Eli Bendersky's website - Finance

The economic crash and free markets

2008-12-04T08:37:35-08:00

I'm having a hard time understanding why many people are blaming the free markets for the recent economic crash. The most popular opinion is that the government has let the markets "run wild", and it should now regulate them more instead. But IMHO, this is the exact opposite of the truth!

If anything, this economic crash happened because of too much regulation, not too little. The mortgage loopholes, the whole subprime business, was made possible by governmental intervention into the free market. This resulted in a bubble, and now the bubble has burst and pulls down the whole economy.

Circa seven years ago the dot-com bubble has burst and caused a short period of recession, which hurt most badly the industry that originated it - the hi-tech, software and internet businesses. This makes lots of sense, and I don't think anyone serious blamed the free markets for the crash. The free markets (like most economic theories) work over prolonged periods of time, not over short few-year spans. The dot-com bubble burst made lots of investors cautious, and a similar burst is very unlikely any time soon (though it will happen eventually, since people have short memories. See the tulip mania, for example). A few months ago (before the big crash) the NASDAQ index was at 60% of its value in the peak of the bubble. This is the free market's way of correcting itself. Some business model seemed successful at one period of time, but (again, as happens a lot in economics) most investors didn't really know that it was shaky - a bubble. So the market crashed - it makes sense.

The same can be said about the latest crisis. Yes, it's deeper, because the financial and banking industry is much larger and affects much more people than the internet business. But it was a bubble none-the-less. And moreover, it was aided caused by the government's regulation of the loaning business. And eventually (in a few years, it seems) - the free market will correct itself, and people will just be more cautious in the future.

But the government tries to solve the problem by even more intervention. My opinion may be unpopular on this subject, but I'm not sure that bailing out banks is a good idea. It's an incentive to err again in the future, and that worries me. Brokers who went loose with the inverstors' money that was based on shaky foundations, and those bankers who've lent money knowing that it won't be paid, but that they will get the bonus for the deal, won't be careful next time, because the government has intervened. "The fed will save us again" they're now saying, and as soon as the crisis ends they'll be back.

Recently I've heard that the incentives programs of the big governments include not only saving banks but also real economic incentives for returning to growth. This is great, but I'm still concerned about the ratio of these expenditures. Saving banks won't help the economy recover, incentives to the industry and to consumers will.

Spending my RentACoder earned money on Books

2007-07-13T07:48:45-07:00

I've earned around $300 from RentACoder when I worked there last month and got the money transferred to my PayPal account (now that PayPal have solved their bug which required international users to have a US back account in order to accept money). I want to spend this money on online shopping, and this means books! Unfortunately, Amazon doesn't work with PayPal (because it belongs to their competitor eBay), so I registered at Barnes & Noble. It is more expensive than Amazon by 15-20% on average, but I don't have much choice.

Today I made the first order - "Lisp in Small Pieces" - it's just the kind of book to buy as a special present to myself. I doubt I would agree to shell out the $80 it costs had I not had the RAC money in PayPal already. For now it looks like the transaction was processed successfully and BN pulled the money from my PayPal account.

Book review: "A random walk down Wall Street" by B. Malkiel

2004-11-28T22:55:00-08:00

I ordered this book after reading Joel's positive review (http://www.joelonsoftware.com/). The review ends with:

What if I told you that you could read one book and know everything you are going to need to know about managing your investments? And I mean, everything. Well, it's true. And this is the book. If you can't be bothered to read anything else about investing, read this one book.

Well, I heartily agree. This is probably the best finance/economics book I've ever read.

Burton Malkiel takes a simple, logical approach, with intuitive mathematical expositions, statistical studies and numerous examples to explain his view of the investment practices on the stock market. He analyzes fundamental and technical analysis and points out their flaws (loaded with historical studies that prove his point). Then, he presents the random walk theory (efficient markets) and takes a position as its proponent to some degree. The book concludes with a guide to investment taken from his own experience.

There's something very charming in the methodical, determined approach of this book. Malkiel takes no prisoners with the techniques he criticizes. He presents studies, both academic and by financial institutions, simulations, discusses some economics related maths and presents historic evidence to prove his points.

I'm not sure I agree with Joel on the "only one" part of the review. I'm glad I've read some investments books before this one, so I can fully grasp Malkiel's criticism. I can especially relate to the attack on technical analysis. As I wrote in previous reviews, this technique of investment analysis seems somewhere from unreal to ridiculous to me, and reading this book just made this opinion stronger. It's very amusing to read about some of the occasionally-popping technical analysis gurus, about running computer simulations with historical data that shatter all the technical "signs" and about random simulations that contain "head and shoulders", "triple bottoms", etc.

The investment plan offered in this book is probably the most logical and down-to-earth one I've read about. To conclude, go get this book, it's a terrific review of where you should and shouldn't invest money.

Book review: "Technical Analysis ..." by J. Murphy

2004-07-29T23:03:00-07:00

The full name is: "Technical Analysis of the Financial Markets: A Comprehensive Guide to Trading Methods and Applications" by John J. Murphy

Carrying on with my financial education, a serious text on technical reference was due. After having read a soft primer on fundamental analysis (Lynch), I felt a need to see "the other side" as well. There's an Israeli online forum of stock market enthusiasts I'm following, and most of the discussions there are "technical" (no doubt because it's the sexiest topic of stock trading - more on this later). So, I just wanted to finally understand all those idioms people are using. I mean, I can grasp what a "trend" is, but when they dive into RSI, stochastics, Doji candles, continuation head & shoulders, fibonacci retraces and Eliott's 3rd wave I just feel a need to get myself acquianted with the whole topic.

So, after some online searching, I came upon "Technical Analysis of the Financial Markets" as the de-facto text on the topic. Its first edition came out somewhere in the 80s, and since then it's definitely considered as "the one, if you only want to read one book on the topic".

The book itself is somewhat encyclopedic in nature. Over 500+ pages, the author presents the theory/applications of technical analysis, from the best-known methods to some obscure ones. Though there is probably more to the topic than covered in this text, I'm sure the 99.9% of the things people actually know/use is there.

It starts with a chapter on the philosophy of technical analysis, and then dives right into the theory. Beginning with the "simplest" and the most traditional - Dow theory (trends, basic charting), and going on to charting, reversal/continuation patterns, options/futures, moving averages, oscillators, Japanese candle-sticks, time series, and so on. The scope, as I mentioned, is vast.

I personally feel that there's too little "philosophy" in this book. The first chapter is good, and is a must read for everyone who's interested in stocks, but I think that the rest of the book would use some "justification" as well. At some point, the impressions is that "patterns" are thrown at the reader in a rapid pace, without giving time to think them over, and without even trying to stress the reason _why_ these patterns work. Maybe it's because the book is intended more as a reference and not as a light-read.

In this review I don't want to go much into my own view of trading - fundamental vs. technical, etc. I think, however, that this book should've spent a little more time explaining some of the drawbacks of techinal analysis, it would be only fair. The amount of information is overwhelming, and one could be easily fooled to believe that these are "magic methods" that just work. Naturally, most of the examples are tailored with perfect patterns. Perhaps more examples which show how patterns fail, and explain why they fail would be helpful.

Technical analysis is dangerous exactly because of such books - a wealth of information, "neat tricks" that tell you how stocks will behave. What is more "cool" - a trader that spends days reading financial reports (dull !!) of a company prior to deciding about buying their stock, or someone who fiddles with formulas on a computer, drawing pretty "candles", "trend lines" and counting fibonacci sequences ? Clearly, the latter is much more attractive to investors. People want it quick, without too much hard work. "Just show me the numbers".

To the defense of the author, I must say that he indeed warns people of using the techniques frivolously. Applying many analysis techniques in parallel is recommended, and tips are given on how to manage investment funds better (how much money to allocate to each trade, etc.)

All in all, the book is useful if you're seriously into trading. Although technical analysis is definitely no panacea, I think that it can be combined with fundamentals, and some common sense to produce good results. After all, though the market is clearly driven not only by sentiments, it's not driven solely by fundamentals either. Technical elements do play role in the movement of stocks, and having tools to analyze these elements is important.

Book review: "Free to choose" by Milton and Rose Friedman

2004-04-27T00:24:00-07:00

Continuing with my financial education, I picked up this book in a store on sale - a Hebrew translation.

Let me start by saying that this is the worse piece of editing/publication I've ever seen. The font is ugly, the paragraphs are scattered without the least care for aesthetics, and the spelling errors... oh the spelling errors. FFS, the book was written in 1979, couldn't they release a normal Hebrew translation since then ? The errors look like scanning errors - letters replaced by letters that look like them. I bet no quality control was present in this printing house - the errors are so obvious...

Ok, ok, enough whining - lets cut to the chase. The book, as its title suggests, is about free economy. Milton Friedman is a known economics prof that holds some very interesting (and somewhat controversial) ideas about the economic market. His basic argument is that everything should be free - he relays on Adam Smith's "The wealth of nations" (I must read this book...), quoting the great economist about the merits of free trade.

Friedman attacks socialism and bureaucracy, and I don't mean the socialism in the USSR (the book was written in 1979...) but the socialism in the western world - US, England, etc. He argues that the govermental control of economics and business is too vast, which brings to a lot of waste, bureaucracy and generally slows down the economic progress.

In fact - this is what this book is mostly about. The author discusses freedom against govermental control in business, monetary markets, education, health, energy, oil, trains, flights... everything. This is, I guess, why some think he's controversial. Some of his ideas are on the verge of anarchy - even I'll have to admit this.

The general idea is sound - economy should be free, only from a free trade between people where each side is interesting in maximizing his own profit, a healthy economy will rise. Govermental control has historically proved to only slow things down and cause a lot of waste by means of feeding a huge bureaucratic machine.

The applications to finance, trade and historical examples are what I really loved in this book. It gave me a lot of food for thought, and helped me to reach a few interesting conclusions about economy. Pity that most of the book deals with the author's personal vendetta against the US goverment - trying to convince the reader how it got it all wrong, starting with Social Security and ending with the Drugs administration. It really started to get boring, and in the end I found myself just flippling through, seeking something new.

To conclude this (as usual) scattered lump of thoughts I call a "book review" - this book has some good sides, but also some bad sides (IMHO, of course). I'm glad I've read it. From the fraction of it I actually enjoyed, I learned things that will help me shape my thoughts about economics and finance, and that's a good thing.