24 December 2012
My Top Five Articles from 2012: Exploding the Risk-Free Rate, Lie Detection, and More
Posted In: Best Of
As we exit 2012 I’d like to highlight a few of my favorite pieces written for the Enterprising Investor blog. Some were popular and some of them languished in obscurity, but all, I think, are worthy of a little of your most precious resource: your time.
- China watchers frequently read tea leaves in order to understand the Asian behemoth. Here is a nice Oolong that I consider to be my finest piece written for the blog, despite its lack of popularity: “Change in China Hidden by Subtle Policy Shifts.”
- Much of the financial turmoil of the past 15 years is due to a mispricing of financial risks. First were the dot-com assets, massively overvalued at the millennium; then the mortgages of the real estate bubble; and more recently the sovereign debts of many first world nations. At the root of risk mispricing is the flawed notion of the “risk-free rate” of return. I began by poking holes in the concept of the “risk free rate”, and then I proposed alternatives to the oxymoronic concept of the “risk free rate.”
- A question besetting fixed-income investors everywhere is the pricing of negative nominal yield debt securities. Given the seemingly boundary-free willingness of central banks to intervene in the economy by keeping interest rates low, I decided to take a look at just “How Low Can Yields Go?” The answer: there is the possibility of a capital gain in a bond so long as you expect interest rates to fall below your yield on cost and there is time left until maturity. I would expect this to remain an issue for financial markets for at least several more years.
- “Capitalism: It’s as Much About Cooperation as Competition.” There. Enough said!
- I have been creating a suite of information around lying and deception behavior detection for more than a year. Here are the three pieces dedicated to this burgeoning area of research (expect more in the coming months):
Wow, did I learn a lot in 2012! Here are some of my favorite things I discovered while trying to keep my head above life’s waters:
- Favorite quote of 2012: “A camel is a horse designed by a committee.”
- Favorite investment lesson of 2012, courtesy of the wise Jim Butcher of Entegra Partners: “Often scenario planning will reveal a problem that triggers a prepared response. It is often the case that the problem that created the solution never materializes, but a problem similar to it does arise and the solution is then easily implemented.” In other words, be prepared for multiple possible futures, not just one forecasted outcome.
- Thing that made me most proud to hold a CFA charter in 2012: “50 Ways to Restore Trust in the Investment Industry,” which was created by fellow charterholders and boldly presented to the public by our CEO John Rogers, CFA. Nice work!
- Favorite book of 2012: Strings Attached: Untangling the Ethics of Incentives by Ruth W. Grant. This book is the first fresh look at incentives I have read in my two decades career in investing. Grant’s keen insight about incentives is that they should be evaluated as a form of power and not just as a way of altering the price-setting mechanism. Genius!
- Favorite thing to worry about in 2012: What will come after the Great Recession, the European Sovereign Debt Crisis, and the Fiscal Cliff?
Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.
