8 Fascinating Reads

Happy Friday! There are more good news articles, commentaries, and analyst reports on the Web every week than anyone could read in a month. Here are eight fascinating pieces I read this week.

Accident waiting to happen
Most Americans don't understand how bonds work, writes The New York Times

If interest rates do go higher, most people don't understand how that will affect bonds. A 2012 financial literacy survey by the Finra Investor Education Foundation asked this question: "If interest rates rise, what will typically happen to bond prices?" Prices will fall, but only 28 percent of adult Americans in the survey answered correctly. Finra ran the same survey in 2009 and got the same results.

Lucky genes
Warren Buffet talks about the role of luck plays in success. Via Cullen Roche: 

WARREN BUFFETT: Well I came up with that a long, long time ago to describe the situation that -- I was lucky. I was born in the United States. The odds were 30 or 40-to-1 against that. I had some lucky genes. I was born at the right time. If I'd been born thousands of years ago I'd be some animal's lunch because I can't run very fast or climb trees. So there's so much chance in how we enter the world. And --

LIU: And you were always aware to make sure your children and their grandchildren, and your grandchildren would be grounded.

WARREN BUFFETT: Yes. And we're not -- how you came out of the womb has really nothing to do with what kind of person you are. You decide what kind of person you're going to be. It does decide whether maybe you never have to do an item of work in your life and maybe determine whether you're fighting uphill all of the time, but where in my life, in my eyes is we're all created equal, and but we don't all have an equal opportunity by a longshot. And my kids really work every day in trying to even up the scorecard.

Famous last words
Twelve years ago this week, Apple (NASDAQ: AAPL  ) introduced the iPod. Here's how one technology analyst reacted:

I question the company's ability to sell into a tight consumer market right now at the iPod's current price. ... Clearly Apple is following Sony's lead by integrating consumer electronics devices into its marketing strategy, but Apple lacks the richness of Sony's product offering. And introducing new consumer products right now is risky, especially if they cannot be priced attractively.

Innovation
Former Fed chairman Paul Volcker once said the only useful financial innovation of the last three decades is the ATM machine. Blackstone shows he's probably right

A unit of Blackstone Group, the world's largest private equity firm, essentially paid a company to purposely miss a debt payment in order to profit on credit default swaps (CDS), Bloomberg's Mary Childs reports.

In a brilliantly crafty deal, Blackstone was guaranteed to make money.

CDSs, a kind of insurance against defaults and missed debt payments, were one of the main culprits in the global financial meltdown. Regulators have tried to make them more transparent, with limited success.

Turning point
Tuition cost growth is cooling, writes The Wall Street Journal

After decades of rampant growth, the rate of tuition increases at U.S. colleges and universities has slowed for the second academic year in a row, but government aid has fallen, continuing a cycle of rising costs and debt for American students

Published tuition and fees rose 2.9% for in-state students at four-year public schools, the smallest one-year increase since 1975-76. At private schools, tuition and fees rose 3.8%, a bit lower than in recent years, according to a report from the College Board, a New York nonprofit that tracks university costs.

Not impressed
Matt Yglesias reminds us that predicting a market crash isn't impressive, even if the market crashes: 

In this era of obsession with bubbles, I think it's important to recognize how fundamentally unimpressive it is to call a financial crash years in advance. If I predict to you today that the stock market is going to crash soon and people are going to lose a lot of money, and then people keep making money for the next 40 months and then the stock market crashes, that would hardly make me a genius financial forecaster. It just shows that the stock market has big crashes every now and again. Sometimes those crashes are driven by clear deterioration in the fundamentals (2008), sometimes they're driven by past overexuberance (2000), and sometimes they seem to be driven by nothing at all (1987). That's life.

The maestro
Alan Greenspan gives his thoughts on his legacy:

I've been around long enough to know that a good deal of the praise heaped on me I had nothing to do with. The only thing I did object to was the fact that where the criticism was actually wrong. Did it bother me? Of course it bothered me. But I've been around long enough to have ups and down. So you get over it.

Wisdom
Investor Cliff Asness gives a great talk on the power of diversification. Watch it here: 

Enjoy your weekend. 

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  • Report this Comment On October 26, 2013, at 10:37 PM, colleran wrote:

    I watched the video and I am not sure what I know now that I didn't before. I can see value in diversification, but we can't seem to help ourselves from trying to predict the future of stocks. I can see what Schiller says about reversion to the mean, but the timing of that reversion is unknown. It could be years.

    So I am left with with buying stocks, bonds, mutual funds and ETFs without trying to time anything. I think this 'quant' stuff is just another technique that might help, but is just as likely to not work.

  • Report this Comment On October 27, 2013, at 8:47 PM, lovepeace wrote:

    I would only add to the comment above that diversification is not as necessary as in the past. Lots of individual companies are actually global now and some even "hedge" their assets and invest accordingly. Some even have stock piles of cash.

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