Modern Pensées

Reconsidering theology, philosophy, culture, economics, and politics

Posts Tagged ‘Hedge Funds

Best Links of the Week

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38% of Americans fail the U.S. Citizenship test

AT&T buying T-Mobile

Strange circumstances surrounding Obama administration policy on action in Libya

Some interesting analysis of cash-only doctors practices

Pastor Accused of Denying Communion to Churchgoers who Didn’t Give Tax Refunds

Scott Walker explains in WSJ Why I’m Fighting in Wisconsin

Chad Ochocinco trying out for Kansas City’s MLS soccer club

There Aren’t Enough Millionaires… (to cover our fiscal/deficit woes)

Hedge Funds had large plays against Japanese economy before earthquake/tsunami

Alan Greenspan says Obama Administration is “Too Active” in Economy.

Possible use of Large Hadron Collider as a time machine?

Obama Budget Underestimates Deficits by $2 Trillion

Kevin DeYoung has a thorough review of Rob Bell’s “Love Wins”

Devastating article examining the essay grading industry

Kindle to be free by the 4th Quarter of 2011?

Journalist grills Rob Bell:

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Best Links of the Week

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Advice for Theological Students” and “More Advice for Theological Students and Pastors” are both absolutely fantastic gems gleaned from Kevin DeYoung.

Developers Trying To Treat Houses Like Copyright; Want A Cut Of Every Future Resale” and even worse than this, the financial firm pushing this garbage is in the process of securitizing these hidden ‘resale contract covenants.’  No offense, but it is greedy morons like these guys who got us into the whole sub-prime mess.  I am all for free-market economics, but I really hope the free-market (particularly the hedge funds) decides to vote ‘no’ with their feet.

A List of Important Sermons and Articles Worth Reading” (HT:  JT) – this is an excellent excellent list.  There are a good number of these that I have not read.  I am particularly excited about those that I have not read that have multiple commendations.

Nancy Pearcey dissects the affect of secularism on America and its’ disability to provide a cogent response to radical Islam.

Here is also a really good interview with Nancy Pearcey on her new book “Saving Leonardo.”  Coincidentally she also weighs in on James Daveson Hunter’s new book (see next link)

James K. A. Smith’s review of James Daveson Hunter’s “To Change the World

Excellent article in The Atlantic from Jeffrey Goldberg analyzing the likelihood and aftermath of an Israeli preemptive strike against the Iranian nuclear program.

Typewriter robot art… very Philip K. Dick-esque

Self-assembling biological photovolatics

Canadian PhD student creates human powered aircraft with large flapping wings.  One of the craziest things I’ve ever seen.

Pacman with 111 human pixels:

Thoughts on Economics and Investment, Part 3: Diversification

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Portfolio Diversification: A Sound Strategy?

If there were a Ten Commandments of investing, “Thou shalt diversify,” would certainly make the list.  This post will explore the veracity of portfolio diversification.

Relevance of the lessons learned from ‘buy and hold’

In the previous post in this series, we challenged another member of the Decalogue, “Thou shalt buy and hold.”  We concluded that the ‘buy and hold’ strategy is highly problematic in the 21st century.  “Buy and hold” is only a self-fulfilling economic prophecy if the 21st century has the same economic growth that the 20th had, including all of its landmark innovations.  Energy and food are no longer cheap.  Science is bumping up against technological asymptotes.  Further, it should be noted that no institutional investment firm follows the ‘buy and hold’ advice.  I believe this advice is intended to bring more (predictable) money into the markets for those who manipulate the markets (institutional investors, hedge funds, big box financials…).

Why Portfolio Diversification Exists

Portfolio diversification is essentially hedging your financial bets.  In theory, hedging your bets seems like a good idea:  spreading out risk by holding positions that perform well when other positions you also hold perform poorly.   I think financial advisors give this kind of advice for three reasons:  1. Market unpredictability – financial advisors do not want to stick their head out, be wrong, and have clients upset with them  2. Risk minimization – it is much safer to have your investors have vanilla portfolios that post minimal gains/losses, plus, some people actually embrace minimal risk (esp. those retired or nearing retirement)  3. To make the market more predictable – big box financial firms want you buying their financial product, such that, their financial product can be a self-fulfilling prophecy, and they also want your money in the market to be a stabilizing influence (ie. if half the market are Joe Plumber with diversified portfolio, then it makes Big Box Financial’s or Richard Hedge Funds market manipulation simpler).

The Danger of Portfolio Diversification

Portfolio diversification can be akin to putting ice in your already cold Coca-Cola.  You trade a drop of a few degrees in liquid temperature to the watering down of the beverage.  Portfolio diversification has the same affect (and I have a deep disdain for watered down Coke).  One has to ask themselves:

If I know (or am quite confident) some particular aspect of my (diversified) portfolio is going to perform poorly this year (or insert X period of time here), why would I continue to hold the position?

Consider the following, several long held safe bets will likely perform poorly this year:

-Bonds – with interest rates so low, these will perform poorly until the global economy bounces back and interest rates rise

-Small-cap stocks – stocks that have no international aspect and are domestically focused will incur the brunt of the American financial climate without the benefit of the pockets of international growth.

-S+P 500 – some may disagree with me here, but I think the S+P is overvalued already.  David Tice at Federated Investors thinks is overvalued by 40%.

Our current administration has been pursuing hardcore inflationary policies by artificially flushing massive amounts of printed money (borrowed from the Chinese) into the economy.  These are inflationary policies, and given time they will result in inflation (it is just a matter of how much inflation).  Why would I want any exposure in my portfolio to these aforementioned investments given the financial trajectory of the U.S. and world economies.

The two dangers of portfolio diversification are:

1.  You will always have aspects of your portfolio performing poorly if you are truly diversified

2.  Diversification assumes a long-term strategy (ie. the ‘buy and hold’ strategy) that is highly problematic

Up next we will take a look at the short-term investment strategy.

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