language is vastly higher in C than in Lisp.

Who loves Clojure and why? And why hasn’t the C world turned into a similar Tower of Babel?

How do rich people spend all of that money?


People with moderate incomes often express an idea of the form “nobody can spend more than $X per year.” So they’re surprised by the public company CEO who seeks to have her golfing buddies on the Board ladle out $20 million per year in shareholder cash. How can she actually spend the after-tax$10 million per year? Or consider Katie Holmes, whose net worth from acting is about $25 million and whose profit from her short-term marriage to Tom Cruise was supposedly about $15 million after taxes (this article provides some background on Holmes’s divorce litigation strategy). She is supposedly returning to the courthouse in an effort to increase the profitability of her child beyond the current $400,000-per-year (tax-free). A reader comment on the Redbook article on the subject is “She needs more than $400 THOUSAND PER YEAR to raise one child? Seriously?” And what about rich retired people? Some of them give half of their money to charity but how can they spend the remaining few $billion?

New Yorker magazine has the answer: “The Couture Club,” complete with photos:

The client on the neighboring yacht, a Russian woman who was relaxing with her family in the fading light, had sailed into Portofino to see the results of Alta Moda’s work.

The [$1700] sundress was a bargain compared to Alta Moda creations, which start at about forty thousand dollars and can cost much, much more.

Suites cost upward of three thousand dollars a night. Portofino, which covers less than a square mile, did not have enough hotel rooms to accommodate all four hundred of the Dolce & Gabbana guests, and some had booked hotels in the neighboring town of Santa Margherita Ligure, or in Rapallo*—a ten-minute boat ride away. A fleet of Mercedes minivans had been amassed from Milan and Genoa, and two dozen boats had been rented for the weekend.

Columbus Day Thoughts


My Facebook friends have been posting Columbus Day items that reference our theft of this great continent from the Native Americans, e.g., “A store had a sign outside that said ‘Columbus Day Sale.’ Does that mean that I can walk in there and take anything that I want without paying?”

Do we have the mental energy and space to reflect on what we might owe the 5 million current descendants of the American Indians? The favored/featured victims in the media lately seem to be (a) transgendered individuals, and (b) women. Those two categories together account for at least 160 million people. If we are going to fret about these 160 million disadvantaged souls can we truly reflect on the fact that the 5 million Native Americans would be crazy rich today if we gave them back their land and paid rent for it?

[Separately, “What Really Keeps Women Out of Tech” is the New York Times’s latest entry in the war-on-women theme. The author says that she “earned a bachelor of science degree in physics in the 1970s but left the field” (a curious statement by itself since, ordinarily, one would need a PhD in physics simply in order to enter the field of physics) and is now a teacher of creative writing. She describes research in which women were frightened off from computer nerdism by Star Wars posters, which could well be a reasonable reaction to the extent that the posters included any depiction of Jar Jar Binks. Neither the author nor any of those reader comments approved by the NYT asks the question “Why would a young American woman want to spend years training to be a computer programmer when she could have the same spending power (median pre-tax pay $74,280) simply by having sex with three computer programmers and collecting the resulting child support? (or by having sex with one dermatologist)” Nor does anyone ask “If, as the author suggests, women don’t major in CS because, though they yearn to sit at a desk for 50 years and code, they feel that they don’t belong with all of the guys already in the department, wouldn’t we expect to find a large enrollment in CS departments at colleges that are 100% female?” Nor, finally, does anyone ask why the author, who chose a career in creative writing/hanging out with humanities majors, and the quoted psychology professor, who chose a career in psychology, are so passionate about women other than themselves becoming programmers.]

Boston Museum of Fine Arts exports class warfare to 17th century Holland


Over the summer the Boston Museum of Fine Arts segregated pictures by the skin color of the subjects (previous posting). This fall they present an exhibit segregated by the inferred income class. “In Boston, a Class-Driven View of Dutch Art” (WSJ):

The exhibition, which opens [today] and closes Jan. 18, splits the classes into upper, middle and lower, with each occupying its own gallery space. They are broken down into further subdivisions in each room, with a fourth space devoted to “Where the Classes Meet,” which includes depictions of the dark interior of a blacksmith’s shop and a bustling town square in Amsterdam.

UK: Government-run healthcare but private litigation for malpractice?


Do No Harm: Stories of Life, Death, and Brain Surgery (Marsh) is a great book in the English tradition of experts writing for laypeople (contrast to the standard American presumption that laypeople are too stupid to understand any technical subject). I’ll write more about this book later but one of the things that struck me was that England seems to have retained its system of private litigation for malpractice despite the fact that medicine is now socialized/government-run:

‘Mrs Seagrave’s daughter was threatening to sue us last night,’ he said. ‘She said we were all hopelessly disorganized.’ ‘I’m afraid she’s right but suing us isn’t going to help, is it?’ ‘No,’ he replied. ‘It just puts one’s back up. And it’s quite upsetting.’

The case was over an operation I had carried out three years earlier. The patient had developed a catastrophic streptococcal infection afterwards, called a subdural empyema, which I had initially missed. I had never encountered a post-operative infection like this before and did not know any other neurosurgeons who had either. The operation had gone so well that I had found it impossible to believe it might all go wrong and I dismissed the early signs of the infection, signs which in retrospect were so painfully obvious. The patient had survived but because of my delay in diagnosing the infection she had been left almost completely paralysed and will remain so for the rest of her life. The thought of the conference had been preying on my mind for many weeks.

I had not dared to ask for how many millions of pounds the case would probably be settled. The final bill, I learned two years later, was for six million [about $9 million].

I wonder if UK-based readers of this blog can shed some light on this arrangement. If the government runs most of the hospitals and also the court system, why would it send medical malpractice cases through the court system to be decided by lay judges and juries? Why not legislate an administrative process for compensating victims of medical mistakes? Why have a system where Person X gets paralyzed from a neurosurgeon’s mistake and gets $X million in compensation while Person Y, starting from roughly the same circumstances and suffering the same paralysis, gets $Y million, purely due to variations from jury to jury?

(And speaking of mistakes, you definitely don’t want to read this book before heading anywhere near a hospital:

I hope I am a good surgeon but I am certainly not a great surgeon. It’s not the successes I remember, or so I like to think, but the failures. But here in the nursing home were several patients I had already forgotten. Some of them were people I had simply been unable to help, but there was at least one man who, as my juniors put it in their naive and tactless way, I had wrecked. I had ill-advisedly operated on him many years earlier for a large tumour in a spirit of youthful enthusiasm. The operation had gone on for eighteen hours and I had inadvertently torn the basilar artery at two in the morning – this is the artery that supplies the brainstem, and he never woke up again. I saw his grey curled-up body in its bed. I would never have recognized him were it not for the enamelled plaque with his name by the door.



I just bought the bottom half of a drone: DJI Osmo


For years I have been wanting the bottom half of a drone. Why? We already have the top half at East Coast Aero Club, i.e., a standard helicopter or airplane. For capturing images out the side of a helicopter, why not use the bottom half of a drone (the gimbal and the camera) to take stabilized video and stills? It seems as though the clever engineers at DJI (now a $1 billion drone company!) had more or less the same idea: the DJI Osmo. I have ordered one to try out. I am a little concerned that a gimbal designed to cancel out the vibration of a smooth electric-powered quad-copter will not be up to the challenge presented by a piston-powered two-bladed 2400 lb.-gross-weight helicopter. As soon as the Osmo shows up I will provide a full report.

Meanwhile… what do readers have to say about DJI and its products? The Osmo can supposedly support their high-quality Zenmuse X5 camera/gimbal with a four-thirds system sensor. Has anyone tried out the high-end imaging devices from DJI?

Ad-blocking: a sign that web publishers don’t care about readers


Ad-blocking has been in the news lately. To me this is a sign of just how abusive web publishers have been. For the sites that I have run over the decades(!), whenever someone would propose a form of advertising I would preface my response with “Remember that everything on the page has to be something interesting to and useful for the readers.” If the proposed ad could not reasonably be expected to interest a reader then it couldn’t go on the site.

This is not a new idea. Look at New Yorker, for example. The ads are generally interesting and feature great photography. Maybe you don’t want to buy a $10,000 outfit but the ad is entertaining for a few moments.

At photo.net we didn’t have any ads at all until Google Ads became available because that was the first system that put reasonably relevant-to-the-content and relevant-to-the-readers ads on pages.

Perhaps the “ecosystem” (as the VCs like to say) has been permanently damaged by the glut of page views available from Facebook, et al. Nonetheless my first response to “consumers are taking the trouble to install ad blockers” is that publishers are violating what should be the first principle of publishing: include stuff that readers want/need.


Update on government versus private sector pay


Cato has updated its study on federal versus private sector pay. Total compensation for government workers was 1.78X what private sector counterparts earned. Adjusted for working hours, job security, and stress presumably the government option would be even better.

Young Americans should make sure to look at this before selecting a career.

[Separately, I’m wondering if the growing disparity makes government move more slowly and increases the burden of regulation. Nobody ever gets fired for saying “no” or “not yet” or “we need more time/paperwork/study.” Thus whenever there is a regulated industry and/or government approval is required, the easiest way for the government worker to preserve those 1.78X larger paychecks and pension checks is to say “no,” “we’ve never done that before,” or “please submit some more documents.” (And, actually, the pay cut from moving from public sector to private sector could be much steeper. The 55-year-old administrator getting $178,000 per year (salary, pension, etc.) who is fired after 25 years in government may not be worth anywhere near $100,000 per year in the private sector even if the skills, background, and experience are nominally comparable.)]

Decline of Detroit: An unavoidable natural phenomenon


“The Black Family in the Age of Mass Incarceration” is an Atlantic article by Ta-Nehisi Coates, recent winner of a MacArthur “genius” award.

There is a lot of interesting stuff in the article, but to me some of the most interesting is how the writer and editors think about ambiguous facts.

For her research, Pager pulled together four testers to pose as men looking for low-wage work. One white man and one black man would pose as job seekers without a criminal record, and another black man and white man would pose as job seekers with a criminal record. The negative credential of prison impaired the employment efforts of both the black man and the white man, but it impaired those of the black man more. Startlingly, the effect was not limited to the black man with a criminal record. The black man without a criminal record fared worse than the white man with one. “High levels of incarceration cast a shadow of criminality over all black men, implicating even those (in the majority) who have remained crime free,” Pager writes. Effectively, the job market in America regards black men who have never been criminals as though they were.

It is uncertain as to why employers in this particular study were unenthusiastic about hiring black workers. It is possible that there was an association between “black” and “criminal” as the writer/editors suggest. But isn’t it also possible that employers avoid hiring people who could sue them for employment discrimination? Every black worker carries an additional expected litigation cost compared to a white worker. Alternatively, perhaps it it is the media itself, which loves to report on how black Americans do worse than white Americans in school (2009 posting on the subject). Perhaps it is the New York Times that has reduced the value of blacks in the marketplace by continuously reminding employers that race can be used as a rough guide to academic achievement. Yet the author and writer are confident that they can get inside the minds of the employers surveyed and know precisely why they preferred to hire non-black workers.

Much of the article concerns Detroit, whose decline is characterized as an unavoidable natural phenomenon, akin to an earthquake or hurricane: “Over the past half century, deindustrialization has ravaged much of Detroit. African Americans have had to deal not just with vanishing jobs but with persistent racism.” Are there no humans in Michigan who played any role in making Michigan an unattractive place to do business? (There are plenty of newly constructed car factories in South Carolina, Mississippi, Tennessee, Alabama, Texas, and Kentucky, Ohio, and Indiana. (WSJ article from 2008)) The author and editors seem comfortable with that inference.

As the U.S. continues to slip downward in the world ranking of GDP per capita (CIA Factbook), I wonder if this will be Americans’ (both black and white) way of explaining the slippage: “we had nothing to do with it.”

[Separately, why would an employer want to deal with people like this, who blame their failures on external factors? Why not build a facility in a location where workers will take responsibility for the quality of their work? And if that is the goal, how to find such a place? If the goal is a factory within the U.S. (perhaps to capture government handouts/corporate welfare), is the answer to find a map of Atlantic subscribers and locate where the smallest percentage of residents subscribe?]

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