2008 July | WhereDoesAllMyMoneyGo.com

A Lap Of The Blogs

Posted by Preet on Jul 31, 2008 | 6 comments

If you are new to WhereDoesAllMyMoneyGo.com, every Friday I run a post called “A Lap Of The Blogs” which provides links to articles I found interesting and think that others may want to read for themselves. I also include some commentary on what’s going on in my personal life and a weekly “racing video” since my former life was in the auto-racing industry. The name “Lap of the Blogs” is in reference to “A Lap Of The Gods” which is an old video series which chronicled on-board footage of the world’s greatest F1 drivers lapping various racetracks from around the world. The draw for July’s Money Movie Giveaway will be announced Saturday. Also, I...

The Market is The Market

Posted by Preet on Jul 31, 2008 | 0 comments

If ‘the market returns’ are the market returns, And the market return can only be made up of active returns and passive returns, And if the passive return before fees equals the market return, Then the average return of all the active investors before fees must equal the market return too. Therefore the average active investor will lose to all passive investors by the increased cost of active management. But if you’d rather read it from Nobel Prize Winner William Sharpe, click here. Note: Today is the last day to enter – don’t forget to enter this month’s Money Movie Giveaway! All you have to do is leave a comment on the contest post by...

Hey Kid, Remember: The Cost of Capital is the Investor's Expected Return!

Posted by Preet on Jul 30, 2008 | 0 comments

Note: Don’t forget to enter this month’s Money Movie Giveaway! All you have to do is leave a comment on the contest post by clicking here. Such is one of the mantras of Dimensional Fund Advisors (DFA). The specific wording of this post’s title is that of Eugene F. Fama, Jr (son of Eugene Fama, Sr who is one of the academics behind efficient market theory and the Fama-French 3 Factor Model). Eugene Junior was recounting one of his childhood memories when Nobel Laureate Merton Miller would be at the house and would always tell him, “Hey Kid! Remember: The Cost of Capital is the Investor’s Expected Return!”. Eugene Junior said it wasn’t...

Bonds Can Outperform Stocks Over Decades

Posted by Preet on Jul 29, 2008 | 1 comment

During one of the breaks between speakers in the DFA conference there was a slideshow running with some of the greatest quotes from investing and economic giants of our time. Unfortunately, they were running too quickly for me to write them down verbatim but one in particular caught my eye. Dr. Kenneth French was quoted as saying that the equity premium needs 30 or 35 years before we can say with any statistical confidence that stocks will outperform bonds. Again, since I didn’t have time to write it down verbatim, the above is my best recollection of the quote (so it could be slightly off). In any case, what Dr. French is saying is that based on past data it is...

The Grossman-Stiglitz Paradox

Posted by Preet on Jul 28, 2008 | 6 comments

Well I have just finished my trip down to Santa Monica to learn more about DFA (Dimensional Fund Advisors), and I have lots to share. While their public website is okay, it really doesn’t give you a sense of what DFA is (in my opinion). As such, I’ll be writing about 30 posts or so on DFA over the next few months (some of the posts will be going down tangents), because there is something very special about this outfit that I don’t think is captured in their website. One of the points raised by Kenneth French (a member of the Board of Directors and the ‘French’ part of the Fama-French 3 Factor Model) was the Grossman-Stiglitz Paradox. The...

A Lap Of The Blogs

Posted by Preet on Jul 25, 2008 | 6 comments

If you are new to WhereDoesAllMyMoneyGo.com, every Friday I run a post called “A Lap Of The Blogs” which provides links to articles I found interesting and think that others may want to read for themselves. I also include some commentary on what’s going on in my personal life and a weekly “racing video” since my former life was in the auto-racing industry. The name “Lap of the Blogs” is in reference to “A Lap Of The Gods” which is an old video series which chronicled on-board footage of the world’s greatest F1 drivers lapping various racetracks from around the world. First a correction to yesterday’s post on options – I incorrectly stated...

80% Of Call Options Expire Worthless

Posted by Preet on Jul 24, 2008 | 8 comments

…if held to maturity. Of course, while many buyers of call options will exercise or sell their options before expiry if the options trade in-the-money, let’s pretend for this discussion that one holds the option until expiry. Michael James on Money mentioned that he thinks it is generally a bad idea for the average investor to buy options, and I would be inclined to agree. Long options (long means you buy something, short means you sell it) can offer tremendous leverage which means you magnify the risk and return. It is estimated that approximately 80% of call option contracts, if held to maturity, will expire worthless. But let’s look a little more...