Place of economics in learning

Here's a nice post on the importance of economics in our daily lives and how we don't give the kind of attention and importance that it deserves. The entire article has been pasted below:

To Which Defunct Economist Are You Currently Enslaved?

January 18, 2009 10:24 PM by Justin Ptak

John Maynard Keynes once wrote that "the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist."

Economic theory does indeed have quite a large impact on our lives that is far greater than most any of us are willing to admit or understand. Policymakers and politicians guide fiscal policy, set monetary policy, and collaborate on financial regulations that impact almost every transaction in the market place. These theorists and philosophers all begin with a set of ideological constraints that frame their world view. Will you sit back and allow them to create the rules of the game?

As Ludwig von Mises stated in one of the concluding chapters of Human Action on The Place of Economics in Learning:

"Economics must not be relegated to classrooms and statistical offices and must not be left to esoteric circles. It is the philosophy of human life and action and concerns everybody and everything. It is the pith of civilization and of man's human existence...

There is no means by which anyone can evade his personal responsibility. Whoever neglects to examine to the best of his abilities all the problems involved voluntarily surrenders his birthright to a self-appointed elite of supermen. In such vital matters blind reliance upon "experts" and uncritical acceptance of popular catchwords and prejudices is tantamount to the abandonment of self-determination and to yielding to other people's domination. As conditions are today, nothing can be more important to every intelligent man than economics. His own fate and that of his progeny is at stake...

Whether we like it or not, it is a fact that economics cannot remain an esoteric branch of knowledge accessible only to small groups of scholars and specialists. Economics deals with society's fundamental problems; it concerns everyone and belongs to all. It is the main and proper study of every citizen."

Source: http://blog.mises.org/archives/009256.asp

How I learned to stop worrying and ignore volatility...

...is a nice little strategy note released by Michael Mauboussin. [link to the article]

The article talks about the times we live in and what strategy a long term investor can adopt. The note is timely and insightful to read. Mauboussin concludes the note with the following advice:

1. Decide if you can be or should be a long-term investor. There’s nothing sacred about it—you just have to make sure you properly align your thinking, policies, and processes around your time horizon.

2. Don’t overbet. Constantly consider the problem of induction and the deleterious effects of leverage and incentives.

3. Work to reduce stress and maintain perspective. Some documented ways to lower stress include:
a. Exercise
b. Maintain and cultivate social connections (family & friends)
c. Get sleep and maintain a healthy diet

4. Don’t dwell on short-term portfolio moves. Sidestep loss aversion if possible.

5. Remember the story from Abraham Lincoln. He recounted that an Eastern monarch once charged his wise men to invent him a sentence that would be true in all situations. They came back with the words: “And this, too, shall pass away.” As Lincoln said, this phrase “chastens in the hour of pride, and consoles in the depths of affliction.” This too shall pass and long-term investors stand well to gain. I agree. [link1, link2]

Greatest hits collection on Investing Widsom...

...compiled by the Value Investor Insight team, is a useful document. It's available for free and can be downloaded from here [link].

The hunters get hunted, and badly!, on a day...

...when Volkswagen was momentarily worth 240 billion sterling pounds, the most valuable company in the world!

A brief excerpt...

Hedge funds believed they were on safe ground by short selling VW shares, which they saw as overvalued when all car manufacturers are feeling the squeeze.What none of them knew was that Porsche had quietly been adding to its 42.6 per cent stake in VW by taking out options to buy VW shares owned by a number of German banks. Germany's somewhat eclectic financial regulations did not require Porsche to disclose this, and so none of the hedge fund managers had a clue what Porsche was up to.

That all changed with spectacular consequences when the sports car manufacturer suddenly issued an announcement, in German, just after 3pm on Sunday declaring that it either owned or had the option to own 74.1 per cent of VW.With the state of Lower Saxony owning another 20.1 per cent, this meant that just 5.8 per cent of VW shares were available to buy.

But hedge fund managers had promised to sell to third parties a total of 12 per cent of VW's shares, and 12 into 5.8 doesn't go.

One London-based fund manager saw the news when he flicked through financial websites on his BlackBerry during a Sunday afternoon walk."I ran like a madman back to my house," he said. "I assumed the numbers were wrong. I called my broker and couldn't get through."But when I finally did speak to him, and he told me he'd had a dozen panicked calls already, I knew it was true."Across the capital, and in financial centres across the world, brokers rushed to their offices to work out just how big a hit their clients were about to take.

Throughout Sunday afternoon, their phones rang off the hook as traders called them begging for help, undisguised panic in their voices.Hours before the markets opened here on Monday morning, hedge fund offices in "hedge fund alley'' in Mayfair were already buzzing with activity as traders went through the numbers over and over again, unable to do anything more meaningful until the German stock exchange opened at 8am.

"We knew there would be a bloodbath as soon as the market opened," said the trader. "We knew the price would rocket, widening the exposure of lots of hedge funds – they would be offering their daughters in return for the stock, just to get out of it."The scramble for shares meant that shareholders could name their price, and VW stock went from 210 euros to more than 1,000 euros in two days, making VW, at one point on Tuesday, the world's most valuable company at £240 billion.

Meanwhile, the fund managers who hadn't managed to buy enough shares to settle their accounts watched with horror as their losses spiralled out of control. Some of the bigger funds are thought to have lost as much as £4 billion.

And as the price of those precious shares quadrupled, Porsche made a paper profit of more than £100 billion, dwarfing the money it makes from selling cars.

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The full article can be read here [link]

Good advice from the man who has seen it all...

...Irving Kahn, one of the earliest members of the Value Investors' gang led by Benjamin Graham. This fortnight's issue of the Outlook Profit is carrying an interview of Mr.Kahn. The interview is worth a read, and so is the magazine (atleast thus far it seems to be reading better than many of the other finance related magazines available in the market).

In reply to one of the questions in the Outlook interview, Mr.Kahn gave the following reply:

"Yes, you are quite right, when it is raining you wear a raining jacket and when the sun in shining you don't need an umbrella. I think that you should have to be prepared for bad times and short-term depression but you have to recognize that when stocks (are trading) below fair value, that is the time to get your money out and buy equities. Also, if you are a good invetsor, you do not ask about which month or in which three months or in which year (you can get returns on your investment). Instead, you hold, waiting for a number of years for something to happen. You must allow time to pass (for market participants) to recognize what needs to be done."

The above statement makes a lot of sense. And, since a large section of today's market participants are overtly worried about the next month, quarter, year, it makes sense for long term investors to use it to their advantage. As I mentioned, in one of my earlier post,

"Growth will not be a problem so far as India as an investment destination is concerned, its the price that one pays for the investment that will determine returns over the next decade. And it is this factor that is now in the favour of the long term investor..."


A brief about Irving Kahn:

Irving Kahn (born December 19, 1905) is an American value investor and, with over 77 years experience in the investment business, one of the oldest financial analysts on Wall Street. Educated at the City College of New York, Kahn served as the second teaching assistant to Benjamin Graham at the Columbia Business School. At the time, other notable students and/or teaching assistants to Graham included future Berkshire Hathaway chairman, Warren Buffett, and future value investors William J. Ruane, Walter J. Schloss and Charles Brandes, among others. Graham had such an enormous influence on his students that both Kahn and Buffett named their sons after him. (source - wikipedia)