Weekend Links - Dec 16

QUOTE OF THE DAY

“I think everybody should get rich and famous and do everything they ever dreamed of so they can see that it’s not the answer.” – Jim Carrey

CHART OF THE DAY

RETIREMENT FINANCE AND PLANNING

Retirement Isn’t Always Fair, Boston College.  Retirement experts, including economists at this Center, urge baby boomers to hold on and work just a few more years to improve their retirement finances. But less-educated older workers often have physically demanding jobs or poorer health, making this very challenging, or even impossible. “It may well be,” the researchers conclude, “that their retirement shortfalls cannot be bridged by working longer and other solutions will be needed.”  [Comment: empathy, yes, of course, but I have to say: beware the "other solutions" if they were to be in the hands of Boston College professors]  

What Does Spending Look Like In Poor, Great, And AverageRetirement Conditions? Pfau.  

[comment: there is a hell of a lot of rules and guidelines in this article.  My advice: constant vigilance and triangulation.  There are no rules that will save you.  Each year, you have to make a judgement about what you have, what you expect,  and what you plan to do this year and for a couple years looking forward based on what you think about future returns, inflation, spending, blah blah blah.  I'll do a post on this sometime because I think rules can be a distracting crutch.  Constant, vigilant adaptation is the only plan that works. That, and making sure you have enough when you start…which means that early retirement is fraught…]

Time Discounting and Economic Decision-Making Among theElderly, Huffman et al.   Abstract: This research project evaluates the extent of heterogeneity in time discounting among elderly Americans, as well as its role in explaining older peoples’ key behaviors. We first show how older Americans evaluate simple (hypothetical) intertemporal choices in which payments now are compared with payments in the future. This adds to the literature on time horizon experiments by focusing on a nationally representative sample of persons age 70 . Using the indicators derived from this experiment, we show how differences in discounting patterns are associated with characteristics of particular importance in elderly populations, such as serious health and mental conditions. We then relate our discounting measure to key outcome variables including wealth, the timing of retirement, investments in health, and decisions about end-of-life care. 

Johnson’s Social Security Reform Proposal Will RequireMillennials to Save 4% More of Their Annual Pay, on Average, to Replace Benefit Reductions, Ken Steiner, 

MARKETS AND INVESTING 

The Dividend Disconnect, Hartzmark and Solomon, UofC and USC. We show that investors trade as if they consider dividends and capital gains in separate mental accounts, without fully appreciating that dividends come at the expense of price decreases. Investors trade differently in response to each component - trading patterns such as the disposition effect are driven by price changes, with dividends being ignored or downweighted. Investors hold dividend-paying stocks longer, and are less sensitive to price changes, consistent with dividends being valued as a separate desirable attribute of stocks. The demand for dividend-paying stocks is higher when interest rates and recent market returns are lower, consistent with investors comparing dividends to other income streams and capital gains. Investors spend the proceeds of each component differently - mutual funds and institutions rarely reinvest dividends into the stocks from which they came, but instead purchase other stocks. This leads to predictable marketwide price increases on days of large aggregate dividend payouts, including stocks not paying dividends.  

Dividend Clienteles: A Global Investigation -  [Opaque but here is one of the conclusions:] "Miller and Modigliani (1961) raise an important question of whether the firms set their payout policies and investors sort accordingly, or whether companies set their payout policies in response to the preferences of their current shareholders. In this paper, we provide evidence consistent with the later argument. Specifically, we test for the effect of dividend demand on payout policy. Firms seem to respond to the tendency of older investors to hold dividend-paying stocks in combination with individual investors’ increased financial demands due to a low government funding in health expenses. Firms also try to attract foreign investors by resorting to a generous payout policy. We also find that overconfident investors, as measured by index of individualism (IDV) developed by Hofstede (2001), reduce their demand for dividends." Jain & Chu. U Wyoming and U Memphis.  

Optimal Trading Strategies — A Time Series Approach, Peter Antony Bebbington  University College London, Department of Physics and Astronomy, Students   Reimer Kühn  King's College London   

[comment: I haven't read this but the abstract, which you are free to read, had the fun phrase "Motivated by recent advances in the spectral theory of auto-covariance matrices..."  While the abstract ends with "Finally we apply our framework to real world data" my personal guess is that if, instead of "real world data,"  they were to apply the framework to real people and real money and you gave them $1B they would end up with $500M in short order. Or less. Or negative.]  

How the 1973-74 Bear Market Changed How People JudgeInvestment Performance, Ben Carlson.  "To recap, before the mid-1970s, investors:

• didn’t really know how to benchmark their investment performance correctly.
• ignored dividends when calculating performance comparisons.
• compared everything — even bonds — to the Dow Jones.
• really had no idea whether or not their money managers were any good or not."

ALTERNATIVE RISK

Using Volatility to Improve Momentum Strategies, Omar Khlaif Gharaibeh, Al Albayt University. "This paper attempts to enhance momentum strategy by using volatility effect. To achieve this objective, double sorting portfolio is used and data is collected from 10 Arabic market indices over the period of 1990-2014. A simple modification to the traditional momentum strategy provides highly profitable results in Arabic market indices. While traditional momentum alone provides significant abnormal raw return of 1.16% per month over the six-month holding period, new momentum strategy based on double sort suggested by this study represented via recent winners with low-volatility outperform recent losers with high-volatility and it provides significant abnormal raw returns of 2.60% per month over the same holding period. Finally, either traditional momentum or momentum with volatility strategies can’t be explained by two factor model."   [comment: second paper I've seen on this in the last week.] 

Stable Distributions: Why They Matter for Trading. Steenbarger. "The wise trader approaches market action as a Bayesian, constantly looking at the most recent activity and determining whether it falls into the pattern of the recent past or meaningfully diverges.  The market situation will always change--eventually.  A key to successful trading is figuring out whether we are in a stable trading period or one of transition. " 

7,500 Faceless Coders Paid in Bitcoin Built a Hedge Fund’sBrain, Wired.com.  The company comes across as some sort of Silicon Valley gag: a tiny startup that seeks to reinvent the financial industry through artificial intelligence, encryption, crowdsourcing, and bitcoin. All that’s missing is the virtual reality. And to be sure, it’s still very early for Numerai. Even one of its investors, Union Square partner Andy Weissman, calls it an “experiment.” 

FX Market Volume Falls--To a Mere $5.1 Trillion Per Day. Timothy Taylor.  " Why the decline? The key point to understand is that most foreign exchange trading isn't related to exports and imports of goods and services According to the World Trade Organization, total global exports of merchandise and services approached $24 trillion for the entire year of 2014. Clearly, this isn't going to explain an FX market of $5.1 trillion per day.  Moreover, foreign direct investment isn't the primary drivers of the FX market, either. Foreign direct investment is about $1.0-$1.5 trillion per year."  

SOCIETY AND CAPITAL

Cashing in on climate change, NYT. As Henry Paulson, the former Treasury secretary, recently put it, the “greenhouse-gas crisis” won’t burst like the housing bubble of 2008 because “climate change is more subtle and cruel.”   

Don’t stick your head in the (eroding) sand, abnormalreturns.com.     

The Unhealthy Desire For Prestige Is Ruining Your Life, FinancialSamurai.  The desire for prestige is why we: 1) spend an outrageous sum of money on education, 2) kill ourselves at jobs we don’t like, 3) put up with colleagues and bosses we despise, 4) never pursue our dreams, and 5) eventually fill our hearts with regret. If we can figure out how to rid ourselves of the desire for prestige, we will become much happier in the process!