Capital Ideas

Review of Pie Five Pizza in Irving

2011-11-07T18:41:00.009-06:00

Does America need another pizza chain? Pie Five Pizza Company, a wholly-owned subsidiary of Pizza Inn Holdings Inc., seems to think so. I received a buy-one-get-one-free postcard from their new location in Irving and headed over.

It helps to imagine Pie Five as a Subway for pizza, because that's exactly what it is, down to the assembly line addition of banana peppers and olives from behind a glass sneeze guard. The pizza is done in less than five minutes and it's priced at a flat rate, regardless of how many toppings you choose. The optional salads are all pre-assembled in recyclable plastic containers, same as the dressing packets.

We had two pizzas - one thin crust with vegetables, the other a regular crust with all the meats. The verdict? Not surprisingly, this tastes like a pizza made by Subway. Not offensive, but without any real positives either. I didn't taste anything that would set this pizza apart from what you'd get at Pizza Hut. So while I wouldn't mind eating here for lunch, there's not much that would draw me in either - it's just your ordinary fast food. When I want really good pizza in Irving, I'll stick with Cavalli's.

Here's a couple of Pie Five pizza photos, taken with a Sony Nex-5N and a Voigtlander 35mm f/1.2 ii.

Nex-5N and the Voigtlander 35mm f/1.2 ii Review

2011-11-06T16:10:00.001-06:00

The Sony Nex-5N has decent high ISO capabilities but it's not in the same league as full frame cameras like the Nikon D700, so fast glass is critical for available light shooting. The new Voigtlander 35mm f/1.2 ii fits the bill when you add a Leica M-mount adapter. It adds some weight but is still a very compact package; here's what it looks like on the 5N:

Manual focus with this lens at f/1.2 takes some practice as the depth of field is razor thin. But when you hit the focus just right, sharpness is surprisingly good, even wide open. Color and contrast are excellent and chromatic aberration is well controlled. Here's a few sample shots:

Nex-5N and 16mm f/2.8

2011-11-05T14:34:00.000-05:00

The Sony Nex-5N and 16mm f/2.8 lens are a portable combo that delivers solid picture quality without a flash, and still fits in your jacket pocket. A couple of sample shots from the Dallas Symphony Orchestra at the Meyerson. There's a few more photos if you click through to the flickr set.

Nex-5N and Rokinon 85mm f/1.4 (Nikon mount)

2011-11-04T22:52:00.001-05:00

The Rokinon 85mm f/1.4 is a cheap, fast lens with very good image quality; the only thing it lacks on Nikon bodies is autofocus. This is less of an issue when you adapt it to the Sony Nex-5N. Here's a size comparison with the kit 18-55mm lens. The Rokinon isn't a huge lens, but with the added bulk of the Nex-Nikon adapter,

I picked up a used copy of the Rokinon for $150 - it feels solid and the focus ring is well dampened. This isn't a full review, but my initial impression is that the lens represents a tremendous value given the image quality and low light performance it can deliver. Manual focus takes some practice but isn't too bad given the Nex's focus peaking and MF assist. Below are a couple of shots taken with the Nex and the Rokinon wide open.

Nex-5n Review - Initial Reactions

2011-11-03T16:22:00.002-05:00

I took my new Sony Nex-5n with the kit 18-55 lens out to shoot a family birthday party a couple of weeks ago. Here are my initial thoughts.

I was shooting indoors with moderately poor lighting. Focusing was relatively quick although it did get fooled a few times when there was strong backlighting from a row of windows along one wall. The automatic focus point selection wasn't bad but wasn't great either - I need to set this on using the center focus point and then recompose.

I shoot in raw - many photos at ISO 3200 were perfectly usable for my purposes (screen and small prints) with a little noise reduction in Lightroom. The kit zoom gets to f/5.6 pretty quickly so it wasn't optimal for indoor, ambient light shooting.

The flash was a disappointment - I tried the fill flash setting but everything I got was way blown out. I haven't had time to tweak this but maybe there is a setting I'm missing. Otherwise they're going to need a firmware update as the flash is close to unusable.

Auto white balance in the camera was ok, but most of the photos benefited from some WB adjustment in Lightroom.

The camera handles very well. Tilting the screen out to shoot from the hip is a nice feature, as is the touch-to-focus.

Nex-5N and 18-55 versus 55-210 size comparison

2011-10-18T19:57:00.003-05:00

I haven't had time to shoot with it yet, but here's a photo to compare the size of the new Nex E-mount 55-210mm lens on the Nex-5N next to the 18-55mm kit lens:

Nex-5N dimensions of tripod mount

2011-10-17T21:13:00.003-05:00

Here are three photos with a ruler showing the base of the Sony Nex-5n and its tripod mount. The mounting area is oddly shaped - the bottom of the camera juts out like an isosceles trapezoid. This makes the base of the camera even with the lens when you set it down on a table, but also reduces the surface area for friction with a tripod plate.

Nex-5N size comparison with a Nikon AI-S lens

2011-10-16T21:11:00.000-05:00

Here's a photo showing the Sony Nex-5N with the 18-55 kit lens next to the Nikon 135mm f/2.8 AI-S manual focus lens. I'm still waiting for my f-mount adapter to try this combo out.

Sony Nex-5N Mini Review

2011-10-16T09:18:00.006-05:00

I just got my Sony Nex-5n camera with the 18-55mm kit lens. So far I’ve only used it for shots in iAuto (intelligent auto) mode but I like it. Here are a few early impressions. The camera turns on quickly and is ready to shoot in less than 1 second.

Autofocus is pretty fast in good light, perhaps a hair slower than a DSLR but not slow. The touch screen allows you to lock focus on a particular object as you compose the shot. I haven't tried continuous focus tracking or manual focus yet.
The in-lens image stabilization works well and allows for shutter speeds below 1/10 second if you use good technique. High ISO shots up to ISO 3200 are no problem – you start to lose some detail but the JPEG noise reduction is pretty good and you can get better control if you shoot RAW. Adobe Lightroom 3 supports the Nex's RAW files. Overall, image quality is quite good with the kit lens. The zoom ring is firm and smooth (no creep). The flash is not great as it tends to overexpose. I need to figure out how to dial in the flash exposure compensation by -2/3 EV.

The interface is good - the touch screen is very responsive (close to an iPhone 4, but no multi-touch) and exceptionally well integrated into the camera's operation. When shooting, you can touch the area you want the focus point on. When reviewing shots, you can flick left or right to scroll through them, or tap to zoom in. The control wheel on the back can be used as a 4-way directional pad, as a scroll wheel, and has a center selection button. When holding the camera, my thumb rests on the playback button, handy for reviewing the shot you just took.

There is a much reported issue where something in the camera makes a slight clicking noise when you move the camera. This noise gets picked up by the camera's microphone when recording video. My camera makes the clicking noise and it does not take much movement to set it off. Contrary to some reports, massive shaking is not required to get the click. And yes, the clicking shows up on the audio track. However, the audio quality with the built in mic is poor - nowhere near as good as a real camcorder - so if you plan on doing any kind of video work, get a dedicated external microphone. Putting aside the audio issues, video quality is outstanding.

The photo shows the Nex-5N with the kit lens next to a Blackberry bold for a size comparison.

The future of the HP Touchpad: pricing, development, apps, and more

2011-08-21T16:10:00.004-05:00

Following HP's decision to discontinue the Touchpad and WebOS, an epic thread began at SlickDeals on Friday night. The discussion surrounded various retailers' plans to liquidate Touchpad inventory - $99 for the 16GB and $149 for the 32GB. These prices were well below the MSRPs of $499/599 and none of the other tablets (Tab, Iconia, Transformer, Xoom, and even the meager Thrive) could even come close to these prices, even on Black Friday. You can't even get a used iPad for close to $99.

The bargain hunting crowds from SD soon overwhelmed the various retailers - HP's own site was the first to start clearing out Touchpads and its systems were quickly brought to their knees. Woe to the admin who arrives at work on Monday morning to find a smoldering heap in the server room. Rumors then quickly spread about other vendors who might offer the Touchpad - Best Buy was the subject of much speculation after their Canadian affiliate began offering units at firesale prices. DataVis had over 6,000 units in stock but it's website was also brought down - they quickly regrouped and posted them on eBay, where the entire lot sold out in less than 15 minutes. Amazon was slow to respond, but offered Touchpads as Gold Box discounted items on Sunday for a lucky few who happened to refresh the page at exactly the right moment. Best Buy initially claimed to be returning all Touchpad stock to HP, but revealed late on Saturday that it would start selling them as closeouts with no returns. Many who had tried to pick up a deal in the store were turned away earlier in the day. Massive traffic then hit bestbuy.com as hordes of people requested units for in-store pickup. Most stores had closed by this time on the east coast, so shoppers headed to the stores first thing on Sunday morning to try to claim their reserved unit. Disappointment struck again as communication had broken down between bestbuy.com, corporate, and the stores - so many stores just started selling their stock to whomever happened to be first in line. Later on Sunday afternoon, eCost's website melted down after they appeared to be selling them at the discounted price.

As for myself, I ordered a 16GB unit on Saturday for $399 from Amazon with the expectation that they would cut the price in the next few days. With Amazon's no hassle returns, the worst case was that I would be out a few bucks. Fortunately, my order shipped on Sunday for delivery on Tuesday (thanks Prime!) and the online customer service rep quickly refunded $300 to my credit card. Normally Amazon does not price match or offer price protection, but they really had no choice in this case.

No one knows exactly how many Touchpads will be released once all the clearance sales are complete, or if the $99/$149 prices will hold. Estimates have put the number of units manufactured in the 250,000-500,000 range. Many of those buying the units this weekend intended to flip them for a quick profit, and completed eBay sales were still touching $300 through the weekend. Craigslist was also flooded with potential sellers, and a few WTBs. Once sanity is restored to the market, it's doubtful that the Touchpads will continue to demand a premium and may even sell below their clearance prices due to the small installed user base and lack of formal support for the software. Today is the peak of the HP Touchpad bubble.

This is not to say that development for the Touchpad will stop - it will simply move from HP to the informal channel of developers that is constantly looking for new hardware to root. With HP's history of quasi-support for open source software, I expect they'll publish many of the specs for the tablet before winding down WebOS completely. There's also a good chance that Android developers will complete a port of Google's software to the Touchpad, greatly expanding the universe of applications that will run on it.

All of this will play out over the coming months, but the biggest unknown is - when will HP stop running those awful commercials touting the Touchpad with its $399 price tag?

How small is the Gitzo GT1541T travel tripod?

2011-01-30T12:35:00.005-06:00

I just picked up a compact travel tripod, the Gitzo GT1541T, from Amazon. Made of carbon fiber, this is one of the lightest, smallest tripods you can find. This is not a full review, but I wanted to show how easily the 1541T fits in a standard 22" carryon bag. Although the bag is listed at 22", the usable interior length is only 19" - but the tripod fits with plenty of room to spare. The tripod is shown with the legs folded back over the center column.

Another size comparison, here's the tripod next to the Nikon D700 with 70-200mm - it's only a few inches longer. With the hood on the lens, they'd be about the same length exactly.

My intial impressions of this tripod are favorable but unfortunately it may be a little short for me. With a height of 45", it's not that comfortable for a 6 foot tall person, and extending the center column reduces your stability quite a bit.

Shooting a Tiger - Pug Mark Park

2011-01-29T08:34:00.003-06:00

A few weeks ago I went up to McKinney, Texas on a photo tour of Pug Mark Park. These tours are organized about once every month by Tom Hicks. For $50 you get 2 hours of shooting with the cats - there were two tigers and one lion when I was there. The funds go to support feeding and care of the animals. The facility has a good setup for photographers as the fence has a fairly open lattice so you can actually put the end of your lens through the fence and avoid getting it in the shot (unlike your standard chain link fence which has smaller openings). However, you do have to be careful standing next to the fence, as the larger openings mean that the cats can swat you if you're not paying attention.

I highly recommend this event - it was well worth the price of admission. Here are a couple of my favorite photos along with the complete set on flickr. Taken with a Nikon D700 and 70-200mm VRII, TC-20e III, and 85mm f1.4.

Does it matter when you invest in the stock market?

2011-01-09T10:28:00.002-06:00

This chart from the New York Times shows the return on an investment made in the S&P 500 by holding period starting back in 1920. This matrix is a nice example of how to display decades of financial returns without resorting to massive data tables.

TaxCaster 2010: Estimate Your 2010 Federal Taxes

2010-12-27T19:13:00.004-06:00

TurboTax has provided a free application, TaxCaster, to help you estimate your taxes before preparing a full return. This is useful for running what-if scenarios as part of your last minute tax planning. For example, you can see the effect of things like whether to double up on your property taxes or charitable giving in 2010 or recognizing capital gains (losses).

This screenshot shows the unfortunate case of a single filer with $1M of income and no withholding (oops!).

Review: Kingston SSDNow V Series 128GB SSD Solid State Drive

2010-12-23T15:41:00.001-06:00

I had previously upgraded my Dell Latitude D630 (Core 2 Duo T7500 with 2GB of ram) to a 500GB 7200rpm SATA hard drive, but when I saw that I could get a 128GB SSD for $200 after rebate at Amazon, I took the solid state plunge. There is a newer version of this drive (the V100) but I decided to save a few dollars and stay off the bleeding edge. I bought the "notebook upgrade kit" which comes with a 2.5” (notebook) sized external USB enclosure.

Installation was straightforward – remove the drive sled, take out two screws, attaché the drive, put the screws in, and slide it back into the laptop. 5 minutes.

I had decided to upgrade from Windows XP to Windows 7 in order to get a clean install and to take advantage of Window 7’s optimized SSD performance (XP has some quirks that need to be worked around if you’re using an SSD). No issues with the Windows 7 install. I moved the old hard drive into the USB enclosure so I could copy my files off later. The enclosure also gives you a place to store data files since the SSD’s size is probably smaller than you’re used to. It's powered by the USB port (no external power supply) and comes with a 12 inch USB cable, but note that not all of my USB ports were powerful enough to operate my old hard drive once I had moved it to the enclosure (presumably a SSD takes less power).

Once it was up and running, I found that the formatted capacity is 119GB. The drive is totally silent. The most immediate difference is the startup and shutdown times. A cold boot takes less than 30 seconds where it used to take more like a minute, and shutdown is in under 15 seconds. The system also feels much more responsive during general usage, things like web browsing and photo editing. Even though this computer is over 2 years old, the addition of an SSD makes it feel like a new machine. Overall, the upgrade was well worth the $200 cost and I’ll definitely look for an SSD in my next computer.

Photos from the Ft. Worth Alliance Air Show 2010

2010-11-16T21:02:00.003-06:00

All photos taken with a Nikon D700 and 16-35mm f/4 or 70-200mm f/2.8 VR at the Alliance airport in Fort Worth, Texas. Full gallery available here.

Cleaning dust from your DSLR sensor

2010-11-11T11:01:00.001-06:00

I never had a problem with dust on my D90’s sensor, but the D700 seems to be a dust magnet. Dust will show up as dark spots on light, even colored areas of your photos taken at small apertures. The blue sky in a landscape is a prime example of where you’ll spot dust. To see exactly how bad your dust is, stop down all the way (f/22 or smaller), set your ISO to 200, and take a picture of a light colored object such that it fills the frame. Something like a well lit piece of paper or a wall will work. It doesn’t need to be in focus and it doesn’t matter if the shutter is slow. Now open this file on your computer and you’ll see all the dust that’s sitting on your sensor. Technically, the dust isn’t on your sensor, it’s on the anti-aliasing filter that sits in front of your sensor.

The easiest cleaning option is to use your camera’s auto cleaning feature, if it has one. Unfortunately, on my D700 this does a poor job of removing most of the dust. Don’t bother trying to use a q-tip or lens brush to clean it off – best case, you’ll just end up smearing dust all over your sensor, worst case, you’ll scratch it and need to send it back to Nikon for a costly repair.

The next step is to use air to blow the dust off. Set your mirror to lock up and then use a Rocketblower from Giotto’s (get the large one) to blast it off. Be careful not to contact the sensor with the blower. Avoid using “canned air” or air from a compressor – the former can contain bitterants and propellants that will condense on your sensor, the latter may be too powerful and could cause misalignment. Make sure you have a full battery before you start this – if it dies while you’re cleaning, the mirror will spring back into place and you can easily scratch the sensor or the mirror (this also applies to the swab cleaning).

There may be some dust that resists your first two attempts to remove it, in which case you need to use a wet cleaning. I recommend the cleaning swabs and solution from Photographic Solutions. Make sure to get the swabs that fit your sensor size (full frame or DX). You apply a couple of drops to the swab and then work it across the sensor. Don't be afraid to put some pressure on the swab - the sensor can take it - and you'll need it to get stubborn particles off. After the first attempt, take a test shot and check the results. Don't use a swab for more than 2 minutes after you apply the solution as it starts to break the fibers down, and never re-use a swab once you've set it down somewhere as it will pick up debris. It may take a couple of tries to get all the dust off - be careful not to pick up new dust from the edge of the camera housing as you use the swab.

Overall, this can be a nerve wracking experience the first time you do it, but it's really not that bad once you get the hang of it and follow the instructions. If you’re in Dallas or Ft. Worth, head over to Arlington Camera and they’ll clean your sensor for $60 plus the cost of swabs ($5/each). They’ll also show you what they’re doing so you can do it yourself next time.

Plano Balloon Festival 2010

2010-09-20T20:14:00.005-05:00

Here's a couple of nighttime photos from the Plano Balloon Festival in Texas. This is a great event - I didn't get up early enough for the morning launch, but I did catch the evening one. However, the best photo opportunities were during the "glow" after the sun went down. They let spectators walk amongst the balloons before clearing them out for fireworks. More shots at my Flickr set.

These were all taken with a Nikon D700 plus 24-70mm and 70-200mm VR lenses.

Nikon 70-200mm f/2.8 VR and VRII: Old Versus New

2010-03-21T11:53:00.000-05:00

Nikon reinvented a classic when it developed the 70-200mm VRII. But how does it compare to the original?

The VRII is slightly heaver, and feels it since the barrel is wider. I appreciate the fact that the VRII is half an inch shorter as it fits better in my Lowepro Fastpack 250; the VRI was pushing the length dimension of my bag's capacity. Neither will fit with the hood installed but you can leave it reversed. By virtue of being shorter and wider, the VRII has less of a "baseball bat" feel to it when installed on a smaller dSLR like the D90.

On my DX camera (Nikon D90) it's hard to say that the VRII has improved image quality. They're both extremely sharp, contrasty lenses. Other reports are that the difference on FX is noticeable - the corners are supposed to be much better on the VRII.

However, autofocus and vibration reduction are noticeably improved on the VRII. These are features that you'll appreciate even even if you're shooting on DX. Plus, the VRII paves the way for a future upgrade to FX.

Overall, there's no question that the VRII is the lens to get if you have a full frame camera, and it's probably justified on a crop sensor camera as well. The picture below shows them side by side.

The best tailor in Dallas: Cantu Tailors

2010-03-12T08:55:00.002-06:00

If you need a tailor who knows what he's doing, Cantu is the place. This is a great family run business that's been around for decades. Robert is always helpful and the prices are fair (yes, there are cheaper tailors, but you get what you pay for). Located in an unassuming strip mall, the storefront isn't much to look at but the work is always first rate.

(214) 739-3190
6064 Sherry Ln
Dallas, TX 75225

The rare light grey (white) Nikon 70-200mm f/2.8 VR

2010-03-07T13:24:00.007-06:00

Traditionally white lenses have been associated with Canon, but Nikon has made a few "light grey" models over the years. One of the most recent was the 70-200mm f/2.8 VR, pictured below with lens hood and mounted to my D90.

It was an interesting novelty, but short-lived for me as a screaming deal on the new 70-200mm VRII came along. No word if they will produce a white 70-200mm VRII but I'm sticking with black. Although I certainly couldn't fault the image quality on DX:

Review: Tei-An restaurant in Dallas

2010-02-25T18:12:00.003-06:00

We took a friend to Tei-An in the One Arts Plaza building for dinner a few weeks ago. It was truly an exception meal. We ordered the omakase (Japanese for "it's up to you") which they offer at $50 and $80 per person. The more expensive version (the one we had) includes more courses with additional ingredients. Started off with a bottle of unfiltered sake ("Nigori"). I can't describe every course in detail but this is what we had:

White seaweed salad
Sashimi - tuna, halibut, sea urchin with organic wasabi
Wagyu beef and duck on a hot rock
Baked halibut with pickled ginger and lotus root
Tempura shrimp and dragonfish
Pressed eel sushi
Curry soba
Tiramisu with green tea powder
Sesame mousse
Angel food cake with green tea ice cream

The courses progressed logically, from light to heavy. Don't order a 10 course meal if you're in a hurry - I think we were there about 3 hours. The service was excellent, attentive without being bothersome. Ambiance in the restaurant is low key but appropriate. There aren't many seats in the relatively small venue so reservations are critical. My only (admittedly minor) complaint is that the omakase didn't include even a small dessert course.

If you like Japanese food, Tei-An is the total package. Nearly flawless from start to finish (and for the price, it ought to be). And of course, any review of Tei-An would be incomplete without a mention of the heated toilet seats in the bathroom. Just be careful with the buttons you press on the control panel.

Review: The Bliptronic 5000

2010-02-11T17:30:00.008-06:00

The Bliptronic 5000 is a cool gadget based on Yamaha's Tenori-On, a hybrid electronic musical instrument. Sure, less features than the Tenori-On but the Bliptronic costs only $50 instead of $1,000. Easy to learn but difficult to master. It's tactile, auditory, and visual. Plus, it has the potential to drive anyone around you crazy with its repetitive electronic bleeps. I recently gave one to a friend as a gift. I think it will help him achieve his lifelong dream of becoming Philip Glass and/or Steve Reich. Just make sure you include batteries.

Review: The Eco Cup Mug by DCI

2010-02-03T19:52:00.005-06:00

I recently received the Eco Cup mug from DCI. Unlike the similar I Am Not A Paper Cup mug by the same company, the Eco Mug is single walled (no insulation) and holds 16 ounces instead of 10. Since it's solid porcelain, the Eco Cup comes with a silicone sleeve to keep from burning your hands - the mug gets hot, especially if you put it in the microwave. The sleeve does a fine job of protecting your digits. Overall I think the capacity of the Eco Cup makes it superior to the I Am Not A Paper Cup.

I bought this mug because the vast majority of travel mugs on the market are made of plastic or metal, and I haven't had good luck putting either of those in the microwave. I like my coffee hot, so by the time I drive to work, I'm ready to zap it for 30 seconds and bring it back up to operating temperature. The Eco Cup lets me do that. I've had several co-workers confuse the Eco Cup for a Starbucks paper cup until I thunked it on their desks - even empty, it's heavy.

Downsides: The white silicone lid can pick up coffee stains over time. You're not supposed to put the lid through the dishwasher, rather, you soak it in boiling water with lemon. That works okay but doesn't quite get all the coffee color out. The mug's capacity is listed at 16 ounces (in reality it holds closer to 14 unless you fill it to the brim) which is a decent amount but I wish it were a little larger. The mug is not insulated, so it won't keep your drink as hot for as long as a thermos if you're traveling away from civilization. However, since there's no metal or plastic in the mug, you can easily microwave it once you get to the office. The lid is not airtight so if it tips over, it will spill.

I like the Eco Mug and would recommend it to anyone who wants to be able to get their coffee extra hot in the microwave. Be careful to buy the mug made by DCI, and not one of the cheaper knockoffs that Amazon also sells.

Photo: Nikon D90 with 17-55mm f/2.8

Review: Lowepro Fastpack 250 camera backpack with photos

2010-01-30T21:05:00.012-06:00

I returned the Kata 3n1-10 bag because it was just a little too small. I also realized that having the option to carry a laptop with me (without carrying a separate laptop bag) was valuable. So this led me to the Lowepro Fastpack 250, shown here behind a Nikon D90 with 17-55mm f/2.8 lens. Hopefully this brief review with pictures will give you a sense of the bag's size and layout in comparison to some common camera equipment.

This bag is a bit larger (mostly in width) and noticeably heaver than the Kata 3n1, given that it holds a lot more. The back has mesh padding which helps if you're sweating - this was a one nice feature that wasn't included on the Kata. Straps are thick and well padded.

Unlike the Kata, the Fastpack only has a quick access flap on the left hand side of the bag (from the perspective of someone wearing it). This makes sense if you're right-handed: slide off the right hand strap, pull the bag around with your left arm and pull the camera out with your right hand. Those wanting a flap on the right may prefer the Kata, since it gives you an option.

There's a flap with two quick release clips over the main camera/lens compartment, and a mesh pocket for water bottle on the right side. Underneath the flap, there's a slim zippered pocket which could hold filters or something else that's fairly flat.

Inside the main compartment, you can see the D90 with 17-55mm attached (no hood) and immediately to the right of it, the Nikon 12-24mm f/4. If I took the 12-24mm out, I could fit the 17-55mm with its hood attached. The D90 doesn't fill up the space for the camera body - I wish it were a little more snug but they've allowed room for larger FX bodies as well as DX bodies with a grip attached. Above that there's a narrow compartment that could hold a couple flashes, but for now I just have the battery charger and AC cord on the left and the lens hood for the 12-24mm on the right. Below, I've setup a divider between my 35mm f/1.8 on the left and the 18-105mm VR on the right (with lens hood attached). The dividers are sturdy and the compartment is well padded on the outside - equipment would be well protected here.

This photo shows my Dell Latitude D630 sliding in to the laptop pocket. This laptop only has a 14" LCD so there's a fair amount of extra room (the bag is rated for a 15" LCD). Even without a computer, you could throw some books or magazines in there.

The top section has a small zippered pouch on the outside. Not a whole lot of room in there.

The flap on the top section is not very well padded compared to the bottom section; I wouldn't put any optics or sensitive electronics in here. But there is plenty of room for other accessories, maps, lunch, etc. I've shown it with the 17-55mm for a sense of scale.

Overall, I like this bag. I could see that I was going to outgrow the Kata 3n1-10 very quickly, so this is a better solution for storing and carrying my gear. The 3n1-20 is probably closer in size to the Fastpack 250 (Kata also makes a model with a laptop compartment the 3n1-22) but I don't see the utility in having a sling bag option for a bag of that size (that much weight on one shoulder is not going to be comfortable for any length of time). Also, I felt that the clips and zippers on the Kata were not as easy to use as I expected, so I opted for the Fastpack instead. The only downside is that once you get it loaded up with gear (especially a laptop), it gets really heavy - not the sort of thing I would want to take an all day walking tour with. However, it'll get all your gear on the plane, and you can leave what you don't need for that day in the hotel.

Complaint: Progressive Homesite Homeowners Insurance

2010-01-28T20:56:00.002-06:00

Summary: avoid Homesite Insurance like the plague.

For the last three years, our house in Dallas, TX was insured for about $200k. First with Amica, and more recently with Progressive's affiliated homeowners insurance company: Homesite Insurance. Everything was fine until we got our renewal bill for 2010 and Homesite had increased our premium about 50%. We've never had a claim. I looked at the premium detail and it turns out they had increased our home's replacement cost from $200k to $300k, and this increased the overall premium.

I called Homesite for an explanation as to how a home's replacement cost could increase by 50% in a single year. They said they had switched to new software and this is the estimate that it had generated. I told them that the market value for this house is around $200k and there is no way you could build a house on this lot for $300k. Their software put our home's replacement cost at about $150/sq. ft. when in fact, new homes are being built in our area for $100/sq. ft. Our house hasn't had any renovations or upgrades that would increase its value by 50% in the last few years. I told Homesite that we didn't want to purchase $300k of insurance for a house that could be replaced for $200k. They said we had no choice but to accept their appraisal.

I then called the Texas Department of Insurance to file a complaint against Homesite. I wanted to see a report from a licensed appraiser or builder who would sign his name to a report stating that our house would cost $300k to rebuild. The TDI said they would investigate and contacted Homesite. A few weeks later we received a letter from Homesite that repeated what we were told on the phone. They provided the detail of the $300k replacement cost, but the largest single line item was "Other/Misc" which was $70k. That was the level of detail they provided. This kind of "estimate" borders on fraudulent to my mind.

TDI later sent us a letter stating that Homesite can use any replacement cost they want. Who am I to argue with the Texas Department of Insurance? So we cancelled the policy and went to another insurer who gave us a $200k replacement cost estimate and a much lower premium. The new insurer suggested that Homesite may not have been able to get a rate increase past the regulators, so instead they're just jacking up everyone's insured value to increase their premium revenue.

Now, I fully understand that my homeowners' insurance premium will probably increase from year to year. I also understand that my home's replacement cost will also increase over time due to inflation. But for Homesite to think that any homeowner should accept a 50% increase in replacement cost in one of the worst housing markets in decades is ludicrous. I guess they haven't noticed that demand for home building services isn't exactly in high demand right now.

We still have our auto insurance with Progressive from when we switched to Homesite, but I'm going to look around for a better rate on that as well. If Progressive wants to associate with Homesite, neither company deserves my business.

Homesite Home Insurance: the worst homeowners insurance company in Texas.

Review: AF-S DX Nikkor 16-85mm f/3.5-5.6G ED VR

2010-01-23T18:49:00.004-06:00

This lens is considered by many to be a potential upgrade from the 18-105mm VR that comes in the Nikon D90 kit. On paper, it has several advantages:

Better build quality with metal lens mount (18-105 has a plastic mount)
Second generation VR technology
Slightly wider field of view (2mm doesn't sound like much, but it's actually 7 more degrees in your field of view)

However, you give up some reach on the tele end, and the 16-85 costs almost twice as much as the 18-105 (the incremental cost is even more if you consider that the 18-105 costs about $200 in the D90 kit, and if you already have the 18-105 you'll have to sell it on eBay or Craigslist). Expectations for image quality from the 16-85 run high given its price, and the lens is generally well reviewed. However, I did an informal test of the 16-85 against the 18-105 over their common range and found that the 16-85 was sharper from edge to edge at close focus distances (less than 30 feet) on the wide end. However, for shots at 85mm with focus distances greater than 30 feet, the 18-105 was noticeably sharper. My informal test shots were taken at the same aperture and shutter speed in outdoor lighting conditions. At 100% crop, it was easy to identify the 18-105's shots based on the center of the frame, and things worsened at the edges. This was really surprising to me and not at all what I expected, but I ended up returning the 16-85. The relatively high price of this lens could've been justified based on its features, but I was unwilling to spend more money for lesser image quality. Ultimately, if the wider angle is what you're after, you'd be better served by buying the Nikon 12-24 f/4, which can be had for about $500 on the used market.

Review: Kata KT D-3N1-10 sling/backpack camera bag with photos

2010-01-09T10:03:00.011-06:00

I recently purchased the Kata 3n1-10 camera bag to hold my burgeoning collection of camera equipment. I originally started looking at the Lowepro Slingshot but came to realize that a sling bag with a body plus multiple lenses puts a lot of weight on a single shoulder. Okay for short periods but not all day walking. The Kata converts between a two-strap backpack and a single strap over-the-shoulder sling bag but I expected to use it in backpack mode most of the time. Here's the 3n1-10 next to the D90 and some lenses. Hopefully this brief review with pictures will give you a sense of the bag's size and layout in comparison to some common camera equipment.

Back of the 3n1-10. For sling use, you connect the red strap to the red hook. It can be reversed for left handed individuals as well.

Inside, there's a fair amount of room, but it's the smallest of the 3n1 series, so even with my gear the fit is tight. From left to right in the photo, you can see the 35mm f/1.8, D90 with 12-24 f/4 and lens hood, and the 18-105VR with lens hood. One improvement would be to extend the zippers an inch to the left as it can be difficult to reach lenses stored on the left hand side of the bag - this is a real annoyance. The bag came with a couple more foam dividers but I've taken them out for the time being as it was just too cramped. The quick draw feature works well although I'm not sure yet if it would fit the D90 with the 17-55mm or 70-300mm VR mounted. Probably possible but a close fit.

There's two side pockets next to the top compartment. They might barely hold the 35mm f/1.8 but clearly they're designed for smaller accessories.

The top compartment is as well padded as the rest of the bag and I have no reservations about storing a lens in that section. You can see it here with the 18-105VR for scale.

Overall the bag is well designed, solidly built, and comfortable. The bright yellow interior is a nice touch. As you can tell from the photos, it's a relatively small bag so if you have more than a couple lenses, you'd be better served by the 3n1-20. Don't even think that you could get a lens like the 80-200 f/2.8 into the 3n1-10. However, for a light travel bag, it's not bad. Ultimately I ended up returning the 3n1 because the single-strap mode just wasn't practical for a bag of this size. It's caught in the middle - too big to be a good sling bag, too small to be a useful backpack. Another issue was that the zippers didn't feel as smooth as I expected for a bag of this price, and was concerned that they would jam over time. Plus, there's no reason this bag needs to have 4 quick release clips on it - they almost defeat the purpose of having a quickdraw flap in the first place. I thought about trying the 3n1-20, but instead I ordered a Lowepro Fastpack 250. We'll see how it works out.

Review: Nikon AF-S DX Nikkor 35mm f/1.8G

2009-12-30T21:04:00.002-06:00

Maybe you just got a Nikon D90 or D5000 for Christmas. Sure, the kit lenses are fine (especially the 18-105 VR), but the whole point of a dSLR is that you're not stuck with one lens. And you've probably noticed that trying to take indoor shots in natural light (no flash) with the kit lens, even at high ISO, is nigh on impossible. Enter the Nikon 35mm f/1.8. At $200 this is one the finest, cheapest lenses you can buy. Indoor shots, especially portraits, have a richly saturated look. Subject isolation is easy at f/1.8 and the bokeh is quite pleasing. Although 35mm (~50mm effective FX focal length) is a little short for a traditional portrait lens, this will one will get the job done if you're just starting out. The 35mm is a lot more versatile than the 50mm f/1.8 for shooting indoors unless you want extreme close ups. The lens is a compact, lightweight alternative to the kit lens and is handy for times when you want to bring your camera along without a lot of fuss.

Be aware that there's a learning curve with this lens. At f/1.8, depth of field is extremely narrow, so there's no room for focus error. And if you're trying to shoot more than one person, stop down to f/2.8 or else you probably won't get the sharpness you're after. Although f/1.8 is a big step up from f/3.5, this lens still won't see in the dark. There are some cases where you really just need a tripod and a longer exposure than you can handhold. If you're used to shooting with a zoom, it takes a little while to get comfortable with a prime. But it's easy to take a step forward or backward (or just crop in RAW). A fixed focal length forces you to think more carefully about composition, but it's also somewhat liberating in that you can just take the shot without having to worry about the zoom. Overall, the Nikon 35mm f/1.8 should be the first new lens you buy for your new dSLR.

Buying a camera lens on Craigslist

2009-12-29T20:11:00.003-06:00

Once you get out of the consumer zooms, Nikon charges a mint for its lenses, especially the fast glass with f/2.8. Even if a lens isn't designated for the pros can still retail above $1,000. Fortunately, there's some good deals to be had on Craigslist, if you know what to look for and how to deal with sellers there. People get excited with a new camera and buy more lenses that they know what to do with. Eventually they realize that all the pieces of glass sitting in the closet are worth some real cash. Personally, I'd rather buy lenses of Craigslist than eBay, as you can get your hands on the merchandise before you commit the cash.

Finding Your Lens

Craiglook is a great resource for digging through Craigslist because it lets you expand your search beyond Craigslist's default search radius.

Negotiating

I'd rather get this out of the way by email or phone before meeting in person to avoid wasting everyone's time. Craigslist sellers tend to have an inflated view of what their lens is worth. While it's true that Nikon glass holds its value very well (especially compared to third-party manufacturers like Tamron, Sigma, and Tokina), it's still a used product that will sell for a substantial discount. Check eBay and KEH for pricing indications. The seller's price needs to be below comparable eBay transactions, because eBay/PayPal/shipping fees (which are paid by the seller) can easily amount to 10-20% of the sales price. Sometimes the seller doesn't know what they're selling, and has overestimated its value. For example, there are 5 versions of the Nikon 80-200 f/2.8 lens. The version made in 1988 is worth a lot less than the version that's currently being produced.

Meeting

Find a neutral location - Starbucks works well - to meet. It's unlikely that someone's going to rob you, but since you're carrying a large wad of cash, why take the chance? I wouldn't meet at someone's house, nor would I want them coming to my house. There's just no reason to risk it.

Inspecting a Used Lens

Does the case have scratches or dents?
Are the zoom and focus rings smooth?
Check the autofocus and vibration reduction switches.
Check the front and rear glass elements for scratches.
Hold the lens up to the light and open the aperture, then look through it. Is there dust in the lens? Depending on the age of the lens, a little dust is ok. If you see lines or haze across the optics, sort of like a spiderweb, that may be mold or fungus, which is a serious problem. I'd avoid any lens with potential mold issues.
Check the aperture control with your hand - when you open the lens to full aperture, does it spring back to minimum aperture quickly?
Pop the lens on your camera and test it out. Does AF work? How about VR? Do you hear any strange noises from the AF or VR?

Keep in mind that if you ever plan to resell the lens, it'll be worth more with the original box and papers. The warranty papers are nice, but Nikon USA's warranty is non-transferable, so if you need repairs in the 5 year warranty period, you'll have to have the original buyer send it in. Also remember that non-US (gray market) lenses aren't accepted by Nikon for repairs if you ever need service, regardless of who owns the lens. Generally, the serial number on all US warranty lenses should start with "US" before the numbers.

Does it Work?

Yes - if you're patient. You have to do your homework on pricing and you'll probably have to walk away from several deals before you find one that works. For example, I was recently in the market for the Nikon 12-24 f/4 wide angle zoom. Amazon sells it new for $999 and used copies on eBay sell for $550-$600. I picked up a copy on Craigslist for $500, still in the box and didn't look like it had ever been used. If I ever decide to get rid of it, there's no question I can get my money back, so it's a low risk investment.

Review: Tamron AF 17-50mm f/2.8 SP XR Di II VC Zoom Lens for Nikon

2009-12-19T18:48:00.010-06:00

I had five minutes to play with a sample of the new Tamron 17-50 lens at the camera store today. Here are my impressions based on test shots with my D90. The VC (vibration control) seems to work quite well, at least on par with Nikon's VR (vibration reduction). I was able to get sharp handheld shots down to 1/10th. I didn't try it at any slower shutter speeds but expect it would help out there as well. Autofocus is relatively quick, I can't say that it's as fast as my Nikon lenses but it certainly wasn't slow. The lighting in the store was ok, not great, but not extremely dark, so it's possible the lens would hunt more in adverse conditions. Build quality was decent, not on par with the Nikon 17-55 f/2.8 but certainly not flimsy. Lens felt well balanced on the camera smooth action in the zoom and focus rings. The big disappointment was image quality at f/2.8 - there was a lot of smearing of bright colors in high contrast areas. I've posted a couple of 100% crops below - check out the transitions between white and yellow to black to see the problem. These shots were taken at ISO 200, 50mm, 1/30th, VC on, RAW with no postprocessing, JPEGs exported from Capture NX 2 (full EXIF information is included). I didn't test anything other than f/2.8 because if you can't shoot wide open, why buy a fast lens in the first place? I expect that this problem diminishes as you stop down. Ultimately, I wouldn't recommend this lens based on image quality as observed below. At ~$650, it's less than half the price of the Nikon 17-55 but I still wouldn't call it cheap.

Review: Nikon AF-S DX Nikkor 18-105mm f/3.5-5.6G ED VR

2009-12-17T20:37:00.001-06:00

This is the kit lens that comes with the Nikon D90, usually at a premium of about $200 over the stand alone camera body. Or you can buy it separately for about $350. If you're wondering whether to buy this lens as part of the kit - go for it. This lens is a bargain for only $200 and a great way to start out if you're new to dSLRs. Focal length range covers just wide enough to get the entire Thanksgiving table in the frame to enough zoom for close up shots outside. Shoot with this lens for a couple months and you'll have a sense of whether you want to invest in the wide (11-16, 12-24mm) or the tele (80-200, 70-300mm) for your next lens. VR is handy, provides a significant improvement for handheld shots at low shutter speeds. Admittedly, build quality could be better - I'm not a fan of the plastic lens mount. But it does keep the weight down. Autofocus is fast. Image quality overall is very good, photos are sharp across the frame with a little distortion at 18mm and slightly less detail along the corners, but you'd only notice this at 100% crop. I have noticed that outdoor shots in direct sunlight tend to be about half a stop overexposed, but this is easy to correct. In total, this lens is a great value and the low price doesn't reflect the high quality shots you can take with it. Highly recommended.

Review: Nikon D90 dSLR

2009-12-16T19:54:00.001-06:00

After using this camera for the last few months, there's no doubt in my mind - the D90 is a great camera and a terrific entry to the world of dSLRs. Image quality is outstanding - 12MP gives you enough flexibility to do substantial cropping and still print or display at large size. The dynamic range provided by the sensor is a thousand times better than point and shoot cameras; it's almost like shooting with film. Finally, you don't have to choose between crushed blacks and blown out whites! The camera just feels right in your hand, with all the controls where you'd expect them to be. Well-balanced and solid, but not so heavy that it's a chore to bring with you. Low light performance is top notch. You can't see in the dark (yet) but results at ISO 1600 are definitely usable, maybe even ISO 3200 for prints below 8x10. The camera gives you a lot more latitude to work with natural light and avoid the stunned, washed out look of flash photography.

Downsides? Not many. Video is one feature that still needs some work - I wouldn't expect much from it. Trying to manual focus while shooting is an acquired skill that takes some practice. Plus, rapid panning results in the infamous "jelly motion" effect because the camera's sensor isn't designed for video. You could buy a $300 camcorder that would take better video and audio. Another feature that falls short is live view - shooting through the LCD. Yes, it works, but the autofocus is extremely slow compared to viewfinder focusing. Presumably you bought an SLR because you wanted a viewfinder, so don't let this hold you back.

Compared to the D5000? Yes, the D5k provides the same image quality and low light performance as the D90. And it's slightly cheaper. If you're not upgrading non-AF motor Nikon lenses, the D90's built in motor is of little value. But I found the D5000's flip LCD to be impractical given how slow live view focusing is, and if you compare the cameras side by side, the resolution of the D90's LCD is immediately apparent. Another more subtle difference is in the viewfinder. The D90 has a larger, brighter viewfinder which makes composing and checking focus much easier, especially in low light conditions. The D5000's 18-55mm kit lens is no match for the D90's 18-105mm VR Nikkor, which is easily worth the $200 premium for the camera bundle (as compared to buying the body without a lens).

Digital camera: upgrading from point and shoot to dSLR

2009-12-15T20:41:00.001-06:00

I gave the latest point and shoot digital cameras (Canon S90 and Panasonic LX3) a shot but neither one could justify its $400-500 price. My next thought was the Panasonic GF1, a promising new entry in the micro four-thirds format. Despite being released a couple of months ago, Panasonic doesn't seem interested in actually shipping any GF1s to the US, as they are on backorder for at least a month from any legitimate retailer. What's the point of buying a new camera if it's not going to be delivered until after Thanksgiving and Christmas are over? Which left me with only one option: the Nikon D90 with 18-105mm lens.

After using the D90 for a couple of weeks, I can recommend the upgrade over a point and shoot without hesitation. However, it should be noted that a dSLR isn't just a P&S on steroids - it actually takes some thought to get great pictures out of a dSLR. Don't have to be a rocket scientist, but it helps if you understand the basics of exposure, focus, aperture, and shutter speed.

Digital Camera Review: Canon S90 versus Panasonic LX3

2009-11-01T16:00:00.015-06:00

I recently had the chance to play with both the new Canon S90 IS and its competitor, the Panasonic DMC-LX3. As far as picture quality and low light performance are concerned, they are the two finest point and shoot cameras on the market today. But which one is best? Unfortunately, there's no clear answer to this question, which depends on the features you're looking for. My impressions are based on JPG output from both cameras, there might be additional benefits from RAW post-processing.

S90 strengths

Size and weight: thinner, with fewer angles and odd protrusions, so it's more likely to fit in your pocket.

LCD: brighter, and seems slightly larger when shooting in 4:3 mode (due to wider format of LX3's LCD).

Controls: control rings are not perfect but allow for quicker, more intuitive settings adjustment compared to the LX3's joystick. I especially like the control wheel on the back of the S90, even though some have complained that the wheel is too loose, I never found this to be a problem.

Low light performance: I had much better luck getting properly exposed photos in low light with the S90, although you do have to keep an eye on the ISO as it doesn't take much to introduce a fair amount of noise. The S90 does apply a fair bit of noise reduction to low light shots, so although noise is not as noticeable as the LX3, the S90 has reduced detail. I didn't test either camera with noise reduction software (e.g. Noise Ninja). Even at higher ISO settings, I had trouble getting the LX3 to take a usable photo of a street at night lit only by streetlight, while the S90 picked up on it right away in aperture priority mode.

Lens cap: the S90 has none. Instead it uses automatic shutters to protect the lens. The LX3's manual lens cap is a minor annoyance, but an annoyance nonetheless (one more thing to lose).

LX3 strengths

Lens: 24mm versus the S90's 28mm provides a wider and more useful field of view for architectural or landscape shots, although there is a lack of sharpness at the edges if you look closely.

Daylight performance: the LX3 has the edge here due to the S90's tendency towards chromatic aberration (purple fringing around high contrast areas, which is the same problem my 5 year old Powershot S410 has - not sure why Canon hasn't fixed this yet).

Aspect ratio: LX3 offers 4:3, 16:9, and 3:2 (my preference is for 3:2) shooting modes without cropping or changing the field of view. The S90 allows you to shoot in the same ratios, but does this by cropping the 4:3 image, which is just throwing away image data.

Video: neither camera will satisfy a video enthusiast, but the Lx3's 720p video is the standard these days. There's no reason the S90 had to be hamstrung by VGA resolution (640x480) video, as HD video has been featured on much cheaper cameras for a while.

Flash: I don't like the tendency of the S90's flash to automatically pop up where you're holding the camera. The LX3's pop-up flash has a switch to release it - much better.

Build quality: The LX3 feels solid. The S90 doesn't feel flimsy, but lacks the LX3's fit and finish.

Tied

Image stabilization: I got usable shots down to 1/2 second exposures, but not reliably from either camera. IS is definitely helpful but not a miracle.

Conclusion: Both cameras are excellent. However, I didn't find that either one represented a quantum leap forward versus my old Canon Powershot S410, not enough to justify +$400. So a Nikon D90 DSLR (or possibly the new micro four thirds Panasonic GF-1) is my next stop. And it's really a shame that Canon couldn't make the S90 clearly superior versus the LX3 given that they've had a entire year to refine their product.

Canon S90 Review

2009-10-23T21:34:00.004-05:00

Canon released the S90IS digital camera in October 2009, and as I was looking to upgrade my 5 year old camera, decided it was worth a shot. I picked it up at Best Buy for list price of $429 less a 10% coupon and a $20 Canon loyalty rebate for a total of $397 including tax, plus $32 for a 16gb SDHC memory card. The following are my impressions after using the camera for a week.

Pocketability

A big selling point of this camera is its size. Although not as small or as light as some of the most miniature SD-series PowerShot cameras, the S90 should fit comfortably in almost any pocket with its smooth edges. Minor annoyance: the wrist strap does not have a size adjustment on it, so you can’t tighten it around your wrist. This piece of plastic probably costs less than a cent and ought to have been included.

Screen

The 3.0” LCD is bright and sharp. All information is displayed prominently without getting in the way of the image. As the screen sits flush with the camera back (it is not recessed at all), I recommend applying a screen protector to prevent scratches. The optical viewfinder is a welcome omission on the S90 – they are so small on point and shoot cameras as to be functionally worthless, yet they add to the camera’s size and weight.

Controls

At first I found the front control ring a little awkward, as you can’t get a grip on it in quite the same way that you would an SLR lens’ focus ring, nor does it turn smoothly (it clicks in place at each stop). Another is that once you’ve used the control ring to adjust your settings, you have to move your hand back to the camera’s body to hold it prior to taking the picture. For making quick adjustments, I prefer the rear control ring located next to the LCD. It turns smoothly and you can move it with your thumb while your finger is on the shutter. Fortunately the camera lets you quickly reassign the control wheels using a button on the top of the camera. The camera gives you a wide degree of freedom to adjust its settings and the controls make it possible to quickly adjust shutter, aperture, white balance, and ISO. Sure, you could leave it in Auto and get decent pictures, but you’ll be missing out on this camera’s potential to deliver great shots.

Lens and Image Quality

Other websites have posted more detailed test shots than I ever could so I’ll leave that to the professionals. However, I will say that my unscientific tests indicate that image quality is very good, not DSLR level but getting close. The camera really shines in low light due to the f2.0 lens and image stabilization. You do have to keep an eye on the ISO, however, as noise starts to creep in above 400, although shots are usable up to 1600. The camera starts up quickly, the lens pops out, and it’s ready to shoot in less than a second. The 28mm wide angle view is a nice step up from my old camera’s 36mm lens, but I do wish it were a few degrees wider, as Panasonic and Samsung now offer cameras at 24mm and 25mm. I ran software called ExposurePlot on all of my old photos and it revealed that I use wide angles for about 80% of my shots, with mid-range and zoom for the rest. As is standard on most compact cameras today, the lens is protected by automatic shutters. Autofocus is fast and shutter lag is minimal. Unfortunately, there are no threads for adding filters or a wide/zoom lens adapter. The S90 supports shooting in RAW and comes with software (Canon Digital Photo Professional) to interpret its RAW output. I am not very familiar with editing RAW files, so I’ve set the camera to record RAW+JPEG files.

Build Quality

The tactile sensation of the camera in your hands is decent but could be slightly better. The front of the camera is metal (aluminum) but the top and bottom are plastic. A common problem is that there is a tiny amount of flex or a clicking noise when you hold the camera by the upper left corner, behind the flash. At 7.0 ounces with battery and memory card, Canon has obviously tried to keep weight down, but the camera feels slightly less sturdy as a result.

Flash

The flash automatically pops up when necessary and retracts if you turn it off. The flash location is a little bit uncomfortable since that is naturally where I would put my left hand to hold the camera. I would've preferred that the flash was built in to the casing rather than popping up, as it can be startling if your finger is in the way when it opens (or closes). I can't comment on the actual quality of the flash at this point - but then, one of the main reasons to get this camera is that you shouldn't need to rely on the flash as much as one with a slower lens.

Sample Photos

I don't have any shots worth posting yet, but a good source is the Flickr S90 Users Group.

Video

It's doubtful that anyone buys the S90 for its video features. The S90 only offers video at standard VGA resolution (640x480) when HD video (720p) has become the standard. Additionally, no zooming or focus adjustment is possible while recording video. If you want a camera with a better balance of still image and video recording features, I'd recommend the Panasonic DMC-ZS3.

Extreme Conditions

An inexpensive option for rain/snow/sand/underwater shooting is the Dicapac WP-410 waterproof case, available for about $30 (much cheaper than the Canon underwater housing). It’s sort of a Ziploc bag on steroids. They have several models but this one seems to fit the S90 just fine. Note that you may have to zoom in from 28mm to avoid vignetting with the case.

Competitors

Panasonic's DMC-LX3 is clearly Canon's target for the S90. Released in 2008, the LX3 quickly became a favorite of photographers looking for above average quality in an affordable point and shoot package. A year later, the LX3 is still in short supply and often sells out at MSRP (potentially indicating poor supply chain management at Panasonic). The LX3 offers an uncommonly fast (f2.0) and wide (24-60mm) angle lens and a 1/1.6" sensor allowing for greater low light performance. The S90 responds with a slightly less wide lens, although more zoom (28-105mm), and a 1/1.7" sensor. Image quality comparisons between the two cameras are subject to much scrutiny, but neither camera seems to have a clear advantage. Some argue that the LX3 has more detail while others are enamored of the S90's color. With an extra year of R&D under their belts, one has to wonder why the S90 lacks some of the LX3's features, such as 720p video, that have become standard on cheaper cameras. And why doesn't the S90 have a clear lead in image quality? On the other hand, the S90 is small enough that you could forget that you have it with you, while the LX3’s size pushes the boundaries for a “pocket” camera. And many lament the LX3’s use of an old fashioned manual lens cap.

As mentioned above, a slightly cheaper option than either the S90 or LX3 is the ZS3, which offers a nice wide angle lens (25-300mm) and better video recording features. However, you will trade off some image quality for your still photos, especially in low light.

Conclusion

Is the S90 the perfect camera? No. I have a few minor things that I would change if I could. But it is an excellent camera, one of the best currently on the market if you’re looking for image quality, low light performance, versatile focal lengths, and manual controls in a compact form factor. Sure, you can find smaller cameras, and you can find cameras with better image quality (micro four-thirds comes to mind) but overall the S90 is a terrific balance between the two. Highly recommended if you’re looking to move beyond the ordinary point and shoot snapshots but don't want to lug a DSLR around.

Is your MBA tax deductible?

2009-08-22T11:21:00.004-05:00

A recent article (PDF) in the Georgetown Law Journal explores the ambiguity surrounding deductibility of expenses associated with a MBA program. Generally, educational expenses which qualify the taxpayer for a new occupation are not deductible, but normal and ordinary expenses in your line of business are deductible. There is some interesting examination of the regulations and court cases where this issue has been challenged, and the author concludes:

Although the line of Tax Court cases considering the deductibility of MBA related tuition expenses may at first appear to be a confusing and winding maze of inconsistency, more careful inspection reveals that—in most cases—the courts probably got it right. For the most part, MBA students at elite schools who attempted to take enormous tax deductions for career-transforming educational experiences were turned away, whereas those toiling away in an effort to improve their established business skills while continuing to work full-time were permitted to take their deductions. In short, at the end of the day it appears as if the courts generally muddled through the cluttered, outdated mess that is Treasury Regulation § 1.162-5 and came out with the right answers.

Samsung TV USB Media Player: Tips and Troubleshooting

2009-08-16T10:24:00.002-05:00

I recently bought a Samsung LCD HDTV LN52B630 and it's a great TV (fortunately I paid a lot less than what Amazon is selling it for). One of the best features of Samsung's LCD and Plasma TVs is the ability to play video files directly from a USB memory stick or hard drive. This feature is alternately referred to as USB Movie 2.0 or Wiselink. Sure, you could buy a TV without this and then add on something like WDTV or Roku but that's an added expense and one more remote to clutter things up. Samsung has done a great job of integrating the media player into the TV. However, the manual doesn't explain everything as clearly as it could, so I've written down some of the problems and solutions I've encountered.

The TV supports a variety of video file formats, such as AVI, MP4, MKV, and VOB. These are really just "containers" for audio and video information, so just because you have one of these files there's no guarantee that the TV will play it. Within the container, the audio and video is stored using a codec. Common video codecs are Divx, Xvid, and MPEG4. Common audio codecs are AC3, MP3, and DTS. You can use software like VLC to tell what codecs were used to create a particular file.

Not supported audio codec

MKV has become popular with high definition material (720p, 1080p). However, the most common problem when you try to play an MKV file is that the video works but the error message comes up: "Not supported audio codec" and there is no sound. Most of the time, this is because the audio was encoded with Digital Theater System (DTS) which the TV doesn't support (Samsung didn't want to pay the license fee). You can easily fix this by reencoding the file to Dolby Digital (AC3) using PopCorn Audio Converter.

Dialog is not in English

MKV files often contain more than one audio track. However, the TV has no way to select between the tracks, so if the default audio track is not the one you want, you can't change it while you're watching. First, open the file with VLC to make sure there is an English language track in the file. Then, open the file in MKVmergeGUI (part of MKVtoolnix) which will allow you to select exactly which audio track you want, and create (aka "remux") a new file that has only that audio track.

It is possible that a file could have both problems - DTS audio and a primary non-English track. In that case, first remux a new MKV using mkvmerge with only the audio track you want. Then, run it through the DTS to AC3 conversion.

The TV won't display subtitles

Just as an MKV file can contain more than one audio stream, it may also contain subtitles, however the TV doesn't support this subtitle format. First, extract the subtitles from the file using MKVExtractGUI. Then, run the output through Subtitle Workshop to convert to SRT format which the TV supports. Make sure you name your new SRT file exactly the same as your MKV file (except for the file name extension, which will obviously be different: .SRT versus .MKV) and put it in the same directory as the video file. Then, you can activate the captions using the CC button on the TV's remote control.

Archiving your DVDs to a hard drive

With 1TB hard drives available for under $100 now, you might want to backup your DVD collection. This would allow you to play any of your movies off the hard drive without having to search for the discs. However, if you try to just copy the files off your DVD and play them on the TV, you probably won't get what you're expecting, even though the TV supports VOB files. The file may not play at all, or the video will start and end in weird places. This is because the DVD menu also contains instructions on where the video should start and stop, but the TV doesn't know how to read that data. The solution is to use DVDShrink to remaster the DVD and extract just the video you want. This will work for both a movie that is one big file as well as a DVD with TV shows on it, where you want a separate output file for each episode. Put the DVD in the computer and start DVDShrink. Select the Re-Author function and then select the various video tracks that you want to extract. Select Backup to copy those files to your hard drive. Now you can open each of those VOBs will be a self-contained video file that the TV can recognize.

Puerto Rico: Day 5

2009-05-22T11:28:00.004-05:00

Friday morning we headed over to the Bacardi tour, though it had some history of the distillery, you don't actually get to go inside the factory itself. Then, back to the airport and a short flight home. Overall we enjoyed Puerto Rico, but our agenda was too hectic - we should've things down a bit. While we expected Vieques to be undeveloped, the roosters are a real problem - I expect that I can sleep in on my vacation, but there's just no getting away from the noise pollution. Personally, I believe the added time and expense to get to Hawaii is worth it compared to Puerto Rico.

Puerto Rico: Day 4

2009-05-21T11:08:00.002-05:00

Thursday we left Vieques (and the roosters) and picked up our rental car in Fajardo (which was no worse for wear). An hour drive to us back to San Juan, where we checked in to the Andalucia Guest House which was a great place to stay. The owners were very friendly and pointed out some good places to eat nearby. Even back on the main island, I was reminded of the fact that everyone operates on "island time" when it took 20 minutes to get two cups of coffee at the nearby McDonald's (two days in a row, and it wasn't very busy).

We drove into Old San Juan and took a tour of Fort San Felipe del Morro. Old San Juan is a nice place to visit but very touristy. One fun attraction was the Don Q rum tasting room near the cruise ship terminal. Who doesn't like free samples of rum? Dinner at Pal Cielo was excellent...a funky little place that we wouldn't have otherwise found except for our host's recommendation. Great ceviche.

Puerto Rico: Day 3

2009-05-20T10:55:00.004-05:00

On Wednesday we woke up early thanks to the thousands of stray roosters that wander the island. Unfortunately these roosters make it difficult to regard Vieques as a relaxing place to unwind as they are constantly crowing, starting early in the morning and continuing on throughout the day. We drove over to green beach, which is located in the abandoned navy base. The road there was quite rugged and parts of it were closed for repairs, making the beach deserted. It's a really nice beach, only downside was horrendous noseeums that would eat you alive if you didn't wear plenty of Off. Wednesday night we did a tour of the bioluminescent bay with Island Adventures. Difficult to photograph the effect of millions of dinoflagellates, but highly recommended if you're going to be in Vieques on a night with low moonlight.

Puerto Rico: Day 2

2009-05-19T10:28:00.006-05:00

I wouldn't say that I had the best rest ever at Casa Cubuy, given the rubber sheets on the bed and the chirping of millions of coqui frogs. Fortunately breakfast at sunrise looking out over the rainforest made up for it. Afterwards, we took a 10 minute hike down to the river in the valley. The water was pretty churned up because of the recent rainfall. Nothing against Casa Cubuy but it is fairly rustic as a result of its location, and if I could do it again I would've made the rainforest into a day trip rather than staying overnight.

Leaving the hotel, we drove to Fajardo to catch the afternoon ferry to Vieques. We didn't have any trouble getting a seat, and for $2 it's a lot cheaper than flying. We left our rental car at the ferry terminal and hoped it would still be in once piece upon our return. Martinque Car Rental picked us up at the ferry and took us to their office, where we rented a Jeep Wrangler that had definitely seen better days. Surprisingly, we had a hard time reserving a car, most of the places were booked up several weeks in advance. It was a short drive to the Esperanza Inn. Our room was a nicely furnished apartment that had air conditioning (thank goodness) and a television. The owners were very friendly and gave us a hand when we had trouble starting our rental car. We spent the rest of the evening walking along the Esperanza beach plaza.

Puerto Rico: Day 1

2009-05-18T10:00:00.003-05:00

We flew in to San Juan and hopped in a rental car for the drive into El Yunque National Forest. Our hotel, Casa Cubuy, had no official address - it's just 26 kilometers up the road. Note that if you are coming in from the airport, you can't reach the hotel by driving into the park from the north, you have to go all the way around and use the south entrance because the road through the park has washed away. The drive there took a couple of hours, partly owing to rush hour traffic and the rain that slowed the ascent up the windy mountains roads. Dinner at the hotel was okay but a bit overpriced for somewhat generic chicken and pasta. The views from the hotel were spectacular but the rooms were a bit more rustic than I was expecting. Running water, but no air conditioning. Up on the mountain, it wasn't that hot, but the humidity was a killer. It did cool off a bit after the sun went down.

The Sovereign Ceiling

2009-04-17T05:53:00.003-05:00

Let's say you're a well run company with a low debt to capital ratio and a high interest coverage ratio. Your bondholders sleep soundly at night, knowing that their principal and interest is coming back to them. However, you happen to be located in a country that is not known for its fiscal conservatism, such as Argentina. If your home country is only rated BBB by S&P/Moody's, what's the best rating your company can hope for?

The sovereign ceiling says that the private sector should not be able to borrow on better terms than the government, since the government has the most senior claims on the firm's earnings (priority ahead of both debt and equity). If the government runs into economic trouble, it may be more likely to expropriate assets. Additionally, the government's problems may reflect broader economic issues that will also impact the firm. Therefore, lenders should not offer better terms to a private company than they would to its host country. The country's credit rating is a cap on all firms' credit ratings.

A graphical representation of the federal budget

2009-04-16T09:21:00.004-05:00

April 15 has come and gone, but that's no reason not to look at where all those tax dollars go (and all those Treasuries we sell). WallStats has created an image that does exactly that. Click on the image below to expand (it's quite large), or use the previous link for an interactive graphic.

The foreign profits tax "loophole"

2009-04-15T09:24:00.005-05:00

Since it is April 15...Much political hay has been made about the supposed "loophole" that allows companies to defer US taxation on profits earned overseas until those profits are repatriated. Is this really a loophole, or is it simply consistent with how most profits on investments are treated? Consider the following.

Scenario 1: You're an individual investor and who buys a share of stock in Toyota in January for $100. Over the course of the year, the company earns $5/share in pre-tax profit. They pay corporate taxes of 20% on their earnings, so your share of the after-tax profit is $4. The local government collects $1/share in tax revenue. The company pays no dividend and reinvests those $4 profits into developing new products, hiring workers, expanding factories, etc. At the end of the year, your share is now worth $104. You haven't sold your share, so your profits are unrealized, and the tax you owe is $0, because although your investment is worth more on paper, you haven't actually received any cash. You have deferred your tax burden until you either sell the shares or receive a dividend.

Scenario 2: You're a corporation who buys a small company that owns several companies in Estonia for $100 million. Over the course of the year, the subsidiary earns $5 million in pre-tax profit. They pay corporate taxes of 20% on their earnings, so your share of the after-tax profit is $4 million. The local government collects $1 million in tax revenue. The company pays no dividend back to the US and reinvests the $4 million profit into developing new products, hiring workers, expanding factories, etc. At the end of the year, your investment is now worth $104 million. Your company in the US hasn't received any cash or profits and under the current system you wouldn't owe any additional tax on top of what the subsidiary already paid the local government.

However, if the tax laws were changed to make foreign income taxable, you would have to immediately pay US taxes on the entire $5 million, even though the parent corporation never received any cash from the foreign subsidiary - all the cash and profits were either paid in the first round of local taxation or reinvested in growing the company.

This is a highly simplified example. Obviously there is a distinction between normal foreign earned profits and truly abusive tax shelters in some countries that should be eliminated. But this example shows that foreign earned profits are not much different than profits earned on other similar investments. So is it equitable to treat them differently? Investors who have a 401k or IRA also take advantage of tax deferral - is that a "loophole"?

2009-04-14T08:11:00.000-05:00

This paper talks about the impact of collateral levels on the economy, not just interest rates. I particularly like this quote:

"Over 400 years ago Shakespeare explained that to take out a loan one had to negotiate both the interest rate and the collateral level. It is clear which of the two Shakespeare thought was the more important. Who can remember the interest rate Shylock charged Antonio? But everybody remembers the pound of flesh that Shylock and Antonio agreed on as collateral. The upshot of the play, moreover, is that the regulatory authority (the court) decides that the collateral level Shylock and Antonio agreed upon was socially suboptimal, and the court decrees a different collateral level. The Fed too should sometimes decree different collateral levels."

Risk Management

2009-04-13T08:59:00.000-05:00

Bling & your computer's input devices

2009-04-11T08:10:00.000-05:00

If you've been watching late night TV commercials, or the afternoon fare on CNBC, you're probably convinced that this is the right time to invest in gold. Inflation is bound to return at some point. But how do you advertise your goldbug proclivities to friends and coworkers without actually spending $900/oz? The gold bullion wireless mouse is just what you need. It contains no actual gold, and can be purchased for around $35.

Divergence: Job losses and time to recovery

2009-04-10T08:11:00.003-05:00

From a WSJ article on the job market. The interesting thing is at the bottom of the chart - the divergence between the percentage of jobs lost from peak to trough versus the number of months it took to recover post-recession. Until the most recent downturn, there is a clear trend of job losses becoming less and less severe (the great moderation?), going from 7.9% to 1.2%. In spite of this, the time to recovery shows the opposite trend, increasing from 18 months to 48 months.

Cap-and-trade market structure, lessons from the past

2009-04-09T07:48:00.003-05:00

From an article in the JACF on Designing a US Market for CO2. Most interesting are the lessons learned from the US SO2 (sulphur dioxide)market, a successful cap-and-trade system that began in 1995. How did the market's design and structure affect trading and contribute to the massive price spike in 2005-2006 (see graph below)? Prices increased from $220/ton to over $1600/ton before declining back to $200/ton. One explanation points to a change in the EPA's regulations in 2005 (CAIR) that put a tighter cap on emissions starting in 2010 and tightening more through 2015. Since emissions credits can be banked, expectations of increased demand in the future should be reflected in the current price. However, this regulation was only supposed to increase the cost to ~$600/ton, and while it might explain the spike it cannot explain the subsequent drop. A second explanation relies upon a shortage of low-sulphur coal due to railroad outages. This shortage increased demand for allowances and correspondingly, the price. While the shortage might have increased demand in the short-run, credits were available that could have been drawn upon to reach a slightly higher price equilibrium rather than a massive spike. So why didn't anyone step in and sell their credits at a massive profit? The answer lies in the restricted float - a low number of credits available for trade - which is due to the way the market was designed.

First, the credits were initially distributed to natural shorts (e.g. a power plant that produces SO2) that expected to use them at some point in the future. Except for relative emissions reductions (a plant installs a better scrubber and thus needs fewer credits), most of the market participants will stay long the credits to offset their natural short exposure. Thus, incentives to trade are reduced and the market is less liquid. Lower liquidity means that small changes in supply or demand can have a magnified effect on price.

Second, the credits were distributed for free, and were held on the firms' balance sheet at zero tax basis. When a credit is redeemed, the increased value is recognized as a gain, but offset by the increased environmental liability from generating the SO2, so it's a wash for tax purposes. If a firm believed the price spike was temporary, it could sell some of its banked credits while prices were high, then buy them back once the market returned to normal, netting a profit. But this action creates a taxable gain today, while the liability is still off in the future. The potential gains from this arbitrage must be weighed against the acceleration of the tax liability.

Third, many of the firms with credits are publicly regulated utilities. If the firm were to profit from selling credits high and buying them back low, regulators might force the firm to pass the profits along to customers (rather than letting shareholders and management keep them). On the other hand, if the arbitrage failed and the firm lost money, regulators might view this as speculation and punish management for being imprudent.

Thus, the owners of SO2 credits failed to create a viable market for them. Note that financial intermediaries, such as the much maligned short sellers and speculators, could help provide liquidity to a market like this and thereby enable more efficient price discovery, reducing the risk of disruptive price spikes.

Law and Economics: The Bimodal Distribution of Lawyers' Salaries

2009-04-08T08:22:00.001-05:00

A New York Times op-ed recently reminded me of the graph below, showing the bimodal distribution of lawyers' salaries: public service on the left, private law firms on the right. Time for more two year law schools? Lower biglaw salaries? People don't think of law firms as highly leveraged institutions but while they don't usually have much debt, they do have operational leverage from the partner-associate structure. Each associate is a fixed cost that has to be paid (debt) before the partner gets his earnings (equity). So a firm with 1:1 partner:associate ratio is about 50% leveraged. Of course, associates can be laid off during bad times, while debt is defaulted on.

Cross-listed Shares and the Bonding Hypothesis

2009-04-07T08:11:00.002-05:00

A foreign company can issue shares on the US equity markets, if it agrees to comply with the US regulatory regime. The bonding hypothesis says that this improves corporate governance by forcing the firm to respect minority shareholder rights and increasing the amount of information that's disclosed about the firm. Thus, a company from a country with low investor protections can "bond" itself with the US, where investor protections are high. In turn, this could lower the firm's cost of capital and allow it greater access to capital markets. However, some challenge the bonding hypothesis because enforcement actions by the SEC against cross-listed firms are rare.

Encyclopedias and the Pace of Change

2009-04-06T08:41:00.002-05:00

Last week, Microsoft announced that they are shutting down Encarta, the digital encyclopedia that was originally released on CD-ROM. A brief history:

1778-1993 (215 years): Encyclopædia Britannica rules the day
1993-2009 (16 years) Microsoft's Encata quickly takes over
2009-?: Volunteer-edited Wikipedia ascends to the throne

The question is, how long will Wikipedia reign? If the average lifespan of encyclopedia technology continues to shrink at the speed implied above, a challenger may already exist. Ironically, Microsoft helped force Britannica's capitulation by giving away free copies (excuse me, "bundling") of Encarta when you bought a new computer with the Windows operating system. Wikipedia's product managed to undercut them on price while offering greater value and a lower cost of production.

Trop50: An Orange Juice Ripoff

2009-04-03T09:01:00.001-05:00

Tropicana (a wholly-owned subsidiary of PepsiCo) recently released a new juice drink product called Trop50. The sales pitch: it has 50% fewer calories and 50% less sugar than regular orange juice. I'm all in favor of reduced calorie/sugar beverages, but do the economics of this make sense?

I spotted a container of Trop50 at the store and although it is the same shape and price as the regular Tropicana ($2.96), the Trop50 package is 8% smaller by volume (64 ounces versus 59 ounces). The problem compounds when you flip the carton around and notice the statement "contains 42% juice." The back panel reveals that the primary ingredient is water, followed by reconstituted orange juice, then some vitamins, and finally stevia (a non-sugar "natural" sweetener). So Trop50 expects you to pay an 8% premium for a product that contains 58% less juice (58% more watered-down) than regular OJ?

Here's a cheaper alternative: fill your glass halfway with regular orange juice, then add water until it's full (cost per 12 oz serving: $0.28). Or, buy Trop50 (12 oz for $0.60), and pay a 117% premium for the 30 seconds it will save you in the morning.

The MBA Job Market for the Class of 2009

2009-04-02T08:25:00.003-05:00

As of mid-March, anecdotal evidence from three schools: Emory (Goizueta), SMU (Cox), and Georgetown (McDonough) indicates that about 40-50% of the full-time MBA students set to graduate in May have accepted job offers. The pace of hiring is well below last year. First-year students (the class of 2010) are having an even tougher time securing internships for the summer.

In what could be mistaken for a headline from The Onion, Harvard Business School is launching a case study to determine why their case studies didn't keep us out of our current mess.

New York Times: Now the Long Run Looks Riskier, Too

2009-04-01T10:33:00.001-05:00

From a recent New York Times article: a new academic study shows that equity investment volatility actually increases over time. Although there is evidence that returns are mean reverting, which reduces volatility over longer time horizons, the authors identify several other factors which more than offset this reduction in risk. These factors include uncertainty about future expected returns and estimation risk. Traditional portfolio theory uses sample statistics (e.g. the average return on stocks over the last 100 years) and assumes they represent the true population of possible values going forward. This approach leads you to believe that volatility of returns decreases as your investment horizon increases (i.e. the standard deviation of your portfolio goes down if you invest for 30 years instead of 1 year). In contrast, this study uses Bayesian statistics, which separates predictive variance (which includes parameter estimation error) from true variance (which has no estimation error).

If you estimate future stock market returns using historical averages, that average has some estimation error in it. As your time horizon increases, parameter estimation risk compounds which leads to an increase in volatility (rather than a decrease). To put it another way: traditional theory says that predictors are perfect and parameters are certain. This theory says that predictors are imperfect and parameters are uncertain. Over time, these imprecisions and errors add up to substantially increase the volatility of your portfolio. The authors use 206 years of data to calculate that the volatility of your stock portfolio over 30 years is about 1.5 times greater than it would be over 1 year. Their conclusion is that stocks are less appealing than they would appear to be under the traditional view of historical risk and return.

Consider: if you started investing in 1979 through 2009, would you have done better in 20 year treasury bonds (rolled over each year) or the S&P 500 with reinvested dividends? An upcoming study (Bonds: Why Bother?) shows that regardless of which month you started in, treasuries outperformed stocks over this period. This is further evidence that the conventional wisdom, that stocks are "safe" as long as you're holding them for 20 years, is wrong. In reality, it doesn't matter how long you plan on holding stocks, they're inherently risky. They may still be a good investment, but you are not guaranteed a higher return just because you took more risk.

Problems with the cost of capital estimation in the current environment

2009-03-31T09:36:00.004-05:00

If you're going to value something based on its discounted cash flows, you're going to need a weighted average cost of capital (or an equity cost of capital) to apply to those cash flows. Duff and Phelps recently released a paper discussing the difficulty of determining the cost of capital in today's environment. Some of the problems they address:

Treasury yields (the risk free rate in CAPM) are temporarily low due to liquidity concerns and a flight to quality, understating risk. It is difficult to decompose treasury yields into components of real return, inflation expectations, and reinvestment risk.

The expected equity risk premium (ERP) has increased greatly (as evidenced by the massive decline in stock prices). However, they claim the equity risk premium ranges from 3.5% to 6.0% throughout the business cycle, which seems extremely low to me. We are not in a normal business cycle here, so I think the forward-looking ERP must be higher than 6%.

Declines in financial stocks and companies with high leveraged have outpaced the broader market, leading to a misleading beta calculation that implies risk has actually declined. Beta measures the covariance of a stock's returns with the market's returns. The market had become overweighted with financial stocks that dragged the index down as they declined. So if you compare a non-financial company's stock covariance to the pre-crash market versus its post-crash covariance, it will appear to have decreased, leading to a lower beta. They recommend using a sum beta calculation to correct for this.

Highly levered companies will probably be unable to sustain their debt loads going forward. The cost of capital needs to reflect likely changes to the capital structure over time. Alternately, you could use an approach like adjusted present value (APV) which separates out the value of the tax shields.

Companies operating with substantial losses may not be able to take advantage of the tax shield on interest in the period when it is paid. So the after-tax cost of debt capital may be inappropriate.

Their final recommendation is that any cost of capital calculation must also pass the reasonableness test. Most of these issues stem from the fact that finance theory attempts to use past data to predict future performance. That becomes increasingly hard to justify during times of discontinuous change, such as the one we're experiencing now. For more information, the authors of this paper have published a practitioner's guide to the cost of capital, available at Amazon.

Regressions everywhere you look

2009-03-30T08:31:00.003-05:00

Is there anything more enjoyable than putting your feet up, opening Excel, gathering data, and running regressions? Of course not. Let's take a look at household energy consumption as a function of cooling degree days (CDD). Cooling degree days are calculated by subtracting 65 from a day's average temperature. For example, if the day's high is 90°F and the day's low is 70°F, the day's average is 80°F. Eighty minus 65 is 15 cooling degree days. There's a similar measure for heating degree days. This data is used for a variety of purposes, including weather futures (derivatives tied to temperature allow utilities to hedge exposure to fluctuating weather). Recent data has put Dallas, TX squarely in climate zone five, with around 3200 CDD and 1800 HDD annually. Here's a nice graph of the country by climate zone:

CDD less than 2000, HDD greater than 7000
CDD less than 2000, HDD between 5500 and 7000
CDD less than 2000, HDD between 4000 and 5499
CDD less than 2000, HDD fewer than 4000
CDD greater than 2000, HDD fewer than 4000

When you regress the last two years of my monthly electricity usage in kilowatt hours against cooling degree days (standardized to a 30-day month for consistency), a clear trendline emerges. In the summer time, the air conditioner accounts for up to 80% of my electric usage. Based on the R-squared, CDD does a better job at predicting energy consumption than just plain temperature. In this case, an exponential regression has the best fit with the data. This makes sense, since the temperature transfer from the environment into the house is larger when the temperature differential between the two objects is higher. Therefore, extremely hot days will take a disproportionately large amount of energy to keep cool. Of course there are other variables, such as cloud cover, wind speed, humidity, etc. but this is a good start. It will be interesting to see if the cellulose insulation and radiant barrier foil I added to the attic last fall will have a statistically significant impact on energy consumption this summer.

Our gas bill is larger in the winter. This time, a linear regression of heating degree days against gas consumption in thousand cubic feet had the best fit with the data.

A graphical representation of social security's problems

2009-03-27T08:51:00.002-05:00

Takeaway: in 1940, social security offered retirement at age 65 - but the average person didn't even live that long. 60 years later, social security's retirement age was unchanged, but the average person lived 75 years. No wonder the program is perpetually on the brink of insolvency. If a life insurance company operated this way, it would've gone bankrupt long ago. (As an aside, it would be interesting to examine purchasing power of social security benefits from 1940 versus 2000.)

This is from a 2003 paper on Demographics and Capital Market Returns that looks at the coming generational conflict between younger workers and older retirees as a result of the shifting "dependency ratio." This has serious implications for investors, who may see declining demand for stocks as people sell assets in retirement and not enough younger workers willing/able to purchase them. Their (optimistic?) conclusion is that retirement will be unaffordable at age 65 for most baby boomers, and therefore they'll keep working until their early 70s. The potential ameliorating effects of immigration, productivity, global trade, and social security reform are all discussed.

Personal investment preferences by country

2009-03-26T10:08:00.000-05:00

Much has been said about Americans' low savings rate, usually less than 1% in recent years. As with most numbers that get a lot of press time because they sound impressive ($60 trillion in credit default swaps? Excuse me, but that's a notional value, not the actual value of the contracts), it's a misleading statistic. It doesn't count saving in 401(k)s and IRAs. It also gives too much weight to retirees who spend more than their income by selling assets in their portfolio. It doesn't account for the amortization of durable goods - if you buy a car, the entire cost is counted as spending in the year of purchase when in fact, you will likely use that car for several years. Depreciation on houses is also counted as spending and this "expense" increased substantially as house values rose. However, no credit was given to households for the appreciation of their real estate. Granted, a lot of that appreciation was phantom wealth, but even so, over the long term we should expect house values to increase roughly in line with inflation. If you're going to count non-cash expenses like depreciation then you should also count unrealized capital gains as income. Once you correct for all of these factors, Americans' savings rate is actually several points higher than the reported number.

So how do Americans invest their savings compared to citizens of other countries? Here's a graph from a slightly dated report on household investments by country. Not surprisingly, we have the highest proportion of our wealth tied up in equities.

More detailed statistics on US household investment preferences is available from the Census:

Spending in retirement: The 4% rule

2009-03-25T10:26:00.008-05:00

Bill Sharpe et. al. prepared an interesting analysis of The 4% Rule (At What Price?) that examines the traditional advice given to retirees: plan on spending 4% of your initial 60% stock/40% bond portfolio every year in retirement to acheive a >90% success rate (confidence interval) of having enough money for the rest of your life. The 4% rule is parroted by many retail investment advisers - and therefore, "it behooves us to be familiar with the rule’s approach, features, and flaws." They find that this strategy, while popular, is suboptimal in terms of overpayments and surpluses (i.e. you are paying more than you need to or spending less than you could). Common modifications to the plan, such as adjusting spending depending on market returns (also known as the glide-path strategy), don't do much to remedy the situation. Part of the problem lies in the fundamental mismatch between the cash flows - the investor seeks a constant stream of payments while the portfolio's returns are variable.

The authors make an interesting comparison between the risky investor that buys stocks and bonds versus one that guarantees his retirement spending by buying zero-coupon inflation-index government bonds (TIPS). For the very risk averse investors, this 100% TIPS portfolio provides the highest utility and dominates other investment strategies. This is an application of financial economics. Investors that are willing to take on more risk with a stock/bond portfolio can still achieve a higher utility by moving away from the 4% rule. But the riskless portfolio provides a minimum cost option that all other investment/spending plans should be judged against.

What does all this mean? Basically, that blind adherence to the 4% rule is inefficient. Unfortunately the paper stops short of developing a new framework that takes into account investors' preferences. However, it does conclude that once surpluses or overpayments are identified, they can be appropriately valued, which is the first step towards improving the spending and investing decisions.

This graph plots the static 4% rule at point A for an investor that has $100 to pay for a retirement plan. You can clearly see that an individual would prefer other points under the curve. Depending on their risk tolerance, they might move up and obtain a higher utility for the same cost, or move to the left and get the same benefits for less cost.

What is the purpose of the capital markets?

2009-03-20T08:23:00.000-05:00

To allow for the efficient allocation of capital across industries, and by extension, society as a whole.

To enable income smoothing over time by letting some borrow from future earnings for consumption today and others lend today in the hopes of higher consumption in the future.

Objective 401k ratings

2009-03-19T08:18:00.004-05:00

BrightScope has a website where you can search for evaluations of employer's 401k plans. They provide an overall rating as well as a comparison to the peer group on dimensions such as employer match, investment options, and participation rate. Perhaps the most interesting number is the average account balance by employee, which ranges from a few thousand dollars to close to a million.

Personal Finance with Zvi Bodie: The Conventional Wisdom is Wrong

2009-03-18T08:14:00.008-05:00

Here's a nice set of videos from my favorite finance professor, Zvi Bodie, where he challenges the conventional wisdom about stock market investing. For a more thorough discussion of his safe investment philosophy, I recommend his book: Worry Free Investing. It's written for a non-academic audience and is fairly accessible even if you're not familiar with CAPM. The first chapter is available as a sample from Bodie's website here.

The next bubble to burst: higher education

2009-03-17T08:30:00.006-05:00

Bloomberg and the New York Times recently confirmed what I have believed for several months now: higher education is the next bubble to burst. Applications at non-Ivy League schools are declining. Private college expenses have increased at a rate far above inflation for too long, and households are no longer willing nor able to tap an inexhaustible supply of home equity to pay $150,000 for a bachelors degree that will not even guarantee a decent wage. Meanwhile, colleges felt the wealth effect as endowments rose and they embarked on grandiose construction plans, often building dorms that would fit in better at the country club than an educational institution. A recent study of university salaries found over 200 presidents making more than $500,000 per year.

As with most things in our economy over the last few years, all of this growth was fueled by cheap debt. An investment in education became one of the most highly leveraged investments you could make (100% financing implies an infinite debt-to-equity ratio). Just as people believed house prices could never go down, they felt that any college degree was worth its price. Obviously, not everyone should be an accountant - but you can justify the $150,000 price tag for an accounting degree much easier than you can justify $150,000 for an art history major. The long-term trend will be massive trading-down in the market for education: those considering private schools will switch to quality in-state public universities, and those who formerly considered state schools will move down to community colleges. Ivy League schools will always be in demand, but they'll have a harder time affording the financial aid they have committed to maintain an economically diverse student body. State universities that have unnecessarily committed to becoming a research institution will also have to scale back their plans.

Ultimately, a return to rational pricing is a good thing. Higher education was becoming unaffordable for an increasing percentage of households. State universities need to focus on their core mission of providing affordable high quality undergraduate education.

A review of Wal-Mart's $2.97 wine: Oak Leaf Cabernet Sauvignon

2009-03-16T08:36:00.008-05:00

Is it possible to produce and distribute a quality bottle of wine for under $3? California residents are probably familiar with Trader Joe's "Two Buck Chuck" but those of us further east were out of luck until recently. I spotted several varieties of Oak Leaf vineyards wine at my local Wal-Mart all selling for $2.97: Cabernet Sauvignon, Merlot, Chardonnay, Pinot Grigio, and Zinfandel. These wines sell for $2.00 in CA; supposedly the extra dollar covers added transportation costs. The economics of this wine are indisputable; consider how it compares to some other common beverages:

2 liter Coke: $0.02/oz
Ocean Spray cranberry juice: $0.05/oz
Oak Leaf wine: $0.12/oz
Starbucks drip coffee: $0.17/oz

But is this something you'd want to drink? Or, I daresay, to serve to company? It's rare to find an opportunity for field research in culinary economics, so I picked up two bottles: a non-vintage Oak Leaf Cabernet Sauvignon (12.5% alcohol) for $2.97 and a 2006 Blackstone Cabernet Sauvignon (13.5% alcohol) for $8.97. Which would my guests prefer in a blind tasting?

All three preferred the Blackstone to the Oak Leaf. They commented that it had more fruit flavor, a darker color, and possessed a more substantial mouthfeel. The Oak Leaf's bouquet had a slightly earthy tone that not everyone was fond of. One person gave Oak Leaf a point for its lower alcohol content. Another felt that it was just a little too watered down. However, no one would object if they were served the Oak Leaf; everyone regarded it as a perfectly drinkable wine, especially when served with a meal (that is to say, Oak Leaf would probably not be a great choice for a cocktail party). The Oak Leaf would also be a fine choice for cooking or any kind of mixed wine like Sangria. Ultimately, while this wine delivers some value given its price point, it's not one I would regularly purchase.

Texas: A very sticky state

2009-03-14T12:44:00.002-05:00

A new study from the Pew Research Center ranks Texas as the country's stickiest state, meaning that it has the highest percentage population of native born citizens who are still here (75.8%). Texas doesn't rank as high on the magnet scale, which measures how strongly it attracts transplants from other states, but this metric is somewhat distorted because the organic population growth and retention rate is so high, on a relative basis it dwarfs the immigration we do have.

A Week on Wall Street: Day 5

2009-03-13T10:01:00.000-05:00

New York Federal Reserve

Truly staggering to see the Fed's balance sheet balloon up from ~$800 billion to +$2.5 trillion over the last few months. And I don't think that includes many of the loan guarantees (e.g. the government backstop of $300B of Citigroup debt) that have taken the form of off-balance sheet contingent liabilities. The Fed is still serving up hot steaming bowls of "alphabet soup" - more acronyms for funding programs than we know what to do with. Another frightening comment from our speaker: when the time comes to reign in all that liquidity, its going to be very difficult to do it in an orderly manner. Many of the outstanding commitments are tied to short term obligations, which will run off in due course. But what about mortgages that could take +10 years to amortize? If those securities are unmarketable, the Fed will have no choice but to hold them to maturity, leaving the money supply inflated for quite a while. Our speaker was also light on details about the Fed's exit strategy.

We toured the gold vault which holds the largest cache of gold in the US (larger than the US Bullion Depository at Ft. Knox). 80 feet below street level, the vault has a massive rotating door that forms a watertight seal at night to protect all the sovereign gold that we hold for other countries. This is a free service of the government. The vault looks nothing like what was pictured in Die Hard.

CNBC

Driving out to New Jersey, we tour the studio and meet with one of the on-air commentators from the news network that everyone loves to hate. Our host is one of the more reasonable talking heads and he comments on how a dedicated financial press is a relatively recent innovation (occurring the last 25 years).

Returning home, the flight was only at 75-80% capacity. Surprising, given the capacity cuts that have already taken place.

A Week on Wall Street: Day 4

2009-03-12T10:32:00.000-05:00

Dynamic Credit Partners

This firm is an expert in dealing with CDOs, toxic or otherwise. Our host took us through the process of creating such an investment and explained how a bank could take $100 of bonds, repackage them to appeal to investors' different maturity/credit preferences, and create securities worth $102 (the $2 was kept as profit for the bank). We examined a pitchbook for one deal that went south rather quickly, the collateral in the CDO was 95% subprime residential mortgage backed securities (RMBS). Whoops! Although the pitchbook had several pages of boilerplate on the various risks of the investment, there was no real analysis of which risks were the most important. A possible justification for lawsuits - investors in the subordinated classes (e.g. below the A tranche) were not informed that their cash flows could be diverted to the senior tranches if the collateral was downgraded by the ratings agencies. This was surprising to me, because why should the lower tranches suffer as long as the collateral was still performing? But that's what the waterfall of cash flows called for. The CDO we looked at had 6 tranches, and currently 5 of those tranches were non-performing and completely worthless. The top-rated A tranche was trading for 7 cents on the dollar.

Barron's

It would be hard to mistake Barron's offices for the well-appointed accommodations of any of the investment firms we visited - it had the appearance of a threadbare newsroom. Tough times for the print media in general, and the financial press is no exception. Demographic shifts - the average age of a Barron's reader is over 50. There is no doubt that investors will keep getting older, but eventually they'll consume content in electronic form only. Bad news for Barron's (and the rest) - rates for online ads have always been less than print ads, but it was hoped the two prices would converge around the average of the two. Instead, they're converging at the substantially lower online rate. Maybe they can clawback some of this differential with better targeted ads?

Cowen and Company

Although business was holding up better than many other firms here, the outlook here was quite pessimistic. Expenses are being cut to the bone - as is prudent - but if everyone cuts expenses until "things start to turn around" it seems the entire economy could easily get trapped in a deflationary spiral.

Completely unsubstantiated rumor of the day: Madoff will plead guilty to everything - the only thing he wants in return is protective custody in jail for the rest of his live, because many of the billions of dollars he is alleged to have lost belonged to organized crime syndicates/drug cartels in South America and Europe. It is an understatement to say they are unhappy with his investment performance and would likely seek to have him killed in prison.

Random observation: under normal circumstances, labor is a cheaper input than capital. In recent history, capital became cheaper than labor, which led to rampant inflation of investment bankers' salaries. The huge profits recorded in good years were actually returns to capital, not labor, but bonuses were paid out anyway.

Overall mood: approaching maximum bearishness.

A Week on Wall Street: Day 3

2009-03-11T09:05:00.001-05:00

New York Stock Exchange

It was a rare treat to go down to the trading floor of the NYSE for the opening bell. Although the vast majority of trading has gone electronic, they still have specialists for many stocks that manually open and close the trading day. The specialist we talked to seemed to base trading decisions on split second gut reactions and news events - there was no time for any kind of fundamental analysis or even technical analysis (one screen had a chart on it, but he didn't seem to rely on it much). Interestingly, these market makers get paid by the exchange for providing liquidity. There were also mad swarms of people running around writing down the expected opening price from the specialists, which was then sent upstairs. There is an electronic feed that provides similar information, but apparently this manual one is more accurate (one of the advantages of having a seat on the exchange is that you can get better pre-market information). Sadly, I learned that the funny looking colored jackets used to be used to identify different positions on the floor, but have since been made unnecessary (though many still wear theirs).
The NYSE gave us a sales pitch on how companies list on their exchange because they want to co-brand themselves. I'm skeptical that this is a prominent consideration when a company lists itself today - the increases competition with Nasdaq over fees has certainly had an impact on the NYSE. In the next 10 years, it would not surprise me if the trading floor was gone all together. Or, the room will be filled with actors hired by CNBC so they can still claim to be reporting from the middle of the action - a live shot of a room full of servers is less glamorous, but more likely where the real trading action is taking place.

WL Ross

It's not everyday that you get to meet a legend in the industry, so we were understandably impressed by Wilbur Ross and one of his managers. These guys were sharp. It is not an exaggeration to claim that before they make an investment, they know more about the company than its own CFO. They have the patience to wait and not bid up deals when dumb money is rushing in. They are also prudent about leverage - if a deal needs a ton of leverage to work, then you're probably paying too much for it. If they think it's an attractive opportunity, they'll consider restructuring an entire industry (such as the entire US steel market). If I could invest with anyone we met this week, it would be this firm.

Oppenheimer Funds

A quantitative fund manager and his team spoke to us about their fund. They have a multi-factor model with almost 100 inputs. They do a lot of back testing. They revise their model periodically. Overall, they seemed like intelligent guys. You'd think that all this fancy math would remove human emotion and mistakes from the investment process - but all of this quantitative analysis eventually came down to which factors they thought would best predict future performance. Given that their fund has been lagging its benchmark, I find it hard to believe that these guys have any edge in factor selection (despite their overall level of intelligence and sophistication). They were unwilling to engage in a discussion of active versus passive management, although they did mention that one of their small cap funds had about 1200 holdings in it (that sounds a lot like a closet index fund, with a higher expense ratio). A cynical observer might note that active management fees do provide for well appointed office space.

The old debate about active versus passive management really fascinates me. Generally, I believe that the market for public equities in the US is pretty efficient. It is exceedingly difficult to earn abnormal risk-adjusted returns of any substantial magnitude over the long run. The statistics regarding active mutual funds that fail to outperform the S&P 500 confirms this. Hence, most mutual fund companies are wasting their time (and their investors' money). However, when you get into active management the way WL Ross does it, the game changes. They have access to opportunities not available to a mutual fund because of their investment process, their investment opportunity set, their time horizon, and their access to deal flow. The stark contrast between Oppenheimer Funds and WL Ross made it very clear to me that one firm is positioned to take advantage of market inefficiencies, and the other, not so much.

Overall sentiment: trending towards bearish.

A Week on Wall Street: Day 2

2009-03-10T08:45:00.001-05:00

MSD Capital

Among other things, this group manages money for Michael Dell. They have recently started buying equities again. An observation: bank debt is trading like equity, equities are trading like options, and options are through the roof. Future inflation is an inevitability. We will not end up like Japan because the American consumer does not want to save - this is rooted in cultural differences. We'll be more like Hong Kong after the last crisis, although their nation is primarily based on pass-through transactions, so not sure how relevant the comparison is.

Primus Financial Products

This company pioneered credit default swaps that didn't require them to post any collateral based on changes in the underlying contract. Just as the monoline insurers have been hammered, so has Primus. Despite having several billion dollars of negative equity under GAAP, Primus is still alive, primarily because they did not have collateral requirements. In theory, as long as actual defaults stay low, most of these mark-to-market losses should reverse out as the contracts mature. Their portfolio of CDS is in run-off mode and they're trying to reinvent their business model. Our speaker was not very bullish on the concept of a CDS clearinghouse - but I believe it is only a matter of time before CDS companies are regulated as insurance companies (they are basically the same thing).

S&P, Structured Finance Ratings

Originally on the agenda, S&P's lawyers cancelled our meeting at the last minute since they are revamping the method they use to rate structured financial products. The phrase "a day late and a (billion) dollars short" comes to mind. I am amazed that the NRSROs have any credibility left at all.

Overall sentiment: slightly less bearish.

A Week on Wall Street: Day 1

2009-03-09T15:39:00.004-05:00

I had the privilege of joining a group of fellow finance MBAs last week for a trip to Wall Street. I don't know that there's ever been a better (worst?) time to visit Manhattan. Over the next five days I'll post my observations for each of our company visits. It was a great trip, and I really appreciated all of our speakers taking the time to meet with us. Disclaimer: These notes are my completely subjective recollection of the day's events and should not be interpreted as official statements by any of the organizations mentioned.

Wachtell, Lipton, Rosen & Katz

A partner from this law firm met with us and discussed the government's involvement in the financial markets beginning with the failure of Bear Stearns. His firm does a lot of work with M&A for financial services firms. A common theme throughout his remarks was that the government (i.e. the Fed and the Treasury Department) had forced many firms to accept a deals at the eleventh hour with verbal promises that they later reneged on. At the risk of sounding like a tinfoil hat enthusiast, it would not be an exaggeration to say "don't trust the government." As far as his investment outlook was concerned, he mentioned that he had moved his entire portfolio to cash and treasuries. On the plus side, this firm seems to have more work than it can handle (or at least, this practice area).

Deutsche Bank, Structured Products Group

This group creates options strategies to limit downside or lever upside. They'll either sell you the strategy and/or implement it for you, although I don't envy anyone trying to sell these products to retail investors (anything that sounds like "derivatives" is going to be anathema). If they put a package together for you, it will probably be with OTC options contracts, so be aware of the limited liquidity that accompanies such a program. I haven't heard of any bailouts for Deutsche Bank lately, but counterparty risk is also a concern for these one-off strategies.

Overall mood for day 1: moderately bearish.

Why the stock market is close to the bottom

2009-03-08T13:16:00.002-05:00

You know stocks are overbought when your hairdresser starts giving you investment advice. When everyone started talking about dot-com stocks in the early part of the decade, it was time to get out. When everyone was boasting about fat profits from flipping condos in Las Vegas, the bubble was obvious.

In the last few days, I've heard from several people, both sophisticated investors and 401k participants alike, talking about how much they hate equities. All of them have stopped making new contributions, and many have switched their portfolio entirely to cash and bonds over the last few months. People have started volunteering information about how much their portfolio lost before they capitulated. Not what you expect to hear from a complete stranger in the seat next to me on a recent flight.

I don't expect that things will turn around tomorrow, but if retail investor sentiment is any guide, 2009 will mark the low point in the market.

Capital Structure Arbitrage

2009-03-04T16:36:00.000-06:00

A fun hedge fund strategy: go long the debt, short the equity.

Federal Reserve: We don't mind traveling first-class

2009-03-03T14:40:00.005-06:00

Recently, much attention has been paid to the travel destinations of banks and insurance companies. Call it the "AIG effect." CEOs were grilled over off-site meetings held at the beach or the casino that were supposedly financed with taxpayer dollars. Now the era of such extravagant travel has come to an end. Never mind the fact that hotels in Las Vegas and Hawaii are laying employees off because so many companies have cancelled their visits.

Surprisingly, the Federal Reserve didn't get the memo that these types of trips were no longer acceptable. Ben Bernanke is sponsoring and attending a posh off-site meeting in May, 2009 at Jekyll Island, Georgia to discuss financial crises and innovation. They are also footing the travel and lodging bills for many of the participants who work in the industry. No one can argue that this conference is extremely relevant, but why is the Fed hosting it at an island retreat? Is there really no cheaper option? The vast majority of attendees are probably coming from in New York and DC - was there no conference space available in either of these cities? Why can't the Fed's guests pay their own way?

The lesson: If a company wants to reward top perfoming employees with a trip to the beach, they should be drawn and quartered. But if the government wants to host a party for its friends, they just get out their checkbooks (and keep the party out of the media spotlight).

S&P 500 Earnings for 4Q 2008

2009-03-02T08:13:00.000-06:00

S&P publishes an excel file with total earnings per share for all the companies in the index. Currently, 93% of companies have reported their 4Q 2008 numbers, and the total EPS for the index is: -$11.97. That is to say, if you added up the earnings of every company in the index, there were enough losers to counteract the winners and the group lost money as a whole. Earnings for the year will be $39.73. However, the Wall Street Journal claims this is misleading. Although the index itself is market-cap weighted (larger firms have more impact on the index), the published EPS is equally weighted across all firms. S&P takes earnings from every firm and adds them up, so a dollar of EPS from Abbot Labs counts as much as a dollar from Zimmer Holdings. The Journal argues that since an investor doesn't hold every stock in the index in equal amounts, each firm's EPS should be weighted by its proportion in the index. If you adjust 2008 earnings this way, you arrive at $71.10 for the year. If you are trying to determine if the market is over- or under-valued based on a P/E ratio, it makes a big difference if you use $39 or $71 for the E.

I think both methods are useful. Consider the following scenario with only two stocks in the index:

S&P's method of calculating aggregate EPS is informative for the health and total earnings of the entire index, or economy as a whole. The Journal's method of weighted earnings is useful for an investor who wholds the index, since it better represents his share of earnings based on his proportional ownership in the companies.

Borrow your way to prosperity

2009-02-27T08:06:00.004-06:00

Here's a cheerful graph from the asset managers at Hoisington, showing the total U.S. debt (government, consumer, and industry) as a percentage of GDP:

If you read the entire report, Hoisington makes Jeremy Grantham look bullish by comparison. Crazy bear market theorists are in fashion right now, but before you write these guys off, consider that their fund returned +37% in 2008 and +13% over the last 5 years. They bet big on long-term, zero coupon treasuries and it paid off.

Their big concern is debt deflation: assets are purchased using large amounts of debt during an economic over-expansion, but then fall in value when things slow down and are unable to generate enough income to make the debt service payments. The bank can no longer sell the asset for enough to cover the debt, leading to large writeoffs.

The true risk of stocks for the long run (part 4)

2009-02-26T07:58:00.001-06:00

If you believe these arguments, how does one create an actionable investment strategy? The first step is often overlooked: consider if you should be investing at all. Individuals need to reassess the wisdom of carrying debt while simultaneously investing in stocks. This approach creates implicit leverage in your investment strategy, which will magnify the gains as well as the losses. It is one thing for corporations and hedge funds to employ leverage, but I do not think such a strategy is appropriate for most households. If you have car loans, credit card debt, or even some student loans at a high rate of interest, they should always be paid off before you start investing.

The mortgage payoff question is less clear cut. The expected return from paying off your mortgage may be lower than investing in stocks, but the mortgage is a risk-free investment. Consider: if it were a no-brainer to take a large mortgage and invest the money in the stock market, why would banks even bother writing mortgages? They could be much more profitable by just investing those funds directly in stocks. The interest tax deduction is frequently evangelized, but the true value of it actually depends on your marginal tax rate as well as the size of the standard deduction versus your itemized deductions. Even if you do get a deduction for it, does it make sense to pay $1.00 in interest to save $0.25 in taxes? You’d still be better off it you had never spent the $0.75 in the first place. It is also worth considering that if you have $100,000 and you give it to your financial adviser to invest, he will earn an annual fee on those funds. If you use it to pay down your mortgage, your financial adviser receives no commission. So what course of action are most advisers going to recommend?

On the other hand, it probably makes sense to prioritize tax-advantaged accounts like the Roth IRA ahead of the mortgage paydown, since there is a limited window for contributions to a Roth IRA (each tax year forces you to “use it or lose it” as there are no retroactive contributions). Similarly, 401k contributions necessary to receive your employer’s matching funds should also take priority over mortgage elimination. But blithely putting as much as you possibly can in a 401k or IRA just because it has some tax advantages is sub-optimal for most investors.

Once the decision to invest has been made, the percentage in stocks and bonds must be determined. Unfortunately, I don’t have a grand unified theory of asset allocation. The best starting point is using traditional mean-variance optimization from modern portfolio theory to create the efficient portfolio. The output would look something like this (the actual output would differ from this graph because I would include asset returns and correlations prior to 1970 up through the present day):

My point here is not that the traditional approach to portfolio construction is flawed; the output (the graph) is reasonable, but the interpretation of the results leads investors astray. This graph tends to make people think that a higher percentage investment in stocks guarantees them a higher return over the long run. A fancy graph makes anything more believable due to the “quantification of fantasy” principle. So investors pick a risky asset allocation that is on the right side of the curve, because that is where you get the highest expected return for each unit of risk (approximately 80% stocks, 20% bonds). However, I believe that for the vast majority of individual investors – those who are financially unsophisticated and saving towards retirement or other long-term goals – the optimal portfolio favors minimizing variance rather than maximizing return/risk. That occurs at the left-most point on the graph - 25% stocks, 75% bonds.

Therefore, the appropriate mix of stocks versus bonds would almost certainly lower than the "bond allocation equals your age" rule of thumb that many use (i.e. if you are 25 years old, you should hold 25% of your assets in bonds). For someone nearing retirement, it is probably lower than the 53% allocated to stocks by Vanguard's Target Retirement 2010 fund. For a young person in their 20's or 30's, it is probably much less than the 90% allocated to stocks by Vanguard's Target Retirement 2050 fund. A very rough estimate of my generally recommended portfolio would invest one-third of its value in each of the following asset classes:

Equities, distributed between US, developed, and emerging markets
Inflation protected securities, such as TIPS
Other bonds like treasuries, corporate, and high-yield

This would be a time-independent allocation that would remain fixed throughout someone's accumulation phase, with a possible reduction in the equity exposure to 20% once the investor enters retirement. Annual rebalancing is assumed and the individual asset classes would be held in index mutual funds with low-cost, passive management.

Some will object to such a low allocation to equities (33%). They will say that over the long term, inflation will destroy the purchasing power of your portfolio. Personally, I think inflation has been used to scare many investors into holding more stocks than they should. If you look at equity returns from the 1970s when the US had high inflation, stocks held up better than bonds but I would hardly call them a good investment over the period. Nonetheless, inflation risk is a legitimate concern, and that is addressed by the 33% allocation to Treasury Inflation Protected Securities (TIPS). These are bonds issued by the US government that increase in value with inflation. Most investors are unfamiliar with them because the government doesn’t run TV commercials telling you to buy them and financial advisers have little incentive to push them due to their lower expected returns. However, they can help protect you from unexpected inflation and are as safe as any government bond (they have no credit risk). You can buy them directly from the Treasury for free, or you can purchase a mutual fund or ETF that manages them for you for a small fee. Because they are bonds, TIPS are best held in a tax-advantaged account like a 401k or IRA.

When times are good and stocks are posting double digit returns, no one feels the need to question how returns are being generated (see: Madoff, Stanford, et al). Investors’ skepticism goes out the window because they think there is easy money to be made. We are all prone to recency bias, believing that the future will look like the not-too-distant past. It is only when risk comes to the forefront that investors reevaluate their exposure to unfavorable outcomes. They realize that risk is not just a number on a page like standard deviation, it is a significant loss of wealth that can affect your quality of life. This also means that investors need to be extremely skeptical of anyone proposing a radical change in investment philosophy – acting out of fear is no better than acting out of greed. If the market drops 50% and you sell all your stocks, what will you do when it starts to recover? I believe it is far better to adopt a reasonable, consistent plan of saving and investing that allows some upside but more importantly, protects you from the disastrous downside. The ideas in this paper are not new; many of them are condensed from arguments made by Paul Samuelson and Zvi Bodie, among others. I appreciate their efforts in challenging the conventional wisdom.

The true risk of stocks for the long run (part 3)

2009-02-25T07:40:00.005-06:00

If investors have been systematically underestimating the risk of holding stocks, where did this bias come from? The financial services industry deserves some of the blame, as do individual investors.

Financial advisers are compensated based on their ability to get clients to invest primarily in equity funds instead of bond funds because higher management fees can be earned on equity funds. It is a lot easier to collect a 2% expense ratio from a stock fund earning 12% than a bond fund earning 5%. There is also a herd mentality - if you put your clients in safe but low return investments, when they hear about their neighbor's awesome returns for 2 or 3 years in a row, you are likely to be out of a job. So advisers try to stay close to the benchmark of what everyone else is doing and speak of performance in relative terms, "we outperformed the S&P 500 by 5% last year." But if the S&P lost 40%, you still lost 35%. As the saying goes, “you can’t eat relative returns,” meaning that if you depend on your portfolio for living expenses, a 35% loss may drastically reduce your standard of living. Another common fallacy: many people think that after a 35% loss, a 35% gain will get them back to break-even. In reality, you need a 54% gain the subsequent year just to break even (and if there was inflation, you still lost ground). We must pay more attention to absolute returns and capital preservation along with growth and inflation protection.

Investors are also guilty of focusing on returns rather than risk. With higher expected returns, they can afford to save less and spend more today. If you assume your investments will earn 12% compounded over the next 30 years (illustrated graphically in almost every investment advisor proposal), you hardly need to save anything at all for retirement. This fallacy was believable not only because we heard it from the "experts" but because we wanted to believe it. It is much easier to increase your 401k’s allocation to equities than to save an additional 10% of your income. I’ve heard from people close to retirement who realize they cannot save enough to afford the lifestyle they expect – so they increase their equity allocation in the hopes of doubling down and winning big. People in that situation should be taking less risk, not more. Stock returns in the 1980s and 1990s made it even easier to believe that stocks would always bounce back. Unfortunately, the power of leverage and cheap credit to inflate those returns is only now fully understood.

The bottom line: asset allocation is the single most important factor in investment returns. But investment returns are only a means to achieve an even more important objective: a comfortable retirement (or college savings, or whatever your goal may be). The most certain way to achieve your long-term financial goals comes not from investing a high percentage of your net worth in stocks, but in saving a higher percentage of your after-tax income and reducing household debt. Stocks are unquestionably an important part of any portfolio. I do not deny the benefits of diversification and its ability to improve the risk-return tradeoff. But stocks are not a low risk investment, no matter how long you hold them. They are also not a silver bullet that will allow you to save 3% of your income and guarantee a comfortable retirement just because you put 90% of your IRA in equities. “Saving” should be risk free, and “investing” should be risky. Somewhere along the way we confused the two terms.

The true risk of stocks for the long run (part 2)

2009-02-24T08:00:00.002-06:00

This simple model posits that investing in stocks for 30 years is actually more risky than investing in them for only 1 year. This runs counter to most of the standard advice about investing. Yet you can clearly see that the risk of investing in stocks increases with time by looking at the price of insuring your portfolio against losses buy buying put options on the S&P 500 index. The graph below shows the how the cost of such insurance as a percentage of your portfolio increases as you increase the length of time you want protection. But are there other reasons why stocks really are a better investment for the long run?

My coin flipping model assumes that returns follow a binomial distribution. For this to be true, equity returns must follow a random walk. Although I believe they do but this is open to debate. There is some evidence that returns are not random from year to year, but are actually mean-reverting. This occurs when a stochastic process tends to return to its long-term average value. To put it another way – if stocks drop a lot over several years, eventually prices will be so low that investors start buying, and returns move back to the average. It’s a plausible theory, but the mean reversion effect is weak. You can’t earn abnormal profits by buying after the market drops one year or sell short after it rises the following year. For example, after the market has a bad (good) year, it may continue to drop (rise) for the next several years. Even if we accept mean reversion, it may take so long for returns to get back to the average that an investor can’t rely on them to prevent his portfolio from declining over a 10 or 20 year period. If those 20 years occur near your retirement, there may not be time to recover before you are forced to start drawing down your principal.

Another line of reasoning says that an investor has two types of assets in his portfolio: financial capital and human capital. Early in your career, you have a lot of human capital and little financial capital. Over time, you convert your human capital into financial capital through savings. Returns to human capital are considered risk-free. Since the intelligent investor should consider the risk of all assets in his portfolio, young people with a lot of riskless human capital can afford to take more risk with their financial capital, and shift this mix over time. My problem with this argument is that your human capital should not be viewed as a risk-free asset. Skills and education are valuable but not invulnerable from risks such as technological change or substitution by cheaper labor somewhere else in the world. Moreover, your returns to human capital are not completely independent from the overall economy. Unemployment and declines in equity prices are highly correlated, so at the time you are most likely to lose your job (or at the very least, not receive a raise or promotion), stocks are also likely to be down. A counter argument to my proposal says that if stocks prices go down, you can work more years to replenish your portfolio. However, there are many other risks to your human capital such as illness, injury, or family circumstances that could force you to leave the labor force early. I believe that economic security in retirement is just too important to assume that none of these risks will affect you.

The true risk of stocks for the long run (part 1)

2009-02-23T08:39:00.010-06:00

Are retail investors taking more risk than they realize? The following discussion is directed towards individual investors who are saving for long term goals such as retirement, primarily using a buy-and-hold approach in accounts like a 401k. The conventional wisdom says that the more time until you need your principal, the more risk you can afford to take, and therefore you should invest more in stocks. What is the logic behind this? Let’s say someone offers you a $100 “investment” based on a coin flip. Heads, you earn 33%, tails, you lose 25%. So after one flip you’ll either have $133 or $75. Since each outcome is equally likely (50/50), on average your $100 investment will return $104, or 4%. That’s not too bad. Let’s imagine that each coin-flip in this example is equal to one year of investing in the stock market. Here’s what a simple payoff tree looks like:

However, you can make this investment multiple times. Every time you flip the coin, there is still a 50/50 chance of heads/tails, and the payoffs remain the same. Since the coin is random, you figure that the more times you flip it, the more likely it is that the total number of heads versus tails will even out. This is equivalent to investing over multiple years. Your financial adviser confirms your intuition and tells you that historically, the variation of stock market returns decreases as you invest over longer period of times. It’s a reasonable-sounding (but flawed) assumption that the more times you flip, the less likely you are to get a bunch of heads or tails in a row. But you believe what your financial adviser tells you, so you expect the risk of this investment to go down if you’re willing to flip it four times instead of just once. Here’s what the payoff tree looks like now:

The average ending portfolio value (probability weighted average) is now $117, which is your 4% expected return compounded 4 times. However, something strange has happened with the ending values. The dispersion between the best and worst cases has increased, from $313 to $31. You also notice that there’s a 70% chance (6% + 25% + 38%) you don’t do any better than break even, and a 31% chance (6% + 25%) that your $100 investment is worth $56 or less after 4 flips. If this money was needed to support you in retirement, would you consider these to be good odds? Is your coin-flip investment (stocks) really better than a less risky alternative investment that might guarantee you an ending value of $106 over four years but with no downside risk? This graph from the Wall Street Journal shows that anyone who started investing after 1996 would’ve been better off in a no-risk money market account than in a broad market index:

Consider the coin flip investment similar to investing in stocks. As you increase the number of investment periods above 4, the trends illustrated in this overly simplified example only continue to increase. The best case gets much better, and the worst case gets much worse. The risk of a substantial shortfall increases as you flip the coin more times. This is contrary to the traditional wisdom that a longer investment horizon reduces the risk of volatile assets. I’ve written about the myth of time diversification before, but this example clearly illustrates how the risk to your portfolio’s final value increases, rather than decreases, over time. At the end of the day, the final value is what matters – standard deviation and expected returns are great, but you can’t eat them.

My point is not that investors should avoid stocks entirely, but that they should be aware of the fact that investing for the long term does not eliminate the risk of stocks. Riskier assets have a higher expected return, but not necessarily a higher realized return. You are not guaranteed a higher return just because you took more risk. If investors are going to be compensated for taking risk, then there has to be a real risk of loss over the long term or else why would the risk premium exist? If you still don’t believe me, take a look at a graph of the Nikkei over the last 25 years:

If you think I’m being overly pessimistic, or if you think the Japanese economy is sufficiently different from the US economy, then how about the returns on the S&P 500 from 1966-1982?

Pension funds and financial economics

2009-02-22T09:10:00.001-06:00

Pension funds are experiencing a double-whammy: losses at a time when companies can least afford to fund them. This highlights the advantages of a pension asset allocation devoted entirely to fixed income. This financial economics approach does a better job of matching the duration of a pension's assets with its liabilities. Stockholders would no longer require a risk premium for the company's pension assets, decreasing the firm's cost of capital. Consequently, enterprise value would be higher and hurdle rates for capital budgeting decisions would be lower, encouraging investment and job creation. Finally, better tax efficiency can be achieved by using scarce tax-advantaged accounts to hold income generating bonds rather than equities, which are already tax efficient.

Unfortunately, misaligned incentives in the current pension regime make this change unlikely. Would any rational person claim that a dollar of stocks is worth more than a dollar of bonds? Oddly, this is the fundamental assumption of current pension accounting rules. Corporations can reduce their funding requirements by holding more equities since the expected return is higher. However, this fails to account for the added risk borne by employees (and taxpayers, via the PBGC), who are the beneficiaries of the plan. Under these rules, corporate managers are divided between doing what is best for short-term investors versus what is in the interests of long-term employees.

Internal rate of return versus time-weighted return

2009-02-21T09:14:00.000-06:00

IRR is primarily used by investors in private, non-marketable securities while TWR is more appropriate for mutual funds that invest in liquid, public securities. Since mutual fund managers can't control the timing of cash inflows and outflows, TWR presents a more accurate view of realized returns. IRR considers the timing and magnitude of cash flows, which private equity managers have control over. More details here.

A bender to remember

2009-02-20T08:53:00.000-06:00

When the price of something goes down, consumption tends to increase (all other things being equal). So what do we make of this graph from the Wall Street Journal's article on The Great Interest Rate Wave? The cost of borrowing money decreased over the last 30 years, so everyone loaded up on it. If this trend reverses, it will not be a pretty picture for investors.

The aftermath of financial crises

2009-02-19T08:03:00.000-06:00

That's the title of a recent paper from the National Bureau of Economic Research. The news is not good. The authors excluded emerging markets crises from the first draft of the paper because they thought those results were too dour. Now, it no longer seems like hyperbole to include them. Here's a summary of their findings:

On average, house prices decline 35% over 6 years
Unemployment rises 7%
Equity prices drop 55% over 3 years

By the second measure, we're ahead of schedule (let's hear it for the USA!). Oh, and there's an 86% increase in government debt. Good thing we balanced our budget before this mess came along. Oh wait, we've been running deficits for years? That can't be good.

They base their analysis on the "big five" crises in post-war developed markets: Spain 1977, Norway 1987, Finland, 1991, Sweden, 1991, and Japan, 1992. For good measure they include the 1997 Asian financial crisis, Columbia 1998, and Argentina 2001. Output (GDP) declines 9% from peak to trough but recovers in only 2 years, and none of the crises studied were nearly as bad as the great depression. However, previous problems were national or regional in nature. It is still unclear how the global nature of this disaster will affect the severity and time to recovery.

Attention shoppers...

2009-02-18T09:05:00.002-06:00

A sign of the times:

The 2008 Periodic Table of Investments

2009-02-17T08:52:00.002-06:00

2008 may be a year that most investors would like to forget, but Callan has decided to go ahead and publish their periodic table of investment returns anyway, available here. Unquestionably, this is the worst year in the 20 years of returns shown on the chart. The best asset class, Barclay's aggregate bond index, had a lower return than any other top asset class over the years. This used to be the Lehman bond index, but they shuffled off this mortal coil. 2008's third place winner, the Russell 2000 (-33.79%), performed worse than the worst asset class in every other year.

Google Trends Revisited

2009-02-16T12:20:00.007-06:00

I wrote about Google Trends before but didn't really explore the graphical option (you can also export results to Excel and manipulate the data as you see fit). A few interesting observations. Curiosity about "deflation" started to pick up at the end of last year, versus inflation which spiked earlier in the year as oil hit $147/barrel.

Searches for "cheap wedding" have been steadily increasing over the last five years, especially in 2008. Note the steady decline through the fall and spike at year end. Must be Christmas/New Years engagement surprises?

If the graph below is correct, 2008 may be the year that pawn shops replaced investment banks as sources of capital. I-banks rallied right around the time Lehman collapsed, but then continued trending down. The second image shows a geographic look at the search terms' support: Miami and Las Vegas were both bullish on pawn shops. Coincidence that these cities also have some of the most rapidly falling home values in the country.

Many terms seem to show a cyclical decrease in activity over the summer. Is this due to students being out of school and googling less?

The Feng Shui Index

2009-02-09T08:51:00.002-06:00

Tired of relying on fundamental analysis to figure out where the markets are going? Technical analysis isn't any better. Thankfully, an Asian investment bank, CLSA, has released their Feng Shui Index for 2009. You can download a copy here. Take note that it is based on "not much more than wind, water, a bunch of fanciful farmyard animals and frequent recourse to spirits." Although this is technically the year of the ox, they predict it will be more of a cow.

Endowment performance in 2008

2009-02-08T17:00:00.001-06:00

NACUBO is the National Association of College and Business Officers. They report statistics on endowment size, performance, and asset allocation. Their 2008 endowment studies are available here and overall, they reported an annual return of -3% for 2008. However, the fiscal year for this report runs through June, not December. They also reported a further 23% decline for the first five months of the 2009 fiscal year - from July through November. Things will probably look even worse once December and January's results are included. It is striking to think that professionally managed, highly diversified portfolios, many over a billion dollars, can take such a substantial hit when the market heads down.

They also report on asset allocation by endowment size. Not surprisingly, larger endowments have greater allocations to alternative asset classes such as private equity, hedge funds, and natural resources. It will be interesting to see when the FY09 results are published if this helped or hurt the larger endowments. The average spending rate (the funds that go to support the university's operations) averaged 4.6%. If returns don't improve, I expect this will also decline in 2009, creating a budget shortfall that will leave many universities (and eventually, students) in a tough spot.

Is your city becoming a hard-money lender?

2009-01-31T09:36:00.002-06:00

The Wall Street Journal reported this week that some cities in California are providing subsidized loans to struggling auto dealerships. Even if you believe it is the government's job to finance private enterprise, this is a terrible way to do it. Why is this such a bad idea?

Municipal bondholders will be forced to take on more risk than they were expecting, pushing prices down and yields up. This will increase the city's cost of borrowing. Higher interest expense means higher taxes or a reduction in city services.
Rather than diversifying its risk, the city has concentrated it even further. Since it depends on tax revenues to operate, if businesses fail then taxes will decline. After making a loan to a struggling business, it's in even more trouble if things go bad - it will lose both the tax revenue as well as the principal on the loan. So the risk of financial distress for the city has increased (is this really a good time to be taking on more risk?).
The city is essentially engaging in interest rate arbitrage - using its strong credit rating to borrow cheap (plus taking advantage of the federal tax exemption) while lending to extremely risky businesses at below-market rates. If you found out that your city was using tax revenues to buy junk bonds, would you approve of that? This is no different. Actually, this is worse, because at least junk bonds might be fairly priced - the loans in this article are at below market rates, so the "investors" (the city's taxpayers) are not even getting a fair risk/return trade off.
The city doesn't have the resources to properly underwrite, monitor, or enforce collections the loans like a normal bank. A bank has departments that deal with all of these issues and as a result, can provide those services at a lower cost than a city that has to develop them from the ground up.
When things go bad, the city will face a lot of pressure to avoid calling the loan and foreclosing on the business. It creates a rat's nest of tangled political issues that will result in poor economic decisions being made.
It encourages a "race to the bottom" among cities to offer lower tax rates to prop up uneconomical or inefficient businesses while forcing the tax burden on the successful ones.

S&P 500 returns and the normal distribution

2009-01-24T09:46:00.002-06:00

One of the fundamental assumptions in modern finance's asset pricing models is that returns follow a normal (Gaussian) distribution. The histogram below shows the annual percentage returns on the S&P 500 from 1926-2008, grouped by 5% increments, overlaid with the normal distribution curve. Note the fat tail on the left that includes the two worst years, 1931 and 1937.

Until last year, many assumed that these data points could be ignored because "things were different" after WWII, so they proceeded to fill their VaR models with mean returns and standard deviations calculated post-1945. My finance textbook, published in 2006, discusses the differences between 40-year returns and 80-year returns and decides that the 40-year returns, (which exclude the 1930s) are more appropriate for our purposes. The book states that "it appears that observed fat tails are largely due to older history" and "we have more confidence that the more recent averages better estimate expected returns for the near future." Then 2008 dropped a -37% return on us. It will be interesting to see how they address this issue in the next edition.

Businesses that will fail in 2009

2009-01-22T13:19:00.002-06:00

The NYT has described one here. A new startup is going to assemble blog postings and print them in a free weekly paper, supported by advertising. Let me see if I can find all of the problems with this business model as compared to a traditional newspaper or a blog.

Cost of printing and physical distribution (blogs are virtually free)
Low responsiveness (blogs can be updated instantly)
No fact checking or editing (a real newspaper provides those, at least)
Environmental impact (blogs use less resources)

Basically, The Printed Blog has taken the worst parts of the newspaper business model and combined them with the worst parts of the blog model. And they're going to launch this in the worst economic environment in recent memory. Right.

Cartoons

2009-01-21T09:35:00.002-06:00

Scott Adams seems to have a better understanding of basic economics than most people these days.

Meanwhile, Bill Watterson has succinctly captured the ethos of the American automakers' management:

The winner's curse

2009-01-20T10:24:00.003-06:00

This can occur in an auction where the bidders have incomplete information about the true value of the item they're bidding on. If the average of all the bids equals the item's true value, then whoever wins the bid must have overpaid for it, since their bid was the highest, and therefore above average. So the tendency is for the winning bidder to be the bidder with the highest misestimate of value.

Unrelated: In honor of the inauguration, here's some presidential trivia - who was the only U.S. president to successfully pay off the national debt? Andrew Jackson, in 1835. Unfortunately, the panic of 1837 (brought on by massive banking failures) and subsequent depression put an end to that, as the national debt increased ten times in the first year of the depression.

Generational risk taking

2009-01-18T08:48:00.000-06:00

A recent paper from Berkeley investigates how the risk you take as an investor may be affected by the economic environment you grew up in. Everyone has heard the stories of those who lived through the depression who refuse to trust banks. This paper finds that people who lived through strong stock market returns have an increased percentage of their wealth invested in stocks. Similarly, those who lived through times of high inflation are less likely to invest in bonds. Early experiences of macroeconomic shocks can color someone's investing philosophy for years to come, although they do show that people are still subject to recency bias, although it fades away over time. This approach supports behavioral finance, which runs counter to the traditional theory that all individuals are rational and evaluate past information (historical average returns) equally.

Going forward, will young investors over the last decade return to investing in stocks after the above average volatility experienced starting in 2000? Or will we have to wait for the next generation for the great bull market?

The promise of equity investing: oversold to the public?

2009-01-17T09:20:00.007-06:00

The conventional wisdom for personal investments is that the longer you have until you need the funds, the more risk you can afford to take. A young person with many years until retirement should put a larger percentage of his asset allocation (mix of stocks, bonds, and cash) into riskier asset classes such as equities. If we examine portfolio statistics, this appears to be a reasonable suggestion - while the S&P 500 may be up or down 40% in a year, over 10 or 20 years the average annual return approaches a more reasonable number, and the standard deviation of returns (how much do returns vary each year compared to the mean) also decreases. Since the standard deviation represents risk, people believe they are taking less risk by holding for the long term.

The problem here is that an individual is concerned with his portfolio's terminal value much more than the average of his returns. That is, when you retire in 40 years, how much real purchasing power does your 401(k) provide? Unfortunately, as time increases, the dispersion of your portfolio's terminal value increases, rather than decreases. This means the range of possible values, both extremely high and extremely low, is wider. The mean (expected) value looks pretty good, and there is a lot of upside, but if you end up in the bottom 3 sigmas, you may be disappointed. See graph from John Norstad below.

My argument is not that investors should eschew stocks in favor of something else. It's that average investors may not be fully informed about the risk that they are taking, and may be misled by the apparent effectiveness of time diversification. The investment community has put the best possible spin on portfolio statistics, but may not explain the nuances to an unsophisticated investor. Now that the primary burden of providing for one's retirement has been shifted from social security and pensions to 401(k)s and Roth IRAs, it is more important than ever that people understand what is going on in those accounts.

A detailed explanation and some other arguments are available here. He gets into some other interesting considerations, such as utility theory and the options pricing model. Regarding the latter - if the risk of stocks really declined the longer you held them, put options on the S&P 500 (the right to sell the index at a guaranteed price) should cost less the further out in the future they mature. This is basically a form of portfolio insurance - you buy the option and ensure that you will receive at least a certain price for your stocks. But we observe in the marketplace that the cost of such an option increases with the time to maturity. If you tried to insure the value of your portfolio for the next 10 years this way, it would be prohibitively expensive.

Word Clouds

2009-01-14T08:49:00.004-06:00

There's an interesting web application at Wordle, which allows you to easily create word clouds from text or a blog feed (RSS or Atom). Options include the font, colors, shape, and layout. Here's a word cloud created from a Wall Street Journal article on how banks are going to need more capital.

Words of the day

2009-01-11T09:01:00.000-06:00

Antediluvian (adj.)

1. Extremely old and antiquated.
2. Occurring or belonging to the era before the Flood (as told in the Bible).

[From ANTE + Latin dīluvium, meaning flood.]

Logomachy (noun)

A battle of words.

[From the Greek logos (words) + makhe (battle).]

Terpsichorean (adj.)

Relating to dancing.

[From the Greek terpein (to delight) + khoros (dance).]