The number of draft postings waiting my attention is getting out of control. So I’ve decided to throw a few together in one post.  As I haven’t posted  a headline story in a while and my seven year old wants to see his art  online I hope you’ll excuse this grab bag being a headline post.

I received two emails asking whether I have started using margin. While one of my accounts is currently in margin I am looking to get back to below 100% invested. My thinking is that if the market goes up from here 100% invested is fine, if it goes down to new lows then being on margin would hurt and deny me the opportunity of profiting from the new lows. Call it the utility of money if you wish. I still see this is a great time to be a net buyer of stocks.

Perceptions Deceit and the Media

Changes in perceptions of a company and industry fundamentals are the catalyst for a stock’s movement. Those changes need to be anticipated before others do. In this article, hard wired to deceive, Aswath Damodaran discusses how people are hard wired to be deceptive and the implications to your finances. Another blog I read today discusses how the financial media is atrociously bad at making accurate predictions. Put the two together and hopefully you conclude that you should never take media at face value. If you still have faith in the media then please consider Herb Greenberg. A journalist presenting himself as an investing guru who later admitted he was often talking the books of the short sellers who were providing his information. I’m not saying Greenberg did anything wrong or had any intention of deceiving people.

Does the financial media help people escape their cage of ignorance only to send them crashing to the jagged rocks below?

Buffett’s metric says it’s time to buy.

“According to investing guru Warren Buffett, U.S. stocks are a logical investment when their total market value equals 70% to 80% of Gross National Product.” via Fortune: Buffett’s metric says it’s time to buy – Feb. 4, 2009 .

Fat Tails

However, although the normal distribution closely matches the real world in the middle of the curve, where most of the gains or losses lie, it does not work well at the extreme edges, or “tails”. In markets extreme events are surprisingly common—their tails are “fat”. Benoît Mandelbrot, the mathematician who invented fractal theory, calculated that if the Dow Jones Industrial Average followed a normal distribution, it should have moved by more than 3.4% on 58 days between 1916 and 2003; in fact it did so 1,001 times. It should have moved by more than 4.5% on six days; it did so on 366. It should have moved by more than 7% only once in every 300,000 years; in the 20th century it did so 48 times.

via A special report on the future of finance: Fallible mathematical models | In Plato’s cave | The Economist.

One day I will post more extensively on this topic and it’s implactions on the Black-Scholes otpion pricing. One day… 

Pullback Less Than Expected in 4th Quarter

Absent a large stimulus package, most economists expect the nation’s output to shrink not only in the first half of the year, but in the second half as well. In April, the [US] recession would become the longest since the 1930s. Until now, the record, 16 months, was shared by the severe recessions of 1974-75 and 1981-82. This one began in December 2007 as employment peaked and began to fall.

via Pullback Less Than Expected in 4th Quarter – NYTimes.com.

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