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Happy Friday! There are more great news articles, commentaries, and analyst reports on the Web every week than anyone could read in a month. Here are the nine most fascinating ones I read this week.
1. High-speed insanity
High-speed trading -- holding stocks for fractions of a second in an attempt to exploit tiny discrepancies between trades -- is often blamed for making the market more volatile, including the May 2010 "flash crash." Now comes this, according to BusinessWeek:
Currently, data take 64 milliseconds (give or take a few fractions of an eye blink) to travel round-trip between New York and London along a cable built in 1998 called the AC-1.
According to its New Jersey-based operator, Hibernia Atlantic, the $300 million Project Express will be 5.2 milliseconds faster than the AC-1, with an execution time of 59.6 milliseconds. That will make Project Express the world's fastest transatlantic cable when it opens in 2013 and the first to achieve round-trip trading speeds of less than 60 milliseconds.
Next time you're thinking about day trading, remember that you're competing against these people.
2. Still worth it?
The New York Times put together a detailed look at student loans and the rising cost of education. A few standout sections:
- "The balance of federal student loans has grown by more than 60% in the last five years."
- "From 2001 to 2011, state and local financing per student declined by 24% nationally. Over the same period, tuition and fees at state schools increased 72%, compared with 29% for nonprofit private institutions, according to the College Board."
- "Ohio's flagship university, Ohio State, now receives 7% of its budget from the state, down from 15% a decade ago and 25% in 1990. The price of tuition and fees since 2002 increased about 60% in today's dollars."
The moguls of J.P. Morgan, in letting a complex risk run wild and denying any potential for error until it was too late, are a reminder that one of the biggest dangers in finance is self-deception.
For investors, the bigger the commitment, the more certain they become that they must have been right to make it -- and the harder it becomes to let go.
The literal meaning of the word "invest" -- from the Latin vestire, to clothe or dress -- is to wrap oneself up in something. Experiments at racetracks and elsewhere have shown that people who bet on an outcome become up to three times more confident that it will occur than people who didn't put up any money.
4. A twist on startups
Joe Kraus has a thoughtful post on entrepreneurship:
In the world of entrepreneurship I think the most dangerous lie we tell ourselves is "I've learned more from my failures than my successes." It's simply not true and I want to talk about why. What I believe IS true is the statement "I've developed more CHARACTER from my failures than my successes." But, I firmly believe we LEARN more from our successes by far.
He cites a study detailing why:
[T]he success rate of a first-time venture-backed entrepreneur is about 18%. If that entrepreneur fails and tries again with another company, their success rate only improves to 20%. Not much. BUT, if that entrepreneur succeeds in their first company, their success rate for their second venture goes up to 30% -- over a 65% improvement in expected outcome.
5. What the smartest investors in the world are thinking
Blogger Josh Brown took notes at the Ira Sohn conference in New York, where some of the world's best investors show off for each other and share an idea or two. A few points I found interesting:
- Philippe Laffont of Coatue Management likes Equinix (Nasdaq: EQIX ) . Josh writes that Laffont "explains how the Web is simply too slow" and says "one example is that a 1 second delay on the [Amazon.com (Nasdaq: AMZN ) ] shopping cart at checkout means $5 billion in lost revenue."
- David Einhorn "wants [Apple (Nasdaq: AAPL ) ] to launch a preferred class to pay high [dividend] income."
6. One reason California's budget is such a mess
California's budget is an utter disaster. Robert Frank of CNBC highlighted at least one reason why. The state's income tax and capital gains tax revenue was lower in 2010 than it was in 1998:
California Personal Income and Capital Gains Tax Revenue (Millions)
Source: California Franchise Tax Board, via CNBC.
Because the barriers to entry are low, there's usually no good reason why returns in an institutional banking business should stay very high for an extended period. Competition should drive those returns down. As a result, sustained high returns on equity -- especially higher returns than competitors are earning -- can be a sign of impending trouble. They might mean a business is taking outsized risks, or misunderstanding the risks it is taking, or is skirting too close to the regulations. Not all high-return businesses crash, but variations on the comment "In hindsight, the returns were probably too good and too steady" are all too common in the financial sector.
8. Don't fear "decline"
Some say America is in decline because other nations -- particularly China -- are growing faster and will probably surpass the size of the U.S. economy within a decade. Ezra Klein in Bloomberg explains why you shouldn't fear their inevitable rise:
A world in which global growth slows so much that countries with three or four times our population never surpass the U.S.'s economic output is a world in which much is going wrong. … If hundreds of millions of Chinese and Indians continue to be stuck on unproductive farms or in unskilled jobs rather than being freed to develop their human capital, the rest of the world will be denied access to the endless innovations they otherwise might have developed. Put another way, the sun may now set on the British Empire, but the average British citizen lives much better because of the medical and computer technologies developed in Britain's former colonies. If those colonies hadn't grown rich and strong enough to throw off the mother country's yoke, the result would be a worse world for everyone -- including the British.
9. When work never ends
Gallup runs a survey every year asking working Americans when they expect to retire. It's shocking stuff: In 1996, the average expected age of retirement was 60. Today, it's 67. And our expectations drop as we age. "Those currently under age 40 expect to retire at age 65, compared with an expected retirement age of 68 for those aged 40 and older," Gallup writes.
Perhaps more telling: 38% of Americans think they'll have enough money to retire comfortably, down from 59% in 2002. "The 38% of nonretirees who expect to live comfortably in retirement stands in sharp contrast to the 72% of current retirees who say they have enough to live comfortably," Gallup says.
Enjoy your weekend.