RIP: Irving Kahn
Posted by Eddy Elfenbein on February 26th, 2015 at 5:03 pm

Irving Kahn has died at the age of 109. He was a student of Benjamin Graham and later, chairman emeritus of Kahn Brothers Group Inc. He started working on Wall Street in 1928.

Jason Zweig writes:

The crash of 1929, Mr. Kahn told an interviewer in 2012, taught him that “the gambling nature of Wall Street has little or no interest in the serious, underlying nature of businesses.” He described rapid trading, then and now, as “crazy competition that had no connection to the real facts.”

His central goal as an investor, he said, was always “to know much more about the stock I’m buying than the man who’s selling does.”

For Mr. Kahn, the most important quality an investor could possess was patience. “You gain much more by slow investing and concentrating on what you know,” he said in 2012, “than on fast investing, which is nothing more than gambling.”

In an article in the Financial Analysts Journal in 1977, Mr. Kahn set out seven “guidelines for intelligent investing.” Among them: “Don’t depend on recent or current figures to forecast future prices….Capital is always at risk unless you buy better than average values….Don’t trust quarterly earnings….Look beyond the one or two largest companies in a given industry.”

He concluded, “The analyst must both practice, and to his client preach, patience.”

Kahn’s sister also lived to 109. His brother died at 101 and another sister lived to 103.

Asked on Thursday if he had any thoughts on Mr. Kahn, Warren Buffett —who also studied under Mr. Graham—joked, “I’d rather have Irving’s thoughts on longevity.”

Q4 Earnings Calendar
Posted by Eddy Elfenbein on February 26th, 2015 at 4:13 pm

Here’s the list of our stocks and their reports for this earnings cycle.

Hormel Foods and Ross Stores have quarters that end in January.

Not Seasonally-Adjusted CPI
Posted by Eddy Elfenbein on February 26th, 2015 at 11:14 am

It’s hard to explain how dramatic the price plunge has been. This chart helps:

With deflation, here’s the change in real AHE. Workers got their biggest real increase in wages in years.

Inflation Falls 0.7% in January
Posted by Eddy Elfenbein on February 26th, 2015 at 9:49 am

Still more deflation in the U.S. The latest CPI report showed that consumer prices fell 0.7% in January. Of course much of that is due to the collapse in oil prices. The “core” CPI, which excludes food and energy, rose 0.2%.

Thanks to the lower prices, the real or inflation-adjusted increase in wages was very good. We got the average hourly earnings report a few weeks ago, but now we see that the “real” increase was 1.2% for January. In other words, American workers got their biggest raise in years.

There was also a big jump in initial jobless claims this morning. Jobless claims rose 31,000 to 313,000. That’s huge but I’ll warn you that this series can bounce around a lot. Just a few weeks ago, we had some of our lowest reports in decades. So before anyone worries about weakness in the job market, I want to see if this trend is confirmed by more data.

Morning News: February 26, 2015
Posted by Eddy Elfenbein on February 26th, 2015 at 7:03 am

German Unemployment Rate Stays at Record Low in February

Populism Spans Globe After Piketty’s Message Resounded

Oil Prices Fluctuate as Market Remains Oversupplied

How Obamacare’s Tax Complications Are Playing Out

FCC on Brink of Broadband Transformation

The Push for Net Neutrality Arose From Lack of Choice

The Real Meaning of $9/Hour

Spain’s Iberdrola to Buy UIL Holdings for About $3 Billion

AB InBev Profit Lifted by U.S. Recovery

GM Cuts Capacity, Jobs in Indonesia, Where Japanese Dominate

Morgan Stanley to Pay $2.6 Billion to Settle Mortgage Cases

Standard Chartered Just Replaced its CEO With JPM Jamie Dimon’s Reject

Grand Central: That Didn’t Go Well, Madame Chair

Howard Lindzon: Kill all the Economists…and Remember YahooBaba and BabaHoo?

Joshua Brown: Twenty Best Investing Blogs for College Students

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The Nasdaq Divided by the S&P 500
Posted by Eddy Elfenbein on February 26th, 2015 at 12:25 am

With the Nasdaq Composite closing in on a record, I thought it would be a good time to look at how the Nasdaq has performed relative to the S&P 500. The graph below is the Nasdaq divided by the S&P 500.

What catches my attention is how absurd the Nasdaq was in 2000. That line is a complete outlier. While the Nasdaq has outpaced the S&P 500 over the last few years, it’s nothing like it was 15 years ago.

The Nasdaq Finally Falls
Posted by Eddy Elfenbein on February 25th, 2015 at 8:42 pm

After 10-straight up days, the Nasdaq finally fell today. The index lost a grand total of 0.98 points today which is -0.01973%. I hope we’re able recover from this setback.

Before the 10-day streak, the index had rallied 10 times in 16 sessions. The Nasdaq Composite closed today at 4,967.14. The all-time close was 5,048.62 on March 10, 2000.

The 20 Best Investing Blogs of 2015
Posted by Eddy Elfenbein on February 25th, 2015 at 8:38 pm

I’m happy to be named as one of the 20 Best Investing Blogs of 2015 by the good folks at The College Investor. To celebrate, I’ll be having a kegger at the Delta Tau Chi house.

Morning News: February 25, 2015
Posted by Eddy Elfenbein on February 25th, 2015 at 7:04 am

Investors Who Held Nerve With Greece Reap World’s Best Bond Returns

HSBC, Europe’s Biggest Bank, To Testify on Tax Scandal

Net Neutrality a Big Step Nearer as Congress Republicans Concede Fight

Oil Rises to $59 as Saudis Say Demand Growing

Obama Vetoes Keystone XL Pipeline, Leaving It In Limbo

Hewlett-Packard Shares Take a Beating on Poor Sales

These Charts Show How Far Google and Facebook Are Ahead of Twitter

Lowe’s Reports Fourth Quarter Sales And Earnings Results

Black Friday Was Biggest Sales Day Ever at Home Depot

Comcast’s NBCUniversal Calls for Better Audience Measurement

Lego Reports Rise in Profit in 2014

Putting a Price on Simon Kuznets’s Nobel in Economics

How an Undocumented Immigrant From Mexico Became a Star at Goldman Sachs

Jeff Carter: Risk and Investing

Cullen Roche: Why Expectations-Based Econ Models Don’t Work

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The SRS for the NCAA Tournament
Posted by Eddy Elfenbein on February 24th, 2015 at 11:57 pm

This post is a small a detour from finance, but I found it interesting—and it’s probably interesting to maybe five other people on the planet.

Still, I wanted to calculate the Simple Ratings System for the seeds in the NCAA Basketball Tournament. Not the teams, but the seeds.

I had no idea how to do this, but I focused on the task and eventually figured it out. I love that sense of satisfaction when you accomplish something you thought was beyond you.

First, let me explain what the Simple Ratings System (SRS) is. Well, it’s exactly that—a simple way to give a quantitative rating to a sports team based on its record. Sabermetricians have been using it for years.

Here’s the idea: Take any sports league and calculate the average per-game point differential for every team in the league. Let’s say the Orangutans have scored, on average, 5 points more than their opponents each game.

You also see that the Orangutans’ opponents score, say, 2 points more on average than their opponents. Adding two together means the Orangutans are 7 points better than average. But wait—when we plug in 7 for the Orangutans’ margin of victory, that changes all the numbers for their opponents, and that comes back and changes all the numbers for the Orangutans. This loop will repeat itself again and again and again. Eventually, though, the numbers stop changing and you have your results. (This is what I was trying so hard to figure out.)

I wanted to calculate the SRS for the seeds of the NCAA Basketball Tournament. I took all the games of the last 30 years which is when it expanded to 64 teams. Since every team but one is knocked out, each year has 63 games. I didn’t include the play-in games since those are match-ups of same seeds. I also took out later games where same seeds met. There were 21 games like that and it only happens in the Semi-Finals or Finals.

Here’s what I got:

The chart shows each seed, their Margin of Victory, their Strength of Schedule and their Simple Rating System. The first two add up to the third.

I thought this was an interesting exercise because the NCAA Tournament is specifically designed to have an unbalanced Strength of Schedule. The best teams play the worst. The #1 Seeds are supposed to be the best, and they are.

A few things to notice. After 30 years, a #16 has never beaten a #1. They’re 0-120. As a result, the #1 Seed’s SRS is the same as the #16 Seed’s SOS.

The SRS numbers are ranked in order except for the #8 and #9 Seeds. Those are lower than you would expect (#9 currently leads #8 in the First Round, 61 wins to 59). I assume that’s from being in the lucky position of getting to be the punching bag for the #1 Seed. The #1 Seed is 104-16 in Round 2. I would think the high Strength of Schedule would have corrected for that, but apparently not. I can’t say for sure.

The table also shows something I’ve suspected for a long time — that there isn’t much difference among the middle 8 teams (Seeds #5 to #12). There’s some difference, but not a lot. A game with an expected difference of 3 or 4 points will seem awfully close. Seeds #11 and #12 both have respectable records in the First Round. They’re worth a lot of points on the brackets, but it’s not much of an upset.

(This was my first time trying this, so if any experienced hand spots some mistakes, please let me know.)