Archimedes was right. Source: Wikipedia. “Give me a lever and a place to stand and I shall move the earth.” That’s what Archimedes said when describing the advantage that leverage gives. Force times distance on one side of the fulcrum equals force times distance on the other side. That’s how you can lift a hundred pound weight with only five pounds of push – if the distance on one side is twenty times that of the other. [...]
They were the best of yields, they were the worst of yields … French Aristocracy. Remember what happened to them? Public Domain. Source: Wikipedia In an environment where short-term interest rates are barely moving up and bonds are exposed to rising inflation, many investors have turned to dividend-paying stocks to provide income for their portfolios. Many blue-chip companies yield more than 3%. How risky can such a strategy be? There’s a lot to like about dividends. They [...]
Do small stocks outperform? Comparison of S&P Small Cap and Large Cap indices. Source: Bloomberg On its face, this seems like a silly question. Everyone “knows” that small cap stocks outperform. Since 2000, small caps have grown over 4 times, while large cap shares have only doubled. There’s a 5% annuallized difference between the S&P 500 and the S&P 600 small cap index. Over longer time frames this relationship seems to hold up as well. From 1926 [...]
Why Finance Should Be Boring This article first appeared in the Summer 2016 issue of Understanding Investments. Every industry relies on jargon to conduct business. Internally, work is done efficiently when everyone speaks the same technical language. But no industry is an island and when your main function is as an intermediary, relying on highly specialized language has consequences. The use of complicated language may seem the best way to demonstrate your superior ability or knowledge. Too [...]
What comes to mind when you think of the Alps? Photo: Kevin Connors. Source: Morguefile Maybe it’s clear mountain lakes and crystal blue skies. Maybe it’s sun and snow and skiing. Or maybe it’s money? A map of Europe scaled by per-capita GDP reveals an interesting tendency: the areas with the most mountainous topography tend to have higher incomes. Northern Italy, western Austria, southern Germany, and Switzerland are all significantly richer than other regions. This holds true [...]
Where does finance fit into the economy? Photo: David Whelan. Source: Morguefile Time was that the real economy was considered the dog and the financial economy the tail. Except for an occasional bubble, the tail didn’t wag the dog. What people ate and how they dressed was critical; how the saved and where they invested wasn’t. Now it’s not so clear. The world produced about $80 trillion in goods and services in 2015. At the same time, [...]
Image Source: Pixabay Remember Long Term Capital Management? Twenty years ago a couple of traders teamed up with some Nobel Prize winners to create an investment company premised on the notion that similar things act similarly—that in the long run, finance obeys rational rules. Small differences in price can be understood and used to create financial returns. For example, the returns on 30-year US Treasury Bonds and 29 3/4 year treasuries shouldn’t be all that different. The [...]
What is a balance sheet? Image Source: Digital Juice A balance sheet is a financial statement that lists all your assets and liabilities—what you own and what you owe. It’s a fundamental part of finance. It’s an accounting ledger that lists, on one side, what you are doing with your money, and on the other side, where the money came from. It’s a snapshot at a point in time. Everyone and everything that deals with money has [...]
Will China become a major market?China’s economy is huge. They are now the world’s second largest marketplace, at $8 trillion, about half the size of the US and 11% of the world. They’re a major player in trade, manufacturing, consumer goods, and large infrastructure projects. But their equity market is tiny. At $2 trillion, they’re 3% of the world’s equity markets—about the size of France. And their debt market is even smaller.Why the disconnect? Why would a [...]
Physicists are looking for the “God particle.” Could its discovery affect investments?The scientists at the CERN Institute are huddling over the results of some supercollider experiments. They show a tantalizing bulge in the curves that has a “one-in-a-thousand” chance of being random. That is, there’s a very good chance that the scientists have found evidence of the Higgs Boson, a long-predicted but never-observed key to the Standard Model of physics.The Standard Model is a set of physical [...]
