Goldman is just better than their competition. (Curious Capitalist, Economist)

For investors, there is nothing to be gained by moaning about Goldman.  (Andy Swan also Falkenblog)

Goldman doesn’t always win.  It fails to get GoldmanSachs666.com taken down.  (Telegraph)

The equity risk premium is no longer a puzzle.  (Aleph Blog also Crossing Wall Street)

An interesting development in volatility land.  (Daily Options Report)

Leveraged ETFs based on factor returns are on their way.  (IndexUniverse)

On the never ending risks of 3x leveraged ETFs.  (Aiki14)

With all the ETFs out there, is there room for three proposed funds?  (Morningstar)

Is a 130/30 ETF in your future?  (Bull Bear Trader)

On the importance of checklists in investing and more from the Value Investing Seminar.  (Manual of Ideas)

Seven questions for Roger Ibbotson.  (All About Alpha)

J.P. Morgan (JPM) is feeling a bit frisky these days.  (WSJ, Clusterstock)

How did CIT Group (CIT) become too big to fail?  (Baseline Scenario also The Stash)

The ratings agencies should be very nervous.  (Big Picture)

California muni bonds have held up during the never ending budget crisis.  (ROI also Money &Co.)

Splitting investment and commercial banking vs. a cap on bank size.  (naked capitalism)

When you are the market, stop buying.  (WSJ)

The recession may be over soon, but the good times are a ways off.  (Calculated Risk)

Is Robert Rubin the modern day Robert McNamara?  (WashingtonPost via peHUB)

Is there a market for subscription-based financial commentary? (Felix Salmon)

Taking a look at add-on programs that make using Twitter easier.  (WSJ)

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“If a certain strategy [asset allocation] worked for your grandparents, that’s probably a good reason that it won’t work for you”  (Felix Salmon also Random Roger)

Goldman Sachs (GS) reports:  blow-out earnings, higher trading risk and bigger bonuses.  (Clusterstock, Zero Hedge, FT Alphaville)

Goldman shares are now a big bet on credit.  (Big Picture)

Does Goldman owe us anything for saving them from the credit crisis?  (Curious Capitalist)

AQR is launching momentum-based mutual funds.  (WSJ, Bull Bear Trader)

Never turn a hedge into a trade.  (Minyanville)

Adding diversification via single country ETFs.  (TheStreet)

When your hedge fund tracker looks like a portfolio of ETFs. (FT Alphaville)

“Do absolute mutual funds follow such a market neutral, zero beta investment strategy? The answer is resoundingly no.”  (Morningstar)

How often should the publicly traded hedge fund managers disclose fund performance?  (WSJ)

How the Dollar Menu saved McDonalds (MCD) and why it may be a burden going forward.  (ScienceBlog)

“CIT’s bailout possibilities are now in the realm of political choice.”  (Baseline Scenario also Market Talk)

Are speculators to blame for high oil prices?  (WashingtonPost also Daily Options Report)

Two top economic forecasters see an end to the recession.  (Slate)

Nassim Taleb says let’s save the global economy through debt-for-equity swaps.  (Clusterstock, Felix Salmon)

Shadow banking revisited.  (Economist’s View)

On the difference between stupidity and villainy in the current credit crisis.  (Megan McArdle)

The factors driving the parallels between our spending on animal health and human health.  (The American also Megan McArdle, Greg Mankiw, Casey Mulligan, EconLog)

Why the Feds will end up bailing out California and every other state in trouble.  (Gregor Macdonald)

Closing the loop.  Allowing online analysts to manage real money. (New Rules of Investing)

Part two of an interview with Barry Ritholtz.  (Wall St. Cheat Sheet)

Is Business Week worth only $1?  (FT)

Reviews of The Myth of the Rational Market and Snap Judgment. (Aleph Blog, Investing with Options)

CNBC doesn’t like it when you call them an accessory to stock manipulation.  (The Reformed Broker)

It’s almost as if Lenny Dykstra never worked for TheStreet.com.  (Dealbreaker)

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It’s taken some time for Jeremy Siegal’s work to come under scrutiny.  (Crossing Wall Street)

CIT Group (CIT) is GE Capital absent government support.  (Breakingviews, WSJ)

Why bother with energy futures with regulatory uncertainty on the horizon.  (FT Alphaville)

What are they going to do with all that bulk shipping coming on line in 2010?  (Research Reloaded)

Andy Lo, “Institutional investors have to start thinking on a daily time frame, because of the financial arms race that has been developing over the last several years.”   (Pensions & Investments)

“Spending our time trying to second-guess the macroeconomic future is a hopeless task. The next crisis won’t look like the last, we won’t see it coming.”  (The Psy-Fi Blog)

“Of course, you don’t have to be a management consultant to know that simply projecting recent trends into the near future—forecasting by extrapolation—is dangerous, especially today, when volatility and discontinuities are rampant.”  (The Big Money)

Why pass a second stimulus bill when the first one hasn’t even been spent yet.  (Felix Salmon, Free exchange)

The consumer protection agency for financial products is dying on the vine.  (Baseline Scenario)

Is Cheesecake Factory (CAKE) a symbol of what is wrong with American dining?  (Ezra Klein)

Justin Fox podcast on the rationality of markets. (EconTalk)

“We used to wonder if we could “untrain” a generation to steal. The answer is yes. Just make it easier to get the content they want and they’ll stop stealing.”  (A VC)

20 finance blogs you might not know about.  (MoneyScience)

How should bloggers get compensated?  (Atlantic Business, NYTimes)

How to crack into the blogging game.  (Felix Salmon, Baseline Scenario)

Why do we continue to elect well-known players past their prime to the baseball All-Star game?  (Newsweek)

Seems apt.  The Chicago Cubs may declare bankruptcy to facilitate a sale of the team.  (Dealscape)

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The S&P 500 is up against all sorts of moving averages.  (dshort)

What are small investors buying now?  (Fund My Mutual Fund)

Checking in on investor sentiment.  (Trader’s Narrative, The Technical Take)

Is Berkshire Hathaway (BRK-A) stock finally cheap?  (Barrons)

“Over the past decade the move to electronic trading and pricing in pennies was heralded by Street insiders as a means to improve liquidity for clients. This appears to be a deception. Virtually every facility benefitted proprietary trading at a select few firms. Who’s the patsy?”  (Big Picture)

High frequency trading is “just another form of parasitic trading.”  (Zero Hedge also The Pragmatic Capitalist)

Did you know that noted finance professor Andy Lo runs a long-short mutual fund?  (NYTimes)

Are asset allocation models broken?  (Abnormal Returns also The Wallet)

Some practical thoughts on asset allocation.  (Aleph Blog)

More evidence that mutual fund investors are awful at market timing.  (NYTimes)

Who is your investment co-pilot?  (Abnormal Returns)

ECRI leading indicators are pointing up.  (Carpe Diem)

“Wall Street is an arrogant beast that more than held up its half of the devil’s bargain which drove us into our current ugly straits.”  (Atlantic Business)

Is Charles Darwin a better precursor of economics than Adam Smith?  (NYTimes)

“The potential for information technology to improve productivity is still enormous, and we don’t need netbooks or cloud computing or new operating systems or quantum computers to get there.”  (Baseline Scenario)

Happy fourth blogiversary Eddy.  (Crossing Wall Street)

Why journalists should blog, and why your sales department should hire a blogger.  (Felix Salmon, Zero Beta)

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“My aircraft,” and took the controls, not because he thought [co-pilot] Skiles couldn’t handle the job but because he was responsible for the airplane as the pilot in command.

(Quoted from the story of Flight 1549, “Anatomy of a Miracle” by William Langewiesche in the June 2009 Vanity Fair.)

Whether you like it or not you are the pilot in command of investment portfolio. You are responsible for its performance.   The question is:  who is your investment co-pilot?

Investors these days have a number of ways to get assistance with their portfolios.  You could delegate the management of your portfolio to others like an investment adviser.  You could follow the recommendations of any number of newsletter writers.  (A misnomer since they all now provide their reports via the Internet).  Or you could take on the task yourself and manage your portfolio.

The investment of choice for many individual investors is the exchange traded fund or ETF.  Even then we must recognize that this constitutes farming out your investment in that asset class.  This decision is not without risk because some ETFs are not exactly well designed.

Absent a few rugged individualists, we all rely on the results of other providers in some form or fashion.  The question is how much weight should we put on the track record of these investment advisers?

Recent research shows that in the face of “expert advice” parts of our brains involving “valuation and probability weighting” actually turns off.  In short we gave over our decision making ability to others providing “credible” advice.  (See this piece by Dan Ariely at Predictably Irrational.)

There is no shortage of recent examples where so-called experts led investors astray.  The Bernie Madoff scandal is one where investors ignored any number of red flags due in part to the impressive returns he was supposedly generating.   On a smaller scale one need only look at the notion that Lenny Dykstra was “110-0” in his picks for his TheStreet.com premium options newsletter.  (We would recommend any one interested in the Lenny saga peruse the Lenny archives of the Daily Options Report by Adam Warner.)

Even in the regulated world of mutual funds it is easy to see how it is that we can get lead astray by a gaudy track record.  Bill Miller of Legg Mason Value was heralded for years for his streak of beating the S&P 500.  But the fact of the matter is that we should expect to see streaks like this arise out of chance.  We really can’t say with any sort of certainty whether Miller was lucky or good.  What we can say is that holding his fund for the past five years has been a disaster.  (See this piece by Jim Bianco at the Big Picture.)

The simple fact is that there are no guarantees in the financial world.  For years the concept of asset allocation was pitched as a way to smooth out portfolio returns while sacrificing little in terms of returns.  The recent economic crisis has put that notion into doubt.  (See our piece on the state of asset allocation these days.)

Howard Lindzon, co-founder of StockTwits, may have said it best:

There are no promises in the financial world. Track records are records of the past.

Which raises a sticky point.  All we have in the investment world are track records.  If we can’t rely on those, what can we rely on? A question for which there is no easy answer.

Once we dismiss the obvious frauds and blowhards the difficult work begins.  Due diligence involves getter a better sense for the inner workings of an investment operation.  For newsletter and mutual funds this is relatively straightforward.  For something more opaque like a hedge fund the work is far more labor intensive. The bottom-line being that investors need to have some sense that the investment process being pursued is legitimate, replicable and reliable.

Thankfully in the vast majority of cases we need worry less about fraud and more about simple poor performance.  It is not a fluke that the majority of actively managed mutual funds underperform their benchmarks on a regular basis.  The fact of the matter is that investing is a tough game.

In the end no matter how much managing we actually do, we are all responsible and accountable for piloting our own portfolio.  However, nearly every investor has some sort of help in managing his or her portfolio.  The question is:  how well do you know your investment co-pilot(s)?

This begs the question:  is asset allocation done as a practice or does it just need to be modified to keep up with the times?  We delved into the topic of rising correlations and its role in asset allocation a couple of weeks ago.  A key takeaway from that discussion was that even if the economy and markets return to some new normal the memories of this period will remain with investors.

While the implementation of asset allocation is under attack, the actual mathematics behind the key concepts are not.  Every investor engages in asset allocation whether they know it or not.  In short, the math is the math, what is being called into question are the estimates used in constructing portfolios.

Looking back over the past few decades one can see how the practice of asset allocation could go wrong.  Economists have characterized the period since the early 1980s as the “Great Moderation” where we saw a significant reduction in economic volatility.  (Virginia Postrel in The Atlantic has a nice piece on the topic.) The business cycle had seemingly been tamed with higher economic growth and inflation well contained.

In this world one can see how practitioners might be caught up in the idea that any new asset class is a worthy one.  Indeed the term, asset class, was thrown around with some abandon.  In a benign environment “new” asset classes are pretty much guaranteed to look good in an asset allocation framework.  This might lead investors down the path of “naïve diversification.”  In an earlier piece we discussed how investors needed to approach each new claim of asset class status with a skeptical eye.

One could argue that this process sowed the seeds of its own demise.  As investors piled into any number of newish asset classes the very characteristics that made them attractive dissipated.   Once certain asset classes became commoditized and traded they inevitably become more correlated with the broader capital markets.

When the economy as a whole took a hit and investors pulled back on risky assets of any kind the flaws of this approach stood out.  Seemingly unrelated assets now traded in near lockstep.  David Merkel at the Aleph Blog notes that investors of all stripes were invested in far riskier portfolios that they thought.  This structural break from the Great Moderation leaves asset allocators with an uncertain future.

If the backward-looking historical approach was flawed, what are investors to do today?

We get some clues from the WSJ piece.  In it Lauricella reports that some advisers are now focusing on those asset classes that will perform better under periods of equity market stress including:  intermediate Treasury securities, TIPS and gold.  In addition to these “safe” assets one could also include higher cash holdings.

Justin Fox at the Curious Capitalist notes that this solution is not without its own risks.   Leaving aside the systematic risks of a global economic meltdown, this additional demand for seemingly safe assets may push down their returns to levels that make them unattractive.  Once again, the paradoxical effect of the actions of investors mitigating the very benefits they are seeking.

Asset allocation models can be characterized like any other model:  garbage in, garbage out.  That is not to say that practitioners were putting garbage into their asset allocation models.  An entire generation had been raised in a world free of significant economic downturns and where volatility was seemingly tamed.  It was simply the case that this backward looking approach was flawed.

The fact off the matter is that real diversification is difficult to achieve.  As stated, so-called safe assets have generally low real returns.  Over time the economic crisis will dissipate and standard asset classes will once again look attractive on a diversification basis.  However real diversification will require a more active approach on the part of investors.  Of course, active in the world of investing also means risky.   So to decrease risk, one needs to take on risk.  Nobody said this investing thing was easy.

Who knew?  Junk bonds experience more upgrades than downgrades in Q2.  (Deal Journal)

Investment grade bonds continue their recovery.  (Bespoke)

Are investment grade or junk bonds still worth a look?  (EconomPic Data)

The world of high frequency trading is in turmoil.  (FT Alphaville, Big Picture)

Are commodity futures markets being driven by speculators and index investors?  (The Stash, Econbrowser)

A recap of some recent market indicators.  (Behind the Headlines)

Has the volatility storm passed?  (Crossing Wall Street)

Once again, the VIX is a STATISTIC!  (Daily Options Report)

A bit wonky, but worth a read.  The lazy guide to delta hedging.  (Condor Options)

Some college endowments are going to see their private equity allocations inevitably increase due to capital calls.  (Bloomberg)

“Nine ETFs have more than $10 billion in assets, and 297 have less than $25 million. Time will tell how long some of the smaller ETFs can survive on such a small base.”  (Morningstar)

That was fast.  General Motors is out of bankruptcy.  (DealBook, The Big Money)

Just how tough are the Feds are going to be with the banks over TARP warrant valuations?  (WSJ, Breakingviews, WashingtonPost)

OTC derivatives have some defenders, the companies that actually use them.  (Atlantic Business)

How to make “bankslaughter” work.  (Clusterstock)

What the Fed has been up to the last year.  (Alea Blog)

“We cannot have the Fed indefinitely take over the provision of credit to most of the economy.  Asset prices need to fall and, if necessary, debts have to be restructured.”  (Baseline Scenario)

Anna Schwartz on the end of the recession.  (Time)

Too early to tell whether the stimulus is working.  (Slate also Ezra Klein)

“Perhaps the real reason why public-sector pension costs have not been tackled is that the full bill has never been revealed to taxpayers.”  (Economist)

“It makes sense for Mr. Andreessen to enter the VC business when his peers are heading for the exit.”  (Economist)

Does financial journalism (and blogging) need to become less obtuse?  (Atlantic Business)

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Relative sector performance since the June top.  (Big Picture)

Is some measure of normalcy returning to the markets?  (Zero Hedge)

The best performing S&P 500 stock of the recession:  Family Dollar Stores (FDO).  (BusinessWeek also Fund My Mutual Fund)

A nice round-up of some recent hedge fund news.  (market folly)

Citadel Investment had a very good June.  (Bloomberg)

BATS joins the growing list of options exchanges.  (FT)

The best online brokers for trading options.  (Minyanville)

Why the likes of John Meriwether continue to get another shot at managing money.  (Curious Capitalist, WSJ)

Why risk management may be more important than asset allocation these days.  (Brad Setser)

Why the Fed Model is broken.  (CXO Advisory Group)

Why do some so-called “gurus” continue to work when they could be sitting on the beach?  (MarketSci Blog)

Farming is the next big (investing) thing.  (Infectious Greed)

Richard Bernstein, “Washington should make sure that if credit is going to flow again, then it flows towards productive use in the real economy, and not into commodity and financial market speculation.”  (Clusterstock)

Prof. Shiller, not every risk is hedgeable.  (Aleph Blog)

In defense of bankslaughter.  (Baseline Scenario, Felix Salmon)

“While the market for banks’ toxic assets will remain largely shut down, we are going to get a sense of their value when the FDIC auctions off later this summer the toxic assets held by failed banks taken over by the FDIC.”  (Real Time Economics also Clusterstock, Atlantic Business)

Another example of Fischer Black foreseeing the future.  (Rortybomb)

“..the credit crunch was not caused by securitization — it was caused by very poor assumptions used to rate securitizations.”  (Atlantic Business)

“Markets may not “guarantee that everything works honestly and properly,” but neither does regulation.”  (macroblog)

An actual positive economic indicator.  (Disciplined Approach)

“Bailout Nation is a lament for the early days of our country, for a system that was both ruthless and ruthlessly efficient, a system that no longer exists in the United States.”  (Freakonomics)

Here’s hoping Ron Insana has a better tenure at TheStreet.com than Lenny Dykstra.  (Dealbreaker, Daily Options Report, Deadspin, Clusterstock)

“There are no promises in the financial world. Track records are records of the past.”  (Howard Lindzon)

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Has John Meriwether finally run out of chances?  (DealBook, Bespoke)

“With all of the chatter recently of bullish moving average crossovers and golden crosses, you have to respect how the market always finds a way to rattle the confidence of those who are utilizing these simple signals for market-timing purposes.”  (Kirk Report)

Were Goldman Sachs’ (GS) proprietary methods for high frequency trading ever at-risk?  (The New Wall St. also Breakingviews)

Speed (and code) matters when it comes to high frequency trading.  (FT Alphaville)

Why the persistent interest in the VIX?  (VIX and More)

“Bill Miller is not unique. There might actually be 8,893 managers just like him.”  (Big Picture also Market Blog)

Nine rules for trading.  (The Pragmatic Capitalist)

A profile of Bill Ackman.  (market folly)

“We are witnessing a pivotal moment in investing history.  After a decade of opening up all markets to the public and to more speculators with exchange traded products, some of these markets might soon be closed to speculators and investors alike.”  (24/7 Wall St. also WSJ)

“To borrow from Winston Churchill, markets are very bad at setting prices, but they are usually much better than any alternative.”  (Floyd Norris)

Not seeing good things for those who trade the new MacroShares housing ETFs.  (The Reformed Broker also Trader’s Narrative)

Did people believe there was a “housing risk premium” akin to stocks?  (Economist’s View)

When GDP and housing diverged.  (Big Picture)

The “huge demand for riskless returns” was at the heart of the current crisis.  (Curious Capitalist via Epicurean Dealmaker)

Can the Fed really identify bubbles and actually do something about them?  (Clusterstock)

Was the economic crisis a function of not taking a look at the bigger picture?  (Felix Salmon)

The Feds are creating are creating a tier of large, too big to fail, financial institutions.  (WSJ)

“Lo-fi finance” is likely sub-optimal, but ultimately more stable.  (designing better futures)

Your taxes are going up.  Join “Club Wagner” before it becomes old news.  (Economix, Atlantic Business)

Congratulations David on Post 1000!  (Aleph Blog)

Talk about trying to freeze the competition.  Google (GOOG) announced an entry into the OS market in late 2010.  (WSJ, NYTimes, Silicon Alley Insider, Economist, naked capitalism, Economist’s View)

According to Billy Beane predicting baseball injuries is “the natural progression of statistical analysis.”  (NYTimes)

“Perfecting your product before you launch it is impossible.”  (Andy Swan)

Accept your negative thoughts and put them into some sort of “larger, more realistic perspective.”  (Time)

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The CFTC flexes its muscles in the energy markets.  (WashingtonPost also Clusterstock, Atlantic Business)

What are we to make of record oil market volatility?  (Fund My Mutual Fund)

Can’t we get past our Bill Miller obsession?  (Clusterstock, MarketBeat)

Short-sellers will likely become scape-goats if stocks fall again.  (Slope of Hope)

Despite a drop in the VIX, option traders are still betting on a market fall.  (Sentiment’s Edge also Daily Options Report)

“Beating GMI over the long haul isn’t easy, at least on a risk-adjusted basis, but it can be done.”  (Capital Spectator)

Are investors more worried about relative risk than absolute risk?  (All About Alpha)

An equal-weighted (by sector) ETF launches.  (IndexUniverse)

Novice forex traders beware the “Forex Industrial Complex.”  (Wall St. Cheat Sheet)

Questions to ask before developing your own trading system.  (Tickerville)

“You can’t create a mathematical model of human psychology that has any real predictive power.  This is why risk management is so important.”  (The Pragmatic Capitalist)

“In my experience, those who use a lot of correlated factors are overfitters, and this makes their back tests look great, their out-of-sample tests horrible.”  (Falkenblog)

Does Goldman Sachs (GS) feel put upon?  (Market Talk)

An interview with Matt Taibbi, the scourge of Goldman Sachs.  (Wall St. Cheat Sheet)

How Citigroup (C) blew itself up by avoiding AIG Financial Products.  (Clusterstock also naked capitalism, FT Alphaville)

Everybody loves this graphic on economic cycles.  (NYTimes also Econbrowser)

“America does seem to have lost some of its labour market springiness.”  (Free exchange also Atlantic Business)

“Darn nice economic eye candy.”  (VIX and More)

A profile of Robert Shiller.  (Fortune)

Wall Street comes to the White House.  (Big Picture)

Everything you know about the rise of Asia is wrong.  (Foreign Policy via Arts & Letters Daily)

“The United States, just like California, now sits astride massive, gargantuan post-war infrastructure that was built with cheap energy and leveraged with cheap energy, for over 50 years.”  (Gregor Macdonald)

A point estimate without some measure of its variability is useless.  (Alea Blog)

Web start-ups just don’t need as much capital as they once did.  (NYTimes)

Private equity fees are coming under pressure by stressed limited partners.  (Dealscape)

How to get your start as a hedge fund analyst.  (How to Get a Hedge Fund Job)

A good reason to not accept advertising on your blog.  (Felix Salmon)

Vanity Fair has become the new go-to home for long-form financial journalism.  (Mediaite)

Why trust gets erased in these tough economic times.  (The Frontal Cortex)

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