2007-05-29 (Tuesday) by Gregory Tucker.

I recently discovered there are 3 bed and breakfasts within 3 blocks of our apartment. I love this city.

http://www.portlandswhitehouse.com/
http://www.lionrose.com/
http://www.apaintedladyinn.com/

The latter looks the most affordable.  There is also a Marriott next to Lloyd Center, which is probably the same price as A Painted Lady without the charm.

Residence Inn-Dwntwn/Lloyd Center
1710 NE Multnomah St, Portland, OR
(503) 288-1400

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2007-05-18 (Friday) by Gregory Tucker.

Daily stock movements are random. Technical investing, in which you try to take advantage of short-term patterns of stock movements, is a fools errand. Technical investors have defined a number of patterns, such as momentum, breakouts, etc. Similar patterns can be seen in purely random processes like flipping a coin, so these patterns are useless for determining future stock movements.

Stocks do trend upwards over time. The long term trend for stocks is approximately 12%, which is significantly higher than any other (non-entrepreneural) form of investment. However, short-term movements are random and you can see significant downturns in the short term. Therefore you should only invest in stocks money you will not require for 5 years.

For unsophisticated investors like you and me, the markets are efficient, which means that all known (and anticipated) information regarding a company is already factored into its stock price. Therefore, throwing a dart at a list of companies on a dart board is as good a stock picking method as any.

There is only one strategy for maximizing return while minimizing volatility. It is called asset allocation. Asset allocation is a very important concept, but I don’t have time to cover it right now. Please research it, because the theory is relatively easy to understand and implement. The secret to success is to not panic, even when faced with 2-3 years of losses.

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2007-05-16 (Wednesday) by Gregory Tucker.

It is a big assumption that consumers are rational in their purchasing and investment decisions. There is a great deal of evidence that people and markets can be very irrational.

In discussing the consistent and repeated flaws in security products, thought leader Bruce Schneier describes the pioneering research of George Akerlof called “The Market for Lemons” which earned him the Nobel Prize. Akerlof illustrated asymmetrical information theory using the used car business. Used car salesmen know more about the car than the buyers. Consumers buy lemons for the price of real cars. Not knowing the true value of a used car, consumers respond by pricing cars at about the average of all the used cars on the entire market. The problem is that sellers of high quality used cars are unable to obtain full value, so they don’t put such cars on the market. This drives down the average quality of the used car market, which drives down how much buyers are willing to spend, which further drives down the quality of the used car market. This is extremely irrational.

http://tinyurl.com/2fh325

Of course, irrational markets are an opportunity for information arbitrage. Carmax inspects cars and their history before they put them on their lot, and offers warranties–steps which improve consumer confidence in their vehicles. Websites like Carfax sell history reports on cars.

There is an excellent article in the May 21, 2007 edition of BusinessWeek called The Poverty Business that documents the increasing interest of finance companies in the sub-prime markets. This is another example of asymmetrical information, in which the sellers hold significantly more information than the buyers. Tax prep firm Jackson Hewitt charges sub-prime clients for tax preparation and refund loans fees that often go to several hundred dollars. Used car dealer J.D. Byrider Systems, which has lots all over sub-prime neighborhoods, no longer shows prices on its cars. After clients decide on a car they negotiate financing with interest terms often in excess of 25%.

As unfortunate as these examples are, they are becoming very common. Credit card holders with high credit ratings and reliable payment records (like me) are now regarded as “duds” by the financial industry. Ever notice how hard it is to see the total balance on your statement when you make a payment? The minimum payment is easy to see. Their preference–though they will not admit this–is for you to forget to make your payment on time in order to rack up penalties in addition to interest. The average quality of lenders and credit card issuers is going down because it is harder for them to make money off reliable payers like me. Where do I go to find a credit card or bank who isn’t trying to stab me in the back at the slightest mis-step? And how much am I willing to pay for such a bank or credit card?

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2007-05-15 (Tuesday) by Gregory Tucker.

Outsourcing may be commonplace, but it continues to confound IT executives’ expectations. Take the common myth that companies outsource to save money. Not only is this not true in half the cases, but our survey shows that most companies aren’t saving money by outsourcing.

Full Story

Hello? Is anyone home? Is this conclusion surprising to anyone? More importantly, how do IT executives know whether they will save money by outsourcing when they have no idea how much their existing services cost them? Doesn’t it make more sense to build a serve catalog and track your costs first?

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2007-05-15 (Tuesday) by Gregory Tucker.

Predicting human behavior is very tricky, but statistics are probably used successfully in more ways than most of us are aware.

In Texas I took a class on election campaigning. Statistics are used heavily to plan advertising and awareness campaigns. Traditional wisdom says you have a trifecta: a third of the voters will always vote one party, a third for the other, and a third are independent. However, particular neighborhoods or areas will often lean in one direction. You use statistics to analyze the voting trends of specific neighborhoods in order to determine how you address them.

Neighborhoods in the hands of the other party you typically just leave alone. Your efforts will be wasted. Neighborhoods in your favor need to be incensed or encouraged to vote. You can use these neighborhoods for fund raising, however, and these neighborhoods are where you target your get out the vote (GOTV) efforts. Politicians typically target independent neighborhoods, because these are where you win elections.

The issues differ from one neighborhood to the next. Therefore a lot of local knowledge is required. It is unwise to assume that all retirement communities will vote Democratic, even though this is the broad tendency. Statistics in this case are just a tool, but they save the planner a lot of wasted time and effort.

Polls do not always predict elections. However, the election markets (or gambling markets) are very reliable at predicting outcomes.

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2007-05-12 (Saturday) by Gregory Tucker.

Predicting the future is always fraught with difficulty. The future is affected by so many things we cannot possibly predict. We cannot predict the weather very accurately more than a few days out. We cannot predict major hurricanes; we can barely predict their paths or inland impact.

Sales predictions are equally fraught with these problems. Most often we fail to estimate the responses and actions of competitors. Competitors are particularly difficult to predict because they are secretive with their actions, for obvious reasons, and their actions are often specifically targeted in response to ours. The real world is not like chess or poker, in which the competitions has only limit numbers of options.

I once took a class on entrepreneurship. The instructor was discussing sales forecasts. For a VC examining a business plan, a red flag is a constant growth of sales / revenues, because this suggests that management doesn’t understand its business very well. Sales growth is never constant. It is affected by seasons, short months (February and November), changes in consumer sentiment, budget cycles, etc. When you look at the business plan, you really need to look at the assumptions and components that went into it. The point is not really to estimate the future. The point is to understand how well management understands its business and the factors that affect it.

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2007-05-11 (Friday) by Gregory Tucker.

http://homepage.mac.com/gregorytucker/

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2007-05-11 (Friday) by Gregory Tucker.

What kinds of bad decisions have you seen or heard of made based on the misuse of statistics or business research?  Please specify two examples and provide brief background.

1. Citing the performance of “stellar” fund managers in BusinessWeek. These pop up every few issues. Twenty percent of actively managed funds beat the benchmark each year. This is a pretty grim statistic, but it gets worse. Of those who do beat the benchmark, they are almost never the same year after year. In other words, beating the benchmark is entirely random, not derived from the smarts of wit of the active fund managers.

Why should investors pay large fees for actively managed funds in order to have a 20% chance to beat the benchmark?

Why does BusinessWeek continue to highlight these managers when these statistical flaws are well known? Easy answer: the funds advertise a great deal in their magazine.

2. Reference:

http://nces.ed.gov/nationsreportcard/pubs/studies/2006461.asp

The Bush Administration has been selling private schools as the solution to the nation’s educational problems, using statistics that show the superior performance of private schools in standardized testing. Critics have long complained that these studies are guilty of selection bias. It is a bit like saying Harvard education is better than the University of Phoenix because of the superior salaries of Harvard grads. (The ROI’s are the same in both cases.) Harvard selects the best students who are most likely to succeed. UoP accepts almost everybody, much like public schools.

The above link points to a study that shows that private schools offer no tangible benefit to students, once you correct for demographic and other factors–in other words, once you remove the selection bias. In some cases the private schools fell short of public schools. The administration did everything possible to downplay the report.

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2007-05-10 (Thursday) by Gregory Tucker.

Okay, I have been negligent of my blog. I will start updating it more frequently from now.

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2007-05-10 (Thursday) by Gregory Tucker.

The Portland area is the nation’s third-best place to live in the country, according to an annual ranking of cities.

Gainesville, Fla., is the nation’s No. 1 city to live in, according to “Cities Ranked & Rated, 2nd Edition,” written by Bert Sperling and Peter Sander, which was released this week. No. 2 on the list is Bellingham, Wash.

More information

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