It's Final Exam Time

I give my last final exam of the semester tomorrow to my MBAs. Just for the heck of it, I named all the companies and individuals in the problems after characters from Terry Pratchett's Discworld novels. I wonder if anyone in the class will notice?

If they do, I'll probably give them extra credit.

Bill Miller: The Stock Picker's Defeat

From 1991 to 2005, Bill Miller (superstar mutual fund manager for Legg Mason's Value Trust) beat the S&P every year - a record no other manager has ever come close to matching. Then, this last year the bottom fell out and his fund lost 58% (about 20% more than the typical fund.

The Wall Street Journal has a great interview of Miller, and here's the best line:

This meltdown has provided a lesson for Mr. Miller and other "value" investors: A stock may look tantalizingly cheap, but sometimes that's for good reason.

It's a very good piece for discussing in class, since it touches on a lot of issues related to market efficiency. Read the whole thing here.

When Diversification Doesn't Work

I'm not sure, but I think it has something to do with correlation...

The Long-Run and International Evidence on the Value Premium

The term "Value Premium" refers to the empirical observation that firms with low price multiples (i.e Price/Book, Price/Earnings, Price/Cash Flow) have tended to have higher returns than their high-multiple counterparts - even after controlling for risk. People give a lot of possible reasons for this - we have a bad model for controlling for risk, there are behavioral biases, or it's simply a case of data diving.

I just came across a paper by a group known as the Brandeis Institute titled "Value vs. Glamour: A Global Phenomenon" that seems to rule out the data diving story. They examine the evidence for the value premium both across time (the mid 1960's to the present) and internationally. They found that

While the degree of outperformance of value stocks vs. glamour stocks varied across data sets, what strikes us as most significant was the consistency the value premium exhibited:

• across valuation metrics, such as price-to-book, price-to-cash flow, price-to-earnings,and sales growth
• across time, which in this study applies to the 1968-2008 period for U.S. stocks,and the 1980-2008 period for non-U.S. stocks
• across regions, as the results indicated a value premium in developed markets in North America, Europe, and Asia
• across market capitalizations, as the relative outperformance of value stocks to glamour stocks was evident among both large- and small-cap stock universes.
  

The paper has a lot of nice graphs that could be useful in class. You can read the whole thing here.

HT: CXO Advisory Group

The Final Throes of the Semester

It's that time of the semester:

• Only one meeting left for each of my classes.
  
• My student-managed fund survive their end-of semester presentation to the advisory board
• I've graded and handed back all assignments except for final exams
• I've even given out and collected my evaluations
  

Now all I have to do is make up my finals, give them, and grade them.

The crop is almost in. And man, oh man is it about time.

One of the things I like about this career is that it has a rhythm to it - we have new "crops" each semester, and a feeling of accomplishment once the semester is done. But that final week or two is always a bit crazy.

So, to all my readers: If you're a student, good luck on your exams and projects. If you're faculty, hang in there - it's almost time for the break.

New Blog on Markets

Al Roth (the George Gund Professor of Economics at Harvard) is extremely well known in the fields of game theory and market design. For just a few examples, he's published highly cited work on the market for donor organs, matching medical students with residencies, and matching public school children with schools. He also

Now he has a blog, titled (appropriately enough) Market Design. It's definitely worth a look-see.

HT: Marginal Revolution

Credit Default Swaps and Arctic Expeditions

This weekend I posted a video of a "whiteboard" talk by Paddy Hirsch of Marketplace, in which he explains CDOs and the credit crisis. Here's another one where he explains Credit Default Swaps (CDS) using the analogy of an arctic expedition.

Since I'm teaching Fixed Income next year, I'm sure some of these will make their way into my class.