Obamacare and Jobs, What's Really Going On?

This past week, the nonpartisan Congressional Budget Office (CBO) released a report that included its projection of Obamacare’s impact on the economy, specifically in labor markets. In Appendix C of the report, the CBO concluded that Obamacare will cause “…a decline in the number of full-time-equivalent workers of about 2 million in 2017, rising to about 2.5 million in 2024.”

Then, the media went crazy.

Headlines such as “ObamaCare could lead to loss of nearly 2.3 million US jobs” (Fox News) and “The Jobless Care Act,” (Wall Street Journal) popped up everywhere. These headlines grossly misrepresented the report and the CBO’s intent behind that statement. The Wall St. Journal should know better.

The CBO did not say 2.5 million Americans would be fired because of the Affordable Care Act (ACA), nor did they claim that employers would seek 2.5 million less employees. This statement means that 2.5 million Americans will voluntarily leave their jobs or not seek employment over the next few 10 years. In CBO Director Douglas W. Elmendorf’s words, “[there] is there’s a critical difference between people who like to work and can’t find a job or have a job that was lost for reasons beyond their control and people who choose not to work.”

Fewer Americans will look for jobs due to Obamacare’s incentives, which are both beneficial and detrimental to society. Democrats point out how an individual willingly leaving their jobs to pursue other things is a positive and that one should not work just to get health insurance. For example, mothers of young children or the elderly may happily leave their job because affordable health care is available elsewhere. Republicans discuss how the subsidies the ACA provides to the poor disincentive work because as income goes up, the amount of subsidies one receives goes down. In that case, it may be better to rely on the government safety net instead of actively seek a job.

For once, both the Democrats and Republicans are probably right. I say probably because the policies within the ACA have never been implemented on such a large scale and unintended and unpredictable outcomes in the labor market are to be expected. The CBO admits, “The actual effects could differ notably.” In the 6 years of debate about the merits of the ACA, there have been too many lies, misrepresentations and dishonesty from both sides. This CBO report could have easily been twisted as “2.5 million new jobs over the next 10 years” and that would have been a distortion of the truth as well. So, whatever the ramifications of the ACA are over the next 1, 10, even 20 years, I recommend following the old saying “believe none of what you hear, and only half of what you see.”
 --
Luke Wolf 

Analyzing the Sports Cable Bubble and Its Impact on Customers and Teams Alike

In recent years, revenues of many professional sports teams, particularly in Major League Baseball, have increased significantly because of a boom in local television revenues. The values have continued to rise in recent years because of the inflation of America’s collective cable and satellite bill. However, few people fully understand why this is the case. Even if someone had no association to a team or channel, simply by paying for cable television they would be contributing to the cause. Each time a cable bill is paid, the channels collect a small fee. The most highly demanded channels are able to bargain for higher fees. As it turns out, most of these are sports channels. For example, according to Wunderlich Securities, ESPN brings in a staggering $10 billion annually. They gain $3.5 billion from what expected sources, such as television, digital, and magazine advertisements. They bring in the remaining $6.5 billion from cable and satellite affiliate fees. ESPN charges cable companies $5.06 per month per subscriber, which when multiplied by 100 million subscribers gets you to the $6.5 billion figure. Much of this comes from consumers who never so much as think of turning the channel to ESPN. This is the genius, or scam, of the sports cable bubble: tens of millions of customers paying at least $100 a year for sports they never watch but indirectly giving billions of dollars to these industries.

The consequences of these seemingly endless streams of revenue is an example like Time Warner Cable being able to offer the Los Angeles Dodgers $7 billion for the rights to broadcast their games. As a result, the Dodgers payroll, in a league with no salary cap, is essentially infinite. The Dodgers were able to increase their 2013 payroll to a whopping $241.7 million, an unheard of 112% increase from the 2012 figure of $114.1 million. The franchise rises in value, the players make more money, the team wins more games, and, ironically, non-sports fans are paying for most of it. Because of the Dodgers deal, Time Warner is expected to launch a SportsNet LA channel that charges subscribers $5 monthly.

According to Bloomberg BusinessWeek, fees for televised sports are rising almost twice as fast as cable subscriber rates, which putting providers in a bind. They are forced to choose between hiking prices to compensate at the risk of customers leaving, or they must stay faithful to their customers and deal with smaller profits. Consumers and providers alike are beginning to complain publicly about the inequitable qualities. However, little appears to be changing in the near future.
 --
Frank Luby

Silicon Valleys, Mountainous Valuations

Google recently acquired Nest, a smart thermostat maker with $300 million in revenue and no reported profit for 3.2 billion Though Google can afford a high price and high valuations aren’t uncommon in Silicon Valley, purchases like these illustrate how cozy the Valley is and how that coziness contributes to such high prices. Nest was founded in 2010; according to the S&P Capital IQ the company launched three initial investment rounds during which it hoped to raise $150 million in funds. Nest, despite decent sales (reported to be just over one million since 2010) may face difficulties in market penetration—the majority of thermostats are sold through home furnace and air condition repair services, which have longstanding relationships with well-established companies such as Honeywell (a company currently pursuing litigation against Nest for intellectual property violation). Consumers are unaccustomed to self-installation of devices such as thermostats; though Nest boasts its easy-to-install/easy-to-use nature, it is difficult to imagine swaths of average American consumers trading in the ease of repair service installation for a sleeker, shinier thermostat. This large price tag will probably drive up valuations of other similar start-ups and tech giants scramble to find the next big thing within the realm of smart home devices/appliances.

Nest's "Smart" Thermostat

In Silicon Valley, it would appear that nobody wants to be the company that can’t keep up. Google is making a bet on Nest—a very large one at that—and this is nothing new in Silicon Valley, where we’ve seen Facebook shell out $1 billion for Instagram to keep Facebookers where they belong, Google purchase Waze for $1 billion to keep the navigation app away from Facebook, and Yahoo acquire Tumblr for $1.1 billion just to keep up with the social media-sharing Joneses. NYT Dealbook analyst/contributor Steven Davidoff recently elaborated on this trend, noting, "The purchases are driven by a venture community that must feed the beast. Their friends at the few dominant players in technology — Google, Microsoft and Facebook — are all trying to find the next big thing and have core products that are money machines. The money is redirected into these acquisitions that are add-on products with great hype, but are undeveloped. It all builds the Silicon Valley prestige, driving valuations higher." Everyone wins...until the concepts don’t, and the bubble pumped up by the soaring prices bursts. I encourage you to think back to when Yahoo bought broadcast.com for $5.7 billion in 1997, before the dot.com bubble burst, which led to a frenzy of overvalued acquisitions culminating in AOL’s infamous $165 billion dollar, deal with Time Warner. This deal is commonly known as the biggest mistake in corporate history.
--
Brandon Nesfield

Getting Rid of the Debt Ceiling

Three decades of bipartisan debt ceiling raises

The US government has been in debt every year since 1865. Every single President has added to the national debt. No other developed country but Denmark has a debt ceiling. The US debt ceiling has been raised 70 times since 1960, without ever defaulting. So when the limit needs to be raised again on February 7th, it should be the last time. We should do away with the relic that is the debt ceiling.

For those who are unaware, the US debt ceiling is an amount set by Congress that the US Treasury is allowed to issue. However, the debt ceiling is set separately from the expenditures authorized by Congress. Therefore, when the amount Congress authorizes to spend exceeds the borrowing limit, the limit needs to be raised or the US defaults on its debt. Defaulting has catastrophic effects on both the domestic and international economy.

The debt ceiling was initially meant to make it easier for the US government to borrow money in times of unexpected war or expense. Today, it is a political bargaining chip that has the power to blow up the economy. In the past three years, Congressional stalemate over raising the debt ceiling has led directly to a downgrade of the US credit, a government shutdown, and a stock market crash. Now imagine if we crossed it.

The effects of defaulting on our debt are terrifying. Both short-term and long-term interest rates will spike, stock markets will lose confidence and drop, it will become more expensive for the US to borrow money, and countries may begin to question a dollar-based global economy. Now, why would risk these incredible consequences so some partisans can make a political statement? We shouldn’t.

The US government’s budget is extremely flexible. Entitlements have unpredictable growth depending on how much people go to the doctor, Presidents can ask for emergency funds and predicting the amount the US collects in taxes is an inexact science. It is ludicrous to set a hard limit on the amount we can borrow when, regardless of whether Congress authorizes a higher debt ceiling, we still owe someone money. We owe social security checks to the elderly, Medicare reimbursement to doctors, interest payments on foreign loans and countless more necessary payments.

I agree that the amount the US borrows does need to be reined in, but this is not the way to do it. Leaving the debt ceiling in place puts the minority party, currently the Republicans, but previously the Democrats, in a position to hold the economy hostage by not paying bills we have already committed to pay. Not paying our commitments is decidedly un-American. How can we hold other countries to a high standard of economic responsibility and critique fiscal policy abroad if we do not pay our own debts to the citizen next door? So when you here Speaker Boehner and Republicans discuss this week how they will demand concessions in return for allowing the US to pay their global commitments, remember that this should all go away.
--
Luke Wolf

Have the Reaches of Online Surveillance Become Breaches of our Privacy?

Apple’s new iOS 7 update boasts a vibrant visual overhaul, enables multitasking, and adds brand new camera software among some other improvements. But the most controversial and radical change that iOS 7 has to offer is the unlimited access to user’s personal data that Apple provides to law enforcement. Those who find this breach of privacy unnerving will be even more unsettled that Apple’s entire iPhone 5S fingerprint data will be shared with the NSA. In fact, for over a year the NSA and FBI have been compiling a special database of fingerprints to be used specifically with Apple’s new 5S technology. While the new technology certainly increases our convenience while lending a hand to law enforcement, it also breaches the bounds of privacy. Apple’s decisions raises the question, what should the ethical and legal reaches of online surveillance be determined by? On the other hand, many companies have taken measures to protect the privacy and anonymity of their customers. Forbes, for example, is launching a new tool for sending anonymous tips and documents. Sensitive information which is usually communicated through email can now be sent into Forbes through a tool called SafeSource, which uses the Tor anonymity network to upload documents to their reporters, while protecting the identity of the sender. As Forbes notes regarding its own tool, these precautions may seem paranoid. Nevertheless, people are paranoid and companies need to accommodate these customers, who will only increase in number as our lives become less private.

This clash between opponents of online surveillance and its advocates is embodied, to a certain extent, in the NSA’s attempts to breach anonymity networks such as Tor. Nevertheless, Tor’s ability to effectively preserve the anonymity of its users has been tested and proven against high standards. The National Security Agency’s inability to break Tor’s anonymity protection regarding the documents leaked by Edward Snowden presents a triumph for the opponents of online surveillance, and preserves some hope for a future in which we can retain semblance of privacy in our everyday lives.
--
Nyall Islam

Book Review: Too Big to Fail

Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System and Themselves
By Andrew Ross Sorkin

“The Most important risk is systematic: if this dynamic continues unabated, the result would be a greater probability of widespread insolvencies, severe and protracted damage to the financial system and, ultimately, to the economy as a whole” -- Timothy Geithner

The quotation above by Timothy Geithner, then head of the New York branch of the Federal Reserve in 2008, strikes at the heart of the finical crisis of 2008 and the severe consequences it posed for our nation’s economy. The economic recession that struck the global financial system was a historic and unparalleled crisis that challenged the bedrock of modern finance. It was a global recession that hit not only the United States but also every country that was exposed to the global banking system, a now essential and interconnected element of every developed economic nation. Dubbed by Ben Bernanke, Chairman of the United States Federal Reserve, as the worst economy since the great depression, the economic downturn in 2008 had far reaching and lasting effects that resulted in stunning losses not only on Wall Street, but Main Street as well. As an academic, and student of the Great Depression of the 1930’s, Bernanke was well aware of the stunning similarities between the then current declining situation and the era that crumpled the country for a decade. The turmoil of 2008 facilitated marked changes across the financial as well as governmental systems that would forever alter the business landscape within America.

Sorkin’s “Too Big to Fail” is an expertly written chronicle of the 2008 financial crisis: in particular the institutions and individuals who had leading roles in both its downfall as well as salvation. The book is above all a chronicle of human folly and the incredible mistakes made not only within this short window of 2008, but throughout the past 30 years of American business. The first and most essential aspect of understanding this book; and an element which Sorkin does well to point out; is how the crisis was not created or caused by events in 2008, but was the culmination and synthesis of a myriad of different factors that had been created for the better part of three decades. If one can learn anything form this book it is that there is no one element, no one smoking-gunthat can be attributed to the crisis of 2008; but a combination of complex and interconnected factors. The unprecedented growth or boomof the US economic system during the 80’s & 90’s laid the foundation for much of the 2008 recession. The US economy was on the rise, credit was flowing and mortgage industry was seeing incredible growth. With governmental pressure to promote homeownership and relaxed lending standards, the home mortgage industry was steering itself into a massive hole. No where was this rise to profitability more prevalent than within the financial services industry, by 2008 it has ballooned to more than 40% of corporate profits in the United States. (Sorkin, p. 3) It was a Wealth-creation machine known for large salaries and even larger risks. This rise is what marks the beginning of the many interrelated themes Sorkin highlights within the book.

The key characteristic of Sorkin’s book, a compilation of interviews and research, is that is flows chronologically; starting with the collapse and eventual sale of Bear Stearns to JP Morgan in March of 2008 all the way to the enactment of the government’s TARP (Troubled Assets Relief Program) in October. Although it was difficult at times to understand the multitude of events occurring so quickly and simultaneously; this calculated decision by Sorkin was critical to demonstrating the overwhelming nature of the period. The individuals facing these challenges were met with an ever-shifting landscape that would change daily if not hourly; their decisions were imperfect, but how could they not be -- they were simply doing the best they could during a terrible situation. As for the content of the book; it explains the rise and then fall of the interconnected banking system though the eyes of the people living through the crisis. The book highlights the complex financial instruments, risky lending practices, risk consolidation, leverage, asymmetric information as well as the many other factors that lead to the crash; however, Sorkin goes beyond simple description and does his best to distinguish to broader stokes of the crisis by placing it within the larger context of human decision making. Such terms as moral hazard and irrational exuberance are used to describe the key drivers of human error that lead to economy astray. (p. 33) For in the end, it was not financial products or lending standards that lead to the crisis of 2008, its was individual’s misguided decision making to use these complex instruments or sign off on a risky loan that truly lies at the heart of the crisis. The economy was not an autonomous decision maker; it was individuals who shepherded it into failure. The most important dynamic explored within Too Big to Fail, was the role of the government within these uncertain times, and its responsibility to protect the financial system. Never before in history had the government’s regulatory agencies played such an important and active role within the American economy. The fundamental characteristics of capitalism and a free market economy were severely challenged; some financial institutions had become so large and so integral to the rest of the system that letting them fail was simply not an option. What had started on Wall Street had become an epidemic of confidence all across the economy. This loss of confidence within the financial system is one of the few week points in the book; Sorkin does not fully explain the paralyzing consequences that a loss of confidence had on the system. The economy is not simply a machine that runs on tangible assets, it’s a larger symbiotic organism that relies on the hypothetical and theoretical relationships created by a collective trust in the system. Perception became the reality, and the economy stumbled. This relationship between Wall Street and Washington; and the interplay between the parties has forever shaped our nation. While many books have been written about the crisis, its origins and its ramifications; no other book offers such substantive insight into this brief period of time that will continue to guide the US economic system. Sorkin recreated the twelve months of 2008 that will most likely shape the economies path for the next twenty years. The crisis shook free many of the false realities our nation had about wealth creation and forced us to take a harsh self-evaluation of who we are as a country and what choices we are making. It pushed us to face the uncomfortable reality that we have serious challenges ahead of us, and that we can no longer afford to live blissfully unaware to the consequences of our actions. Our nations’ fanatical drive towards material wealth must come to an end; the 2008 crisis is evidence of that.

Too Big To Fail, is a delightful read that presents the details of the crisis in a manageable and tangible manner. But by far its strongest quality was its ability to truly create the individuals who had to face these epic challenges and make decisions that would impact not only the United States, but also the world at large. It truly is an illumination of human discourse, reasoning, ineptitude and brilliance; and how the leaders of the financial system coped with the potential destruction of our economy and how they lead their companies and the nation to a more stable place. The book constructed a window into the past for us to understand how the decisions were made and where adversities arose. I became intimately connected to the characters and the firms; griped by the books consistent flow and steady stream of relevant information. Sorkin does a wonderful job of constructing the larger contextual framework in which these decisions were made. It presents the reader with meaningful questions and timely opportunities to evaluate what they have read and what it means to them within everyday life. Well written and gripping, I would recommend this book to anyone interested in finance, as well as to anyone engrossed with the future of our nation and our economic system. Sorkin does not harp upon financial instruments or paint a morbid picture of egotistical bankers running wild; but fairly presents the crisis in a context that is significant to any reader, i.e. ‘where do we go from here’?
--
Editorial Staff 

iPhone 5 Released Amidst Consumer Concerns

AAPL: Not all is well in Cupertino, CA. Apple Inc. recently released their infamous and highly anticipated iPhone 5. With all the great new features and increased processing speeds the new Apple Maps app is under great scrutiny. The major issues are that the app often displays shops and restaurants streets away from their true location, important sites including some train stations are missing, and the search function appears unable to understand simple requests—essentially the app is unreliable and inaccurate. Many workers close to the case think that Apple placed its rivalry with Google ahead of its focus on iPhone customers. Apple has reassured customers that the product is in its infancy and will continue to improve. The issue with this is theory of improving with consumer feedback goes against Apple’s confirmed identity of producing products that are extremely user friendly. Could this yield an identity crisis? Only time will tell.
--
Zachary Zarnik 

Book Review: The Big Short

The Big Short 
By Michael Lewis 

The world of finance is one of losers and winners. When the sub-prime mortgage crisis hit the market in 2007, the big Wall Street firms with huge pile of sub-prime mortgage bonds lost while a few wise men betting against these bonds won. In Michael Lewis’ Book The Big Short, Lewis recounts the story of how a handful of Wall Street misfits anticipated the doom of the sub-prime mortgage bonds and made a fortune betting against the home-price inflation in mid-2000s. Lewis successfully tells the story with humor and clarity, considering the complexity of the sub-prime mortgage bond market before the crisis. However, his account of the financial crisis in 2007 is biased in that it exaggerates the effects of the public feature of investment banks, ignores factors such as government’s policies that lowered borrowing standards and neglects home owners’ speculative behavior.

Lewis overstates the effects of the public nature of the major investment banks. Lewis points out, toward the end of his book, that what lied at heart of the crisis was that all the major investment banks went public rather than functioned as partnerships. (Lewis traced the crisis back to a decision John Gutfreund had made- when he’d turned Salomon Brothers from a private partnership into Wall Street’s first public corporation.) Here is his logic: if a major investment bank were organized like partnership, each partner would have been more careful with their decisions and taken fewer risks. Now that these banks were public and the bankers were operating with shareholders’ money, they had few incentives to scrutinize their decisions or products because they could transfer risks to their shareholders; that was what led these firms to use high leverage and buy a great amount of sub-prime mortgages bonds without even knowing what were underlying these assets. (Lewis, 257) Lewis states that the incentives on these public Wall Street firms are entirely wrong because the bankers can get rich [even] when they are making dumb decisions. (Lewis, 256) In short, Lewis is saying that people within the investment banks took excessive risks because they had nothing to lose. This statement is not sound. First, the bankers did have many things to lose. Many individuals most responsible for the massive money loss during 2005-07 were the largest shareholders in their companies. These individuals lost money when their firms suffered.

In other words, they did not transfer much risk to the companies’ shareholders. Even though Howie Hubler, a former trader at Morgan Stanley, got away with large bonuses, the majority of the Wall Street professionals responsible for the crisis suffered from the crisis. Jimmy Cayne (CEO of Bear Stern)’s stock declined from 1 billion to 50 million. Richard Fuld (Lehman’s chairman) lost 550 million of his Lehman stocks when Lehman Brothers went under. The bankers had a great deal of interest within these firms. These individuals did want their firms to perform well. Even though the bankers are employees in a public company, they are effectively like partners in a partnership company because of their large stock holdings. Therefore, the employees engaged in careless behaviors not because they were in a public firm, but rather, because of some other factors. Second, we can refute the author’s contra-positive statement: if an investment bank were not public, bankers would not have been as careless. To refute this, just imagine that an investment bank were actually a partnership. In this case, a banker would still have bought those mortgage bonds because they were led to believe that they could make profits in these bonds. The only difference would be that the bank would not have had the ability to raise funds in the stock market. In this case, these partnership firms would just have found other creative ways to raise enough capital to buy the mortgage bonds, which would eventually lead to the 2007 crisis. To conclude, the mere fact that the major investment banks were public is not important in causing the crisis.

Moreover, the book is biased in that it gives all the blame to investment banks and ignores the government’s policies’ effects on the crisis. If the government did not lower the borrowing standards and encouraged lending at Fannie Mae and Freddie Mac, the crisis might never have had happened. Here is what happened: at first, the banks were making money with bundling mortgages backed securities backed with good credit and down payment and selling them to investors. Then they became greedy and wanted to make more money by making more loans. When there were not enough people with good credit, the banks invented credit default swaps. (In the book, a trader named Mike Edman within Morgan Stanley came up with this idea). With these swaps, a bank could give out loans to people with low credit score and little down payment. However, a loan could be granted only if it fulfilled the underwriting standards designed by the government. Therefore, the banks had to persuade the politicians to ease the underwriting standards. The investment banks then spent huge amount of money to get the government ease the standards. Then Barney Frank was saying that everyone deserves to own a home and Bush was saying that everyone deserves to live the American Dream. Clearly, if the government had not relaxed lending standards, the investment banks would have never got the chance to create the CDOs, which eventually led to massive defaults of people who should not have owned houses at first place. True, the investment banks were greedy. However, without the help of the government, they would have never been able to unleash their greed. The book also ignored that homeowner speculation also contributed to the crisis. In the book, the homeowners who got sub-prime loans were depicted as poor people who were told by the mortgage sellers to tell lies and who got deceived by the teaser rate and was later ripped off by the real rate. (Lewis, 19) These customers were truly the victims of the entire housing market scheme.

However, we had another crowd of customers who had more than one house, to whom we should not be as sympathetic. They were buying houses as speculative investments. During 2006, 22% of homes purchased were for investment purpose, with an additional 14% purchased as vacation homes. During 2005, these figures were 28% and 12%, respectively. The widespread speculation pushed house prices up dramatically. Housing prices nearly doubled between 2000 and 2006. Many homes were purchased even when they were still under construction and then sold for a profit without the sellers ever having lived in them. The housing bubble was so big that Warren Buffett stated that it was the greatest bubble he has ever seen in his life. The question is how did the broad speculation contribute to the crisis? The rising housing price gave mortgage sellers excuses to give out sub-prime mortgages, whose defaults eventually led to the crash. The inflating house prices also gave credit to the CDOs that investment banks created and encouraged large trading volume of CDOs, which increased the magnitude of the crash. As a reader, it is hard not to wonder how could Lewis know every time in advance that a crash was coming and went about documenting it, as what he did when he wrote Liar’s Poker and this book. It must be that the crash had shown its signs in times of prosperity and Lewis captured these signs.

We should learn to be as forward-seeing as Lewis is. We are just four years away from when the crash happened and our economy is still not fully recovered. As we gradually pull ourselves out of recession, let’s remember the lessons learned in the past and walk with great care. And here, we refer not only to investment banks, but also the government and every average American citizen.
--
Editorial Staff

Book Review: A Random Walk Down Wall Street

A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing 
By Burton Gordon Malkiel 

Money Lying on the Ground and an Ape Throwing Darts: two stories in A Random Walk Down Wall Street strike me the most. First, if you are walking on the street and see a $100 bill lying on the ground, you should not pick it up. Second, a blindfolded ape throwing darts at a newspapers financial pages could select a portfolio that would do just as well as one carefully selected by experts. And these two stories illustrate the main point of the book: the stock market is efficient and no one can earn above-average returns without accepting above-average risks. Therefore, an average person who invests in index funds can even do better than a professional who actively manages a fund. Besides this thesis, the book also introduces some investment vehicles and strategies. The question is: should I recommend this book as an introduction book to an intelligent friend with no investment experience?

The answer to this question depends on what my friend’s situation is. Specifically, it would concern my friend’s intended length of investment, market she chooses to invest in and her purpose of investing. In the following, I will mainly talk about situations where I won’t recommend the book to my friend. The book’s Efficient Market Hypothesis might not work well if my friend wants to invest short-term. If she sees a $100 bill on the street, why wouldn’t she pick it up just because it should or will disappear eventually? (The EMH says that the bill should or will disappear.) In other words, if my friend wants to invest in the short-term, why would she refuse to grab the short-term benefits just because it will disappear in the long run? Say that if my friend needs to send her children to college in four years, she can only invest the inheritance for the next four years. She might be better off by investing in an actively management fund. She probably will get much money by buying some tech stocks in 1995 and selling them in 1999, even though the internet bubble busted later on. If one is investing in a short period of time, the book’s theory will not necessarily apply since the thesis is based on long term. In this case, I won’t recommend the book to my friend. Instead, she will benefit more from a book that introduces different strategies on how to select stocks or fund managers.

The place the ape (average investor) is at also matters. "King Kong was a king and a god in the world he knew, but now he comes to civilization merely a captive", says Carl Denham in King Kong. Index funds might not outperform the actively managed ones at certain places. For example, if my friend is in China, she might be better off by hiring a good manager to manage her funds because the Chinese stock market is highly speculative and relatively opaque. According to the China Securities Regulatory Commission, as high as 65% to 70% of the investors in the Chinese stock market consists of private individuals. Partly because individuals tend to aim at the short-term rather than the long term compared to institutions, the Chinese stock market can swing dramatically and easily go out of norm. In the book, the market always adjusts itself to normal state. However, if abnormality is the rule, rather than the exception, like the Chinese stock market, the abnormal state becomes the new norm. Since it would be difficult to tell when the market will correct itself, one can do better by just following the trends or the new norm. Moreover, information from the public companies is not highly transparent, which prevents the market from performing efficiently. Since the Efficient Market Hypothesis is a condition for the superiority of index funds over actively managed funds, sticking with index funds, as promoted by the book, might not work well. Sometimes, the big mutual fund management companies have insider information that helps them take advantage of market inefficiencies and perform better than the index funds. (Note that the Chinese law system is not mature enough to prevent that from happening.) In fact, a recent research on S and P has shown that in some areas, stock picking outperforms passive investing. For example, more than half of actively managed large- and small-cap value funds beat the benchmarks in the past five-year period. Actively managed large-cap value funds did particularly well, returning 2.2% per year on average, versus 0.63% for the index; actively managed small value funds earned 3.79% per year, versus 2.96% for the index. The average actively managed international small-cap fund returned 4.91% per year over the last five years, more than triple the index. Index funds might be the King and God of stock market in some areas, but merely a captive to actively managed funds in other areas.

Moreover, the purpose of investing matters. If my friend is on the street to appreciate the spectacular architectures, a $100 bill lying on the ground will not be appealing to her. If my friend wants to invest to have fun, she would not derive much pleasure from just passively investing in index funds. Rather, I would recommend some other book that goes into the details of how to pick stocks to her. In another case, if my friend is investing to learn about companies or behavior of equities, she would not learn much with index funds. On the other hand, if my friend just wants to get rich slowly, the book by Malkiel is the right one. Lastly, you never know if your friend will be the next Warren Buffet. It is always worth a try. If I recommend the random walk book to my friend up front, she might become a passive investor and just give up picking her stocks and developing her own investment strategies.

A potential Warren Buffet might just get covered up in the mascot of a blindfolded ap.
--
Editorial Staff

Occupy Wall Street: Where Is It Headed?

As the Occupy Wall Street movement continues to sweep the nation, and the 99% continue to cry for accountability and justice within the financial system -- we should take heed in not only their movement, but also the glaring reality that the group is fighting a battle they simply cannot win. For despite the growing number of Occupy groups that have sprung up across the nation (both on and off college campuses) -- these protesters face a discouragingly long uphill battle. Starting with the negative media surrounding the group’s often fragmented goals, and ending with a financial situation that is often too complicated to explain to the average American -- OWS was doomed from the start. The blame the group seeks falls to no one individual, nor can the economies downturn be traced to one specific event. Beyond the desperate cries for Wall Street executives to be held accountable for what they have done -- what the movement has failed to realize is that they are not protesting the greed and corruption of the financial system, but those of American society. The full-bodied, drastic changes OWS wish to see implemented would only come only at the cost of broad-spectrum changes to American consumer culture and massive disruptions to the American economy.

Without even taking a stance on the movement, it is easy to see that the group’s vision completely outdistances the realities of our current situation. There is no doubt that the glaring disparities in wealth, education and living standards need to be addressed within our society -- but protesting the men and women who have the means and the ability to keep themselves in the 1% is not the best way to get there. To attack the principals of capitalism -- the foundation upon which this nation was built -- is but to alienate yourself to a position where you can no longer create the meaningful change you wish to create.
--
Editorial Staff