Category Archives:Education

What a simple long-term solvency ratio says about Caterpillar

Financial ratios can be very helpful in measuring the performance and health of a corporation. Each year in the investing class we take a look at Times Interest Earned. As the name implies, it reveals how many times over a corporation is able to pay the interest on its long term debt. The point is that when a corporation’s profits are no longer sufficient to pay the interest, there’s likely trouble ahead, including the possibility of bankruptcy.  We usually look at and discuss the ratios for at five corporations.

Should you trust the CDC? An analogy may help you decide.

The documentary Trace Amounts explains that in 1999 the CDC conducted a study (often referred to as the Verstraeten study) regarding mercury and major neurological diseases, including autism. The study showed a shocking 7.6 reading for association with autism. This number represents relative risk. It means that a child receiving a vaccine containing Mercury would be 7.6 times more likely to develop autism than a child not receiving the vaccine.

How a money manager realized High Frequency Traders were ripping him off

The book Flash Boys by Michael Lewis tells the story of how a mild-manner stock trader named Brad Katsuyama, while working at the milder-mannered Royal Bank of Canada (RBC), identified how High Frequency Trading (HFT) firms were stepping between buyers and sellers to make an unfair profit for themselves. How do they do this? The short and no-longer-a-secret answer is that they pay the stock exchanges enormous sums to give them information about what’s happening in the market before it is seen by ordinary investors.

Slipping one past mutual fund investors

In 2013, PBS Frontline released the documentary titled The Retirement Gamble. While the name is off target — it’s really about how Fund industry fees hamper nest egg growth —  the video takes key retirement issues head on.

In one scene, economist Robert Hiltonsmith is sitting at a computer scanning an on-line fund report as he explains the myriad fees levied by the industry. He points out the column heading shown in the screen shot below.

What I learned watching Inside Job 25 times

Despite the implication, I am not completely obsessed with Inside Job, a documentary post-mortem of the 2008 financial crisis. It’s just that I have five sections of my introductory investing class each year and we’ve been watching the movie as the culmination of the course since its release five years ago. Without further delay:

Most shocking moment   It’s a tie!

  • Larry Summers trying to intimidate CFTC Chairwoman Brooksley Born into silence by menacingly staring her down during her very public Congressional testimony (at 24:59), and
  • Harvard Professor Martin Feldstein, who, after being asked if he had any regrets in his role as a member of AIG’s Board of Directors (which presided over its implosion, necessitating a taxpayer bailout in excess of $150 billion), to which he replied “No.” This occurs at 1:23.55. Feldstein’s nonchalant answer is so stunning that the interviewer is left speechless.

Person who should be most embarrassed  Fred Mishkin, who showed himself to be a buffoon on so many levels. He acknowledged that everything he said about Iceland in his paper defending its deregulated financial system was incorrect. He had no idea that many top financial institutions such as Lehman Brothers, Fannie Mae and Freddie Mac had AA or even AAA ratings until just a few days before they imploded. He acknowledged attending meetings where consumer advocate Greenlining presented evidence of abusive and predatory mortgages being offered to unsuspecting borrowers, to which his response was “So, what do you do?” Here’s an idea: immediately prohibit those types of mortgages.

A strong runner-up is John Campbell, Chairman of Harvard’s Economics Department. He saw no conflict of interest in his professors becoming wealthy by cashing in on the prestige of their positions at Harvard. It took the interviewer using a scenario of a doctor prescribing a medicine that he or she has an ownership interest in to get Campbell to understand what conflict of interest means. Upon achieving this “aha” moment, Campbell froze and could only utter “um” and “ah” for the next several seconds.

Biggest revelation   That the tentacles of the financial industry are so far-reaching they’ve corrupted the study of economics itself. Basically, professors traffic in the prestige of their universities by providing cover to Wall Street firms that want a highly reputable third party (like only an Ivy League institution can be) to assure Congress, the public and critics that its latest financial innovation is perfectly safe (and couldn’t possibly blow up the world).