Economics Rigor

There is a rich intellectual discourse on economics in the recent years. My classes in college got stuck on the basics: Paul Samuelson, price elasticity, supply and demand, micro and macro economics. The good stuff where never covered like behavioral economics and financial investments. Basically the stuff about capital markets like the stock market, central bank functions and so on. I guess it’s because the country back then has not reached the level of sophistication as the west. The whole concept of the efficient market was bypassed in relation to the capital markets.


The only significant treatise I remember from college was the critique on the School of Economics on the Marcos regime. It was basically a challenge on the form of cronyism that affected the free functioning of the market. These days these problems seemed to be quaint and simplified. Other Asian countries like Malaysia and Indonesia have even exceeded the Philippine in terms of cronyism. Now, government intervention and control seem to be the accepted response in the wake of the financial turmoil. It seems government will always play an important role in the economy. This role is something that is already in full bloom in countries like China, Japan, Korea and Singapore.



I guess my college years were more a reaction to the Marcos regime where the old oligarch is reacting against the new cronies raised by Marcos. It seems that this is a normal development in third-world economies where everyone wants to keep the pie for himself. The underdevelopment of the capital markets resulted in not being updated with the latest theories on stuff like modern portfolio theory, diversification, Black-Scholes model and so on. The recent crisis has resulted in an explosion of books that tries to explain the current problems. At the heart of the critique is the failure of the efficient market theory. This efficient market theory is now being replaced with the so called behavioral economics where irrational people subject the market boom and bust cycles.

The destruction of wealth plus the fall of institutions like Lehman Brothers and Bear Sterns have shown that tools like risk management is inadequate. Risk was not understood the wrong pricing models made the situation unmanageable. So we are back to square one although people like Warren Buffet and George Soros as usual prove everybody wrong. I guess these people do not rely on exotic theories but on common sense although Soros tried to create a philosophical framework for investment, coming close to behavioral economics with his theory of reflexive phenomenon. So its important to jump into the books again to understand the present predicament.

Books by Gillian Tett, Justin Fox, George Soros and Benoit Madelbrott, Nassim Taleb all try to explain the present situation. It now clear the Alan Greenspan is likely wrong. and efficient market is a fallacy although some parts of the model still work. So one should cultivate the following skills: understand one’s cognitive bias in investing, the herd of crows and behavioral economics and assessing risk. It does not hurt to learn as well from Warren Buffet and read books like ‘Fool’s Gold,’ ‘The Last Man Standing’, ‘Lords of Finance; and so on to understand the new normal in the financial systems. It’s a good way to understand tomorrow’s world today.

Pay Your Taxes

Its tax time again. I have been attending free seminars on taxation and investment in the library for the past few weeks. The teacher is an accountant from the nearby university. Basically it’s basic stuff but a good introduction to the US environment for recent emigrants like me. The tax system here is complex and encompassing so one should really understand and take advantage of tax credits or deductions. It’s really an important task because filling tax is a big deal here. Civil wars have been fought in the past and political battles rage today regarding the proper level of taxation. One can get audited and sometimes jailed if one is not exacting. The complexity for me is filing 2 tax returns for 2009.


The library showcases some books to read after the weekend seminars. I borrowed a few and liked Larry Swedroe’s book on making wise investments. He is similar to the author of ‘The Coffeehouse Investor.’ They both agree that the best way to invest is via passive investing, usually by buying index funds and/or ETFs. I agree with their views but in the last minute I decided to buy individual stocks. The reason is that Index Funds or ETF cost more that some really good value stocks out there. In fact, one could invest in companies like Citigroup, GE, Pfizer and Xerox in today’s market with their current price levels. Its taking advantage of the depressed prices of certain firms that have a good upside potential in the future.


I guess I bought because I intend to hold them for a long time. I will not be trading but rather keeping these stocks for the long term. So I guess I am a contrarian, buying value stocks. It is this ease in applying the correct labels that I learned from the seminars. I have borrowed a lot of books too and it’s been very helpful. Now I wonder if the confidence I have in buying individual stocks is warranted. I may be a victim of overconfidence as well the error of looking at the past as a predictor of future events. The new field of behavioral finance has opened up a new perspective for investors who are affected by downturn.

I guess I can describe myself as having a high risk tolerance, with a buy and hold mentality, who focus on value stocks with a contrarian perspective. I hope a got these labels right. Actually I have investing in stocks since my early twenties, having read a stock primer on the Philippine stock exchange. Prior to my meager US investments, I can say that I have invested in the Philippines and Singapore stock market, invested in mutual funds, REIT, ETFs and individual stocks. I have an undergraduate degree in Economics and post graduate degree in business. I have also read my share about investing by reading books by Benjamin Graham, Warren Buffet, George Soros, Robert Kiyosaki, about the stock market, economic theory, history books on banks, financiers as well as attended all sorts of investing seminars.

With this background, I hope that I am not blindsided by any mental bias or overconfidence. At the moment, I have lost some money due to the recent downturn although overall I am OK because of my gains in real estate after selling my flat. It’s only the first time I have invested in US stocks. I think I have also developed through the years a good ability to assess risk. Not necessarily in investment but in my work and life. Most of my bets are good though I sometimes have a gambler’s recklessness. I guess one’s progress in life and work reflects one’s risk assessment skill. Applying this sort of instinctive skill with investment psychology and financial literacy is the key to being a good investor.

Being the Man

By all accounts the quintessential individual in the present time are people like Jaime Dimon and Barack Obama. They are the symbols of rationality amidst the turmoil of current events. There were false models that seemed to epitomize the age such as Sandy Weill or George W Bush. But their leadership tended to go straight to a dead end. It is the ‘second stringers’ who have emerged out the shadows to succeed and offer a voice of maturity. This theory holds true for software as well. For instance has Tumblr become the new mature tool after learning from the lessons of Twitter and Blogspot?


One notices that decision making is well thought out if it is to be done well. Notice how John McCain seem to short circuit his hopes of winning the election by making fast decisions that now seemed erratic in the circumstances. I think it’s rarely that a decision is right if made in a fast manner intuitively. I may have made the same mistake for example by rushing to buy real estate and settling for a small townhouse when one could easily afford something larger with just a little more expense. It was the rush to decision that led to a possibly poor choice. But then again I think that it was a good investment considering the continuing fall of property prices.



It’s the price that counts. As Dimon says, the price should be at such a (low) level that it would mitigate any unforeseen risk. J.P. Morgan Chase has applied the same principle in their purchase of Washington Mutual and Bear Sterns at a low premium when compared to Bank of America’s purchase of Merill Lynch or Wells Fargo’s purchase of Wachovia. Now that property prices seem to have decreased by about 2% in this area so this allows one to absorb a much lower loss by coming into the market at a low price. Its how one can absorb the risk without losing one’s shirt. Hence, it’s a relation between having a strategy that would accommodate the worst case scenario and one that does not consider risk.

The recent passage of the health care bill and arms control agreement with Russia seem to indicate that Obama has now moved into the arena of great presidents. His legacy is no longer in question. Recently his efforts seemed to be considered a fluke after his election victory and health care reform controversy. Now the passage of the bill has removed all doubts. Consequently, Nancy Pelosi is the pre-eminent woman politician and not Hilary Clinton as assumed in the last election. Pelosi will probably go down as one of the most effective house leaders ever. It took awhile before the bill was passed to allow every one to vent their opinion but also to deliberate all the issues. It’s perhaps the classic example on how to pass a controversial bill.

On The Road

Living in the slipstream, listening to Jack Kerouac’s book ‘On the Road’, and addressing problems at home and at work. Being on the slipstream means living at a different level than one normally is accustomed. Something like getting on a stream and following the currents, trying to establish some equilibrium. We are living on a new age, where the stage has been ‘reset’, that’s what the head of GE said when determining the new sign posts. It’s like all the old markers have been swept away. In Asia, it was always like that all along while looking at the roads leading to China now that the dragon has finally awakened. It’s a frightening sight to see the new cities springing up in the Chinese coast and large factories producing stuff. It’s like a monolith consuming everything like raw materials, in its path.


Living in the slipstream, listening to Jack Kerouac’s book ‘On the Road’, and addressing problems at home and at work. Being on the slipstream means living at a different level than one normally is accustomed. Something like getting on a stream and following the currents, trying to establish some equilibrium. We are living on a new age, where the stage has been ‘reset’, that’s what the head of GE said when determining the new sign posts. It’s like all the old markers have been swept away. In Asia, it was always like that all along while looking at the roads leading to China now that the dragon has finally awakened. It’s a frightening sight to see the new cities springing up in the Chinese coast and large factories producing stuff. It’s like a monolith consuming everything like raw materials, in its path.



Looking for the new normal is the operative sentence. It’s scary to be alive for some when all the old truths don’t seem to matter anymore. Health care reform for example, being passed recently has unhinged a few people in the conservative right. It’s like the end of the world. But so has the collapse of housing prices, the fall of financial institutions, the rise of China and India and so on. But that’s what it means to be on the road. To accept everything that comes on the road and adapt. Kerouac and the beatniks used a lot of alcohol and drugs to understand so maybe some sort of assistance is needed such as meditation and Tai Chi to avoid the substance abuse. It’s a ground breaking work that people often mislabel as a drug filled hedonistic voyage along the American highways. But I think it is a much more mature work compared to Alan Ginsberg or William Burroughs.

Admittedly, there is no transcending goal or noble objective in the novel. Just a drunken movable feast led by charmingly, funny deviants. It lacks the weight of Hemingway’s ‘The Sun Also Rises’. Somehow the psychological abuse and carnage described in the book reminds one of the financial institutions and their greed and excess. Established institutions and even countries all plunged headlong on the road to financial ruin. It has all brought everyone to a new level of overindulgence. The new stage has disturbed many and the reaction is either to increase regulation and control or accept the new playing field. The new normal is radical wealth or excessive debt and no in between. Perceptions are rapidly changing. Watching the excellent movie ‘Milk’ would shock conservatives as well as it’s about a gay rights leader who was assassinated in San Francisco.

Gay movement is rightfully rising to the proper place, following the principle of equal rights for all and health care as well becoming basic human right shows there is progress in the world. ‘Broke back Mountain’ is the new normal which would cause old heroes like John Wayne to roll in their graves. Perhaps there is still hope for the old normal with sensible people trying to keep things in a normal groove. Like Sal Paradise in Jack Kerouac’s ‘On The Road’ or people like Jaime Dimon of J.P. Morgan Chase or even Barack Obama. Sensible people who try to navigate the new normal and try to bring order for the rest of us. Make sense? At least we still have Warren Buffet who through the years has profited through the changes and who one can learn from.