Monday, September 22, 2008

Freedom and Changes in the Level Regulation

The problem that I see here is that when people have freedom sometimes bad stuff happens but with highly restricted freedom different bad stuff happens. Unfortunately people are inclined to believe that if you try to prevent bad stuff from happening through restrictions of freedom (generally called by the nicer name regulation) then less bad stuff is likely to happen. But human behavior is so complex and our understanding of it so limited that the restrictions of freedom beyond some old tried and true basics are not likely to have a bet benefit but. This seems to the story for not only economic issues but for things like recreational drug use.

Another big problem is that changes (either more or less regulation) can cause bad stuff to happen in the short term but be good long term. In the case of deregulation people get angry but in the case of more regulation people assume that regulation was meant to do good and so they support it.

The adjustments can be harsh. E.G. if you suddenly legalized all recreational drugs the news people would have a feast reporting on lives destroyed by drugs.

Freedom advocates get blasted for the great depression but FDR is lauded because he tried stuff, but the great depression lasted 10 years after the election of FDR. I think that if FDR was a do nothing advocate (freedom advocate) and depression persisted he would have been gone in 4 years. The country would have recovered either way. There is little evidence that FDR's policies helped end the depression sooner than otherwise. There was a rather sharp serious depression in 1920 - 1921 but Warren G. Harding did little to address it in fact, he cut government spending but the economy quickly recovered.

Thursday, September 4, 2008

Katrina a Short Retrospect

Scientific models predicted 61,000 deaths if New Orleans was hit by a category 4 hurricane (if you do not belive me look it up). Katrina relief over all was an incredible success!

That is not to say that people were not hurt they were, but overall the response was amazing this is an amazing country.

The reporting was sensational and made things sound far more chaotic and violent than reality. One heartening thing to a libertarian was that unlike predictions and what reporters said even the poor people in New Orleans did not resort to violence despite no police presence. The people even in very bad conditions kept a level of civility.

Perhaps people are disappointed that non-government people had to do so much.

Monday, April 14, 2008

Basic Principles of Stock Investing

The Basics of
Stock Investing

Principles of Stock Investing) 

Selecting a Brokerage

Choose lowest cost brokerage.
Generally you want the brokerage that charges least for trades. The only other concern is
the finical stability of the brokerage.
This is to ensure that the broker be able to deliver your money. So you want the cheapest brokerage that seems stable enough to return your money to you in hard times.
A broker’s advice is of little value because the broker’s interests are not necessarily aligned with your interests. Further more keeping in mind efficient market theory, which will be discussed below, it is doubtful whether the brokerage’s advice will help you in anyway.
If the brokerage is a large broker it is difficult for their advice to be of value or to lead to market beating performance. This is because if a large group of investors with a large amount of money decides to buy a stock the stock price will go up. So if a large brokerage firm like Merrill lynch recommends a stock to their clients if will have a short term effect of driving the price up but only the first investors who act on the recommendation will benefit, the great majority will have to pay a higher price for the stock because of the recommendation. Unless you know that you have knowledge of recommendation ahead of everyone else it is of no value. Because of this reality when a large brokerage gives a strong buy rating on a stock it means you have bough this stock 6 months ago.

The bottom line is shop for price. I currently use Brown & Company because Brown & company charges only $5.00 a trade for market trades.

Evaluating stocks
There are only three ways that companies can return money to investors. Companies can pay dividends, they can buy back their own stock and the company can be liquidated with the money returned to investors. These are the only ways that money is returned to stock investors. Investing without focusing on the money that companies pay back to investors is just gambling that there will be a bigger fool to sell to down the line.
Companies can only pay money to investors that they have earned. So earnings are important both current and future earnings must be considered when evaluation stock. But earnings are not the only thing you need to consider, you should also ask yourself whether this company will eventually pay a dividend or buy back its stock in sufficient volume to justify the price of the stock. Some companies have good current earnings and good rapid growth but are in businesses that are temporary in nature an extreme example of this would be the companies who prior to the year 2000 where making their money fixing Y2K bugs. You need consider whether a company's business model will be viable in 15 years, if not the dividend must be big enough to give you not only a return of your money but additionally some extra to cover for the eventual capital loss.
The value of any stock is based fully on the amount of money that is will eventually return to the stock holders. 
How much return is enough?
In economics there is a concept called the discount rate. (htp:// That is the
value of having your money to spending today as compared to having to wait to spend it.
It is considered that it is 3% better to have your money now. So inflation plus 3% is the minimum return one would want on zero risk investment. (Note: no such investment exists although short term government securities, the kind that money market funds hold are about as close as you can get. They still have some risk due to inflation or some major calamity).

When investing, stocks like bonds, are judged by return on investment. For example if a particular stock is currently paying a 3% dividend appears to be able to pay that dividend indefinitely and there is no inflation then that stock is just matching the discount rate.
Beyond the discount rate a good rate of return is based on the return provided the alternatives like bonds, money markets and real estate.
Keep in mind that a stock that is not currently paying a dividend will have to
payout enough dividend in the future to make up for the return that you
are not receiving now.

Before buying a stock try to think of all the things that could make the company’s
earnings fail to reach the level required to produce the returns that you are looking for.
There will always be some things that can ruin any investment even very wise investments.
Examples include:
Economic collapse
Natural disaster
These should not keep you from investing but you should be aware of them
Company specific things that might be enough to keep you away from an investment include:
Is the company running out of market (like in the example above of software companies specializing Y2K fixes)
Limited lifetime demand for the product produced. (IE buggy whips being
replaced by cars).
Lack of franchise products. (What we call "me too" products with nothing specific to differentiate the company from others have little franchise value.)
Rising competition.
Finally a caution about companies that buy back stock rather than paying a dividend is in order.
To calculate the annual rate of yielded from a stock repurchase you must take the annual reduction in the number of shares outstanding and multiply that by the price of the stock. You cannot just look at the amount of money that the company spent on the repurchase. This is because many companies that buy back stock also compensate employees with stock. If they buy back 1,000,000 shares but compensate employees with stock giving them 1,000,000 shares then they have in effect returned nothing to share holders. They have used the money to compensate employees and have done noting for the shareholders.

What accounts for the rise in stock prices over the years

An important question to start off with on this subject is: How much of the stock market gains over the years where due to the increase in earnings and how much due to growth in the average PE (PE = the price of the stock divided by the earrings per share) of stock. Growth in PE indicates a growing comfort with stocks but I would assume that at some point when the long-term return of stocks drops below the discount rate (about 3%.) the growth in PE will stop.
Another factor keeping stock rising is the growth in the population. More customers for coke
means more profits for Coka-Cola (KO).

Another factor is the growth in productivity of public companies?
Another factor is the rate at which public companies have grown in relation to private companies? (If public companies relative to private companies, do a growing portion of business then this can justify a growth rate in stock prices in excess of growth in productivity plus growth in population).
All returns should be measured in fixed dollars that means that each years growth rate should be reduced by that year’s rate of consumer price inflation?

Consider as many of the possible causes of the rise in stock prices as you could discover?
Inflation is due to growth in the supply of money. Deficit spending is only one way that the money supply grows. Friedrich Hayek, he won a noble prize for his is work on the business cycle and money supply.
The 1920s, the 1960s, 1970s and the 1990s where periods of rapid growth in the
money supply.
In the 1960s and 70s money supply growth was driven by Deficit spending.
The 1920s and 1990s money supply growth not driven by Deficit spending but by loose
  monetary policy by the federal reserve.

Each period of increase led to bubbles and crashes.
Money supply is important because more money makes for higher prices, with more money in the economy people can pay more for stock bidding up the prices.
Also on the subject of money supply consider that when money supply increases the upward pressure on prices is uneven and those products with highest demand and least short-term supply elasticity, like oil, tend to rise more than other products and can bring the end to the boom.

Efficient market theory
Be aware of and respect efficient market theory. Over confidence is a great danger for investors. As I heard one famous investor say what makes you think that you can invest better than anyone else.
The Efficient Market Theory says that security prices correctly and almost immediately reflect all information and expectations. It says that you cannot consistently outperform the stock market due to the random nature in which information is spread and the fact that prices react and adjust almost immediately to reflect the latest information. Therefore, it assumes that at any given time, the market correctly prices all securities. The result is that securities cannot be overpriced or under priced for a long enough period of time for investors to consistently beat the average.

The theory holds that since prices reflect all available information, and since information arrives in a random fashion, there is little to be gained by any analysis. It assumes that every piece of information has been collected and processed by thousands of investors and this information is immediately reflected in the price. Studying historical data since past data will have no effect on future prices cannot increase returns.

So if Efficient Market Theory is correct or close to correct and it deserves “great respect” why shouldn’t I invest in a index mutual fund?
The following are some reasons why I think that despite efficient market theory investing in individual stock rather than index mutual funds can be worthwhile:

a. Because the .5% cost that index mutual funds charge is high. For a portfolio valued at
$100,000.00 a .5% cost is $500/ year.
At a cost of $5.00 per trade that is 100 trades a year that is allot of cost.

b. I believe that at times the market can be beat. For example in the year 2000 it became obvious that the market was a poor investment.

Note: This does not mean that it could not have gone up but that the return as noted above was very low.

c. Even if the market cannot be beat it is fun to try.

Risk aversion verses ignorance of the risks

Sociologists who study such things tell us that people are naturally risk averse. So why do so many people blindly take huge risk in the stock market?
Sociologists study people’s aversion to risk by making simple models where the subjects in the study understand the risk.
In contrast many people invest in what they see as sure things. In this case they are taking on huge risks but they think that they are not taking much risk at all.

In the case of the stock market the longer a bull market lasts the more comfortable people become with the market. Even though the market gets riskier and riskier the higher it goes, people's perception of the riskiness of the market is diminished because looking backward it looks less risky. Thus due to ignorance the riskier stocks get the more likely the risk averse are to invest in stocks. This is the explanation of the paradox of if people are risk averse why do they take such great risks in the market.
To lessen the risk of the market you must evacuate stocks based on returns. You should judge your investing on the returns that it produces rather than the value of your portfolio. 

Profit margin and economic problems

The profit margin of a company effects its valuation because in a recession companies with wider margins will generally be more able to last out the recession and recover market.
Economics pages and principles verses stock information.
I find the economics web pages much more objective than the stock web -pages


If a balanced coin is flipped 49 times and every time it comes up heads what are the chances that it will come up heads again? Well we should all know that the answer is: it has a 50% change of coming up heads.

Have Realistic expectations

One of the surest ways to get scammed it to have unrealistic expectations. Always respect efficient market theory. With the discount rate of 3% plus inflation 4% plus inflation is a good return 25% above the discount rate return.


The demographic argument is that the aging baby boomers may pull their money from the market creating a long down turn. This should increase the caution with which one engages in the stock market during this ore baby boomer retirement period. Caution even more highlights the need to focus on divided as the return from stocks. Seniors needing money to live on are more likely to hold onto dividend paying stocks beyond the retirement age. Also if the stock is paying you a good dividend and you view dividends as the end (rather than price appreciation) you should be in a much better position to just sit back and collect dividends.
Balance your portfolio with “puts”
A “put” is an option that bets that a stock fall in price below that specified, “strike price” by a “strike date”. Puts can be bought and sold. An alternative to the put is to write a covered call. When you write a call you are selling a “call”. A call is a bet that a stock will rise above a given “strike price” by a given “strike date”
believe that as a hedge against a general market downturn investors should include some down positions in their portfolios. If the S & P 500 drops 20 percent in one day it is comforting to watch the value of your puts rise.
I like to buy puts on story stocks. Companies that unlikely to even make it to profitability. Using puts rather than “shorting” the stocks limits you liability for the occasional case where one of these story stocks does become a great success.

Tuesday, March 4, 2008

Schooling is not equal to Education

These two stories give me a chance to make some points about schooling:

This from Robina Hanson's blog overcomming bias:

Human capital offers an interesting case study in theory versus data. Just as most people think it obvious that medicine deserves most of the credit for health gains, most people think it obvious that education deserves most of the credit for human capital gains. Do-gooders the world over have for centuries "known" that what the poor really need is more medicine and education (and religion and art).

We theorists will tell you that, yes productive people tend to be better educated, but there are many possible explanations for wealth-education correlations. For example, schooling could be a credible signal of ability, or school could be consumption that the rich can better afford.

Most who study education are data-crunchers with little patience with such abstract theorizing. But until recently they were troubled by the fact that data on nations across time seemed to show a negative relation between wealth and education, even after controlling for measures of physical capital! For example, see this 2001 Pritchett paper.

This from the Wal Street Journel:

What Makes Finnish Kids So Smart?
Finland's teens score extraordinarily high on an international test. American educators are trying to figure out why.
February 29, 2008; Page W1

Helsinki, Finland

High-school students here rarely get more than a half-hour of homework a night. They have no school uniforms, no honor societies, no valedictorians, no tardy bells and no classes for the gifted. There is little standardized testing, few parents agonize over college and kids don't start school until age 7.

Yet by one international measure, Finnish teenagers are among the smartest in the world. They earned some of the top scores by 15-year-old students who were tested in 57 countries. American teens finished among the world's C students even as U.S. educators piled on more homework, standards and rules. Finnish youth, like their U.S. counterparts, also waste hours online. They dye their hair, love sarcasm and listen to rap and heavy metal. But by ninth grade they're way ahead in math, science and reading -- on track to keeping Finns among the world's most productive workers.


What is valuable education

Education, skills and knowledge seem to me to be very valuable in general but schooling is only valuable to the individuals who do better than average and to a certain extent to employers for grading people. IMO schooling is more about testing than teaching. If one looks at school objectively it seems that one would come to this conclusion. School helps with some useful skills like reading and arithmetic but it teaches very little information that will be useful to the students in life. Students would seem to better of watching myth busters than in a class.

What are the returns to schooling

Richard Vedder has found that the statistics by state shows that those states that increase education spending faster have slower economic growth than similar states that increase education spending slower. More education spending means more taxes and maybe less spending on physical capital. In a diminishing returns case should we not all agree that at some point spending on education would have a negative effect on economic growth? So then the argument is about at what point we go negative not if we ever go negative.

If you look at individuals, I am convinced that some students would be much better off if the money spent to school them was instead spent on physical capital that was then given to them. A poor student with 12 years of schooling will generally do less well that a poor student with 3 years of schooling and his own bulldozer and trailer to carry it to jobs.

How much instruction in needed

The un-schoolers are matching schools with minimal instruction and input. Most children, with individual instruction, can be taught to read, write and do addition, subtraction, multiplication and division in a very short period of time. So the returns on further instruction may start to decline rapidly a very low level of instruction.

Is it possible to educate those who do not care to learn

To paraphrase Murray Rothbard it seems that if a child does not want to learn and if his parents do care if he learns or not, the child will not learn in school or out of school.

Human brain's up take of information and what we learn

If human brains take up information at a fixed pace is it not possible that the useless information that we learn in school in order to make the grade squeezes out some other learning that might be more valuable in our lives? Rather than trying to teach children more maybe we should try to teach them more useful things.

Wednesday, January 30, 2008

Old Age is Mostly not Treatable - Medicare is the Stupidest Program Imaginable!

  • Medical care for the elderly yields the least bang for the buck of any medical care.
  • Since it is only part of the market the program has little ability to control costs.
  • Free care for mothers and infants would make far more sense.
  • I believe that the program started because the medical establishment was taking to much of the inheritance of the American people but the program did not address the problem, it just shifted the payment to the tax paying population.

    Study after study shows that medical care for the elderly has very little benefit for health. In fact some studies have shown medical care for the elderly to have a negative impact on life expectancy and quality of life (see the
    work of Robin Hanson). One study showed that people who choose hospice on average actually lived longer that those who chose more aggressive care.

    If the US government was the sole buyer of medical care they would have some power to affect price. They could set price for procedures which might cause rationing but they could push prices down, but because Medicare is only about one third of the market they have to pay close to the market price.

    Now if the politicians who enacted Medicare where truly interested in helping people the best bang for buck in healthcare is in care for mothers and infants. Care for mothers and infants can yield sizable benefits in quality life years.

    So why did Medicare get enacted? I see two reasons. First there was a real problem in that people whose parents became too ill for them to care for would hand their parents off to the medical establishment who would treat them to a level that would put large cost burden on the families. Secondly the elderly reliably vote in large numbers and Most will consume medical care at some point. Young people (in the child bearing years) do not vote in large numbers and only a small percent need the care as most babies are born healthy.

    And so we have Medicare and the medical establishment takes over people lives at the end and often does more harm than good.

    A related story to show in real life an alternative to excessive care in late life

    My mother (86 years old) has always had an attitude of trying to avoid doctors. For years we (the family) have tried to get her to go to regular doctors appointments. She resists saying that they always find something wrong. She will go if she is very sick. Once after much prodding she went to a doctor and asked about a symptom of having frequent bowel movements. She was diagnosed with Crohn's Disease. They gave her prescriptions for meds which she took for a while but the meds made her feel worse that the frequent bowel movements so she stopped taking them. Now she avoids certain foods and she says that the symptoms have lessened. She is now all the more determined to avoid doctors. After many years of trying to encourage her to get regular care I have begun to wonder if her way is not the better way. One thing that she fears is the medical establishment taking over her life at the end.

    My mother has always said that doctors are fine if you have something that there is a cure for but there is no cure for the disease of old age. Some times it seems that it is better for old people to not know all the diseases that they have. If the symptoms can be treated great but the treatments should be balanced against the harm that they do.

    From talking to my parents and their friends all that most old people care about is the expense. In fact once their health makes them unable to care for themselves they often prefer to die so they do not much care about the quality of care. Often it is family and the medical establishment that give them care that they do not want. That is why they strongly support medicare. It is not that they demand the care it is that they It back to the orgional problem they do not want the medical establishment to steal their money by giving them care that they do not want.