finance

The Surprising Business of Life Insurance Policies

readingbyeugene Leave a comment

Are you worth more dead than alive? That’s the premise behind this fascinating New York Times Magazine piece, which goes into depth behind life insurance policies.

First, the author drives one point home:

Selling your life and selling a house have more in common than you’d think. The seller puts a listing on the market. Prospective buyers do research and get inspections; there are offers and counteroffers until the seller accepts a bid. The seller doesn’t literally peddle his own life, of course, but his life-insurance policy. The distinction is in many ways moot, however, as the sales value is inextricably linked to a cold-eyed estimation of how much longer the seller has to live.

There are many, many reasons why selling your own policy can be a bad idea:

For all the supposed benefits, settlements still strike many people as creepy. They invert the traditional incentives of life insurance. Insurance companies have always had an interest in you, the policyholder, living as long as possible so that they can collect more premiums. Generally, you also want to live a long time, for obvious reasons. But a settlement means someone hits the jackpot when you die, and the sooner that happens, the more money that person makes.

The investors who buy policies from others must be diligent (even if what they are doing is unsympathetic):

Life-settlement investors, like those in other sectors, crave timely information about their holdings, and the key metric for predicting portfolio performance is the health status of the policyholders. To acquire this sensitive information, Fred says a Vespers representative would call and question the policyholders — or their adult children, nurses and doctors — as often as quarterly. He would then receive tracking reports summarizing what the company learned.

Much of what I’ve read in the NYT piece I’ve read previously, in different concoctions, at other sites. So the biggest takeaway from the piece, for me, was near the end:

Back in 1921, a Stanford University psychologist, Lewis Terman, selected 1,528 kids for a study on what demographic and psychological factors enabled students to excel, in both their early years and later in life. The children were regularly assessed even as they grew into adults, got jobs and had families. After Terman’s death in 1956, the project was taken up by other researchers, who continued tracking the participants all the way into the 21st century. That the study hadn’t been designed to analyze longevity scarcely mattered to Friedman: here was a large group of people who had undergone standardized assessments from age 11 till death. Friedman and his colleagues exhaustively mined the Terman data for statistically valid correlations between the “psychosocial” profiles of the participants and how long they lived. “Surprisingly, the long-lived among them did not find the secret to health in broccoli, medical tests, vitamins or jogging,” Friedman wrote in his 2011 book “The Longevity Project.” “Rather, they were individuals with certain constellations of habits and patterns of living.”

Friedman’s findings buck much of the conventional wisdom on longevity. For instance, the cheerful study participants were less likely, on average, to live to a ripe old age than the more serious ones, in part because happy-go-lucky people are prone to “illusory optimism,” meaning they underestimate health risks and are less likely to follow medical advice. Highly sociable people, on average, did not live longer than less gregarious ones as is commonly believed, because they tended to drink, smoke and party more. Over all, Friedman found a longevity edge for the successful nerds of the world, the scientist types over lawyers and businesspeople. “The findings clearly revealed that the best childhood personality predictor of longevity was conscientiousness — the qualities of a prudent, persistent, well-organized person — somewhat obsessive and not at all carefree,” Friedman wrote.

Sounds like it’s good to be a nerd!

But really, if this topic is new to you, I suggest reading the entire piece. The topic is macabre, but it’s quite fascinating.

A Brief History of Trading on Wall Street

readingbyeugene Leave a comment

You don’t get to read about history in the Dealbook blog, but we get a great one today about the history of trading on Wall Street. It’s pretty crazy to think that in the early days of Wall Street, stock prices were communicated by runners:

Even after the introduction of the trans-Atlantic cable in 1865 and the telephone in 1878, brokers still relied on manpower over gadgetry. Market prices were listed on slips of paper, and runners, most younger than 17, would deliver letters between brokerage houses, according to a report by Alexandru Preda at the University of Edinburgh. The new technologies were not seen as reliable. Problems ranged from typographical errors in the closing stock prices listed by newspapers to outright forgery.

In the days after the Civil War ended, traders seeking a timely edge still relied upon foot speed. The fastest man on Wall Street was William Heath, a celebrated runner with a huge drooping mustache, who was nicknamed “the American Deer.” Standing an inch taller than the Olympic sprinter Usain Bolt of Jamaica, Mr. Heath was reported by The New York Times to have been “as quick in his locomotion as in his operation.”

On the invention of the first ticker symbol, which was unreliable:

In 1867, Edward A. Calahan, a draftsman with the American Telegraph Company who previously worked as a messenger on Wall Street, unveiled the first stock ticker. The device, which earned its name from the unique sound it created, featured two wheels of type placed under a glass jar. The ticker printed off company names and stock prices on a narrow strip of paper, which was read aloud by a clerk.

Mr. Calahan’s machine was the first step in a major technological revolution of Wall Street, but it was also slow and unreliable. Twice a week, the batteries had to be filled with sulfuric acid, which was carried around in buckets. More important, the wheels of type would not always print in unison resulting in a mash of letters and numbers.

Catch up on the rest of the history lesson here.

Why Facebook Stock Will Continue Its Decline

readingbyeugene 2 Comments

From this excellent New York Times piece detailing the woes of the Facebook stock, I wanted to highlight these two paragraph:

The next test for the stock could come soon. Over 1.6 billion shares will be eligible to come on the market in several waves, starting on Thursday, when a number of shareholders are allowed to sell. Investors may fear that an influx of shares could cause prices to fall even more.

One former Facebook employee, who did not want to be named because he did not want to damage his relationship with onetime co-workers, said he expected other employees to cash in their stock options as soon as they could, and predicted that the stock’s woes could make it difficult to retain and hire talent. He no longer owns Facebook stock.

My prediction? A lot of insiders are going to unwind Facebook stock, and the effect will be a further decrease in the stock price. I am staying far away. I wouldn’t be surprised if the stock price is trading below $10/share by the beginning of 2013.

Bill Gross: Cult of Equity is Dying

readingbyeugene Leave a comment

This is a must-read investment letter by Bill Gross, managing director of PIMCO, on the cult of equity:

​The cult of equity is dying. Like a once bright green aspen turning to subtle shades of yellow then red in the Colorado fall, investors’ impressions of “stocks for the long run” or any run have mellowed as well. I “tweeted” last month that the souring attitude might be a generational thing: “Boomers can’t take risk. Gen X and Y believe in Facebook but not its stock. Gen Z has no money.” True enough, but my tweetering 95-character message still didn’t answer the question as to where the love or the aspen-like green went, and why it seemed to disappear so quickly. Several generations were weaned and in fact grew wealthier believing that pieces of paper representing “shares” of future profits were something more than a conditional IOU that came with risk. Hadn’t history confirmed it? Jeremy Siegel’s rather ill-timed book affirming the equity cult, published in the late 1990s, allowed for brief cyclical bear markets, but showered scorn on any heretic willing to question the inevitability of a decade-long period of upside stock market performance compared to the alternatives. Now in 2012, however, an investor can periodically compare the return of stocks for the past 10, 20 and 30 years, and find that long-term Treasury bonds have been the higher returning and obviously “safer” investment than a diversified portfolio of equities. In turn it would show that higher risk is usually, but not always, rewarded with excess return.

Gross points out that the long-term history of inflation adjusted returns from stocks shows a persistent 6.6% real return. But he argues that we should examine this real return with more scrutiny, going so far as to call the returns of the stocks a Ponzi scheme:

Yet the 6.6% real return belied a commonsensical flaw much like that of a chain letter or yes – a Ponzi scheme. If wealth or real GDP was only being created at an annual rate of 3.5% over the same period of time, then somehow stockholders must be skimming 3% off the top each and every year. If an economy’s GDP could only provide 3.5% more goods and services per year, then how could one segment (stockholders) so consistently profit at the expense of the others (lenders, laborers and government)? The commonsensical “illogic” of such an arrangement when carried forward another century to 2112 seems obvious as well. If stocks continue to appreciate at a 3% higher rate than the economy itself, then stockholders will command not only a disproportionate share of wealth but nearly all of the money in the world! Owners of “shares” using the rather simple “rule of 72” would double their advantage every 24 years and in another century’s time would have 16 times as much as the sceptics who decided to skip class and play hooky from the stock market.

Now, read the whole thing with a grain of salt, as Gross heads the largest bond fund in existence, the $270 billion Pimco Total Return Fund (so he’s got a fair amount of bias lambasting stocks). Still, the evidence he presents is eye-opening. I’ve read his investment letter twice.

A Man Walks Into a Bank

readingbyeugene Leave a comment

Patrick Combs received a fake check in the mail for $95,093.35. As a joke, he went to his ATM and deposited it, thinking that it would bounce in a day or two. But it didn’t, as he describes in this great piece for The Financial Times:

But seven long days later the lottery-like amount was still there and I visited the bank where an employee told me that the funds were now all available for cash withdrawal. All $95,093.35 was mine for the taking. All I had to do was ask. Windfall money begs us to take it and run. But I restrained myself. And gave the bank another two excruciatingly long weeks to do their job, catch up with their mistake, and bounce the cheque. But at the end of three hellish weeks, during which I hourly resisted the urge to take the money and run to Mexico, where it would be worth twice as much, I was told by my branch manager, “You’re safe to start spending the money, Mr Combs. A cheque cannot bounce after 10 days. You’re protected by the law.”

So he decided to withdraw the money… What happened next was pretty interesting. The comments, however, disparage Mr. Combs:

Not funny. Mr. Coombs is a consumer ‘shoe bomber’. Because he could not restrain himself from doing something deliberately stupid, there will be endless paragraphs added to banking terms and conditions as the lawyers try to plan for every imaginable glitch in the use of atms. This kind of idiotic behaviour eventually makes life more tiresome for millions of others. Grow up.

You withdrew the money. A dishonest act. All business’s make mistakes. It would have been more amusing if you had notified them of your mistake first showing some honesty. The world can do without people like you. It moved into the area of appearing like attempted fraud on your part and not at all funny. How you bleat about them getting cross. You would have been calm of course if it had been your money?

What do you think Mr. Combs should have done? Is he deserving of the cash? Or was it a morally wrong thing to do?

Stocks Perform Better If Women Are On Company Boards

readingbyeugene Leave a comment

Heather Perlberg  for Bloomberg reports:

Shares of companies with a market capitalization of more than $10 billion and with women board members outperformed comparable businesses with all-male boards by 26 percent worldwide over a period of six years, according to a report by the Credit Suisse Research Institute, created in 2008 to analyze trends expected to affect global markets.

Net income growth for companies with women on their boards has averaged 14 percent over the past six years, compared with 10 percent for those with no female director, according to the Credit Suisse study, which examined all the companies in the MSCI ACWI Index.

The analysis doesn’t apply to IPOs, as evidenced by Facebook’s decline. Facebook appointed Chief Operating Officer Sheryl Sandberg as its first female director about a month after its May initial public offering; the stock is down nearly 50% since the $38 initial public offering in May.

The Knight Capital “Glitch”

readingbyeugene Leave a comment

Yesterday, The Knight Capital Group lost $440 million when it sold all the stocks it accidentally bought Wednesday morning because of a “computer glitch.” According to Dealbook:

The losses are greater than the company’s revenue in the second quarter of this year, when it brought in $289 million.

The company said the problems happened because of new trading software that had been installed. The event was the latest to draw attention to the potentially destabilizing effect of the computerized trading that has increasingly dominated the nation’s stock markets.

Until this week, Knight had been one of the biggest beneficiaries of the evolution of the market, helping clients trade in and out of stocks at high speeds.

The glitch occurred over a span of 45 minutes, during which Knight Capital lost $10 million per minute. The stock tumbled 30% yesterday and is down 60% today to a low of $2.75/share.

For a specific glance at the stocks that were affected yesterday, check out this blog post. The blog post begins appropriately “What follows should strike you as crazy. If it doesn’t, read it again, because it is.”

Incredible how much value can be wiped out in a company because someone on the High Frequency Trading desk didn’t do his/her homework.

How to Make $44 Million in 20 Minutes

readingbyeugene Leave a comment

Short answer: become and exit as CEO of Duke Energy, all in less than a day’s work.

Earlier this month, Bill Johnson enjoyed one of the shortest (and most lucrative, in dollars/hour) terms as CEO in U.S. history, as he was ousted from his new position at Duke Energy after only a few minutes on the job. Earlier today, Johnson explained to regulators that his brief time on the job was just as surprising to him as it was to the rest of the world.

Only a few weeks ago, Johnson has been the CEO of Progress Energy. Then that company merged with the larger Duke — becoming the nation’s largest electric utility provider — and Johnson was named CEO of the combined businesses… but only for about 20 minutes, at which point the board called for him to leave (with the help of a payout worth around $44 million).

The Wall Street Journal has more details about this crazy story. Call it a see-saw turn of events.

Americans Living Larger

readingbyeugene Leave a comment

Recession? What recession? Bloomberg reports:

The percentage of new single-family homes greater than 3,000 square feet has grown by one-third in the last decade, according to data released last month by the U.S. Census Bureau. The increase has occurred even while 4.3 million homes have been foreclosed upon since January 2007, a result of the housing- bubble collapse and economic meltdown. Slightly more than 1 in 4 new homes built last year were larger than 3,000 square feet, the highest percentage since 2007.

This is even more mind-boggling:

The Census Bureau reports that the average size of a U.S. house rose in 2011 to 2,480 square feet, up from 2,392 square feet in 2010. The 2011 figure is 62.6 percent larger than the 1,525-square-foot average size in 1973.

So people are buying fewer newer homes, but when they do, they want to get that 3,000 square foot McMansion. Makes total sense.

Mark Cuban on High Frequency Trading

readingbyeugene 1 Comment

The Wall Street Journal interviewed the brazen Mavericks owner Mark Cuban about his thoughts on high-frequency trading. His response is gritty:

WSJ: What do you say to the argument that high-speed traders provide liquidity to markets and narrow spreads? The argument is that those benefits outweigh the negative side effects that you’re talking about. If the HFTs are pushed out of the market, they say, regular investors will wind up paying more to buy and sell stocks.

Mark Cuban: That’s a bogus argument. By definition they can’t go into an equity unless there already is liquidity. To say they’re adding liquidity is like saying spitting in a thunderstorm is adding liquidity.

As far as narrowing spreads, that’s absolutely true, but in absolute terms what does it translate into? For the individual investor it might save them a quarter a month. So what? Relative to the risk that’s the worst tradeoff in the history of tradeoffs

And the argument is horrible for another reason. If you’re an investor you shouldn’t care if the spread widened by a penny, nickel dime or quarter. If you’re anything but a trader the change is of no impact to whether or not the company will be successful and create returns for investors. In fact, that anyone even considers this a valid argument is a red flag that the exchanges are more interested in traders than investors.

WSJ: What’s the solution? There have been some calls for a transaction tax recently for instance.

Mark Cuban: Public companies need to figure out what business the exchanges are in. Is the market supposed to be a platform for companies to raise money for growth and to create liquidity and opportunity for shareholders as it has been in the past? Or is the stock market a laissez-faire platform that evolves however it evolves? The missing link in all the discussions is: What is the purpose of the stock market?

Good stuff.