The Finance Monk

A lot of people don’t realize the amount of knowledge that there is available on publicly traded companies. When they say ‘public’, they really mean ‘public’. Public companies - the kind that trade on stock exchanges and you can find in your 401k plans - are required to file a slew of documents with the Securities and Exchange Commission (SEC) which they provide over the Internet for free to potential investors on a server called EDGAR.

It’s not the most user friendly system in the world, but what they lack in interface they make up for in content. You can find the following types of documents on their server:

• 10-K: This is the standard yearly financial statement filing. They’re audited by independent accounting firms to make sure they’re doing it right.
• 10-Q: These are the quarterly filings. Generally they’re not audited by firms, but are more like guideposts that can be useful in predicting what the 10-K will be for the year.
• 8-K: Anytime there’s a material change to a firm (basically something investors would want to know) the company files an 8-K with the SEC. This is where you get information like mergers and acquisitions or significant events occur.

So let’s say you want to look at Coca-Cola.

1. Click on ‘Company Listings’
2. Click on ‘Company Searches’
3. Look up the company’s ticker symbol here or here.

They provide a link that can look up the CIK. This is nice, but it tends to provide an almost confusing amount of companies sometimes. ‘Coca Cola,” for example, brings up 46 entries. This is because many companies can have multiple entities that must file separately (Coca-Cola’s bottling company vs. holding company, for example), as well as the fact that many companies can have similar or identical names if they’re incorporated in different states and/or different industries.

4. Click “Enter” and look for the document you want; Form 10-K is generally the most interesting.

Here’s the link for Coca-Cola Enterprises.

As you can see, there’s a wealth of information about the company, it’s core business, who the major shareholders are, its financial statements, risk factors, pending court cases, corporate governance…

It’s a great resource not only for investors, but for entrepreneurs who want to learn more about their major competitors and the way they’re doing business. Even people who are just plain curious about how an industry or company works can look these up. I’ve found that if you ever have an important job interview coming up it’s a great way to get a very solid understanding about a company’s business model and how the company presents itself to the public. All in all, it’s a neat little database.

Last year I had a book about hedge funds thrown in the back seat of my car during a long car trip, and a friend of mine (named Fish) was bored enough to read a good portion of it. He’s a physics PhD student so he tends to understand everything. It’s a pretty academic book with graphs on every third page and seems about as legitimate as books get on the subject (It’s used for the CAIA exam). Plus, the author is the Chief Information Officer of CalPERS - the California Public Employees Retirement Service - and has about 50% of the alphabet coming after his name: Mark J. P. Anson, J.D., PhD, M. Fin, CFA, CPA, CAIA, CIA.

Basically, Fish’s reaction was this:

Honestly, I tend to agree with him. I’d really love to believe the hype, but the data sets out there are spotty at best and plagued with survivalship and self-selection bias. It’s difficult if not impossible to identify a subset of funds that actually do consistently outperform risk-adjusted market benchmarks after fees, if they even exist. Dr. Anson’s book rather sagely leaves out any specific fund names.

The idea is simple - hedge funds are private, specialized investment companies with experts that pursue stocks and companies with above-average market returns (”alpha”) in specific fields. These managers are more skilled than the rest of the market in their specialties, so they’re able to spot inefficiencies others can’t. Hedge funds, therefore, become a useful part of portfolios of wealthy investors who understand their risks and can choose among funds from all sorts of classes - from general long/short stock-pickers to statistical arbitrage to merger speculators. The web’s best (or at least one of the more vocal) hedge fund apologist blog is here, if you’re hankering for a sip of the Kool-Aid.

Unfortunately, I really think the verdict’s still out until I see a good model with a solid, unbiased time series, but I’m inclined to say that most probably don’t justify their fees. A fund that consistently beats their risk-adjusted benchmarks may be out there (SAC Capital, perhaps?) but as an individual investor I don’t have the resources to do the research I’d need to convince myself that one can separate the ‘Alpha’ from the ‘Schmalpha’ (thank the dour Nouriel Roubini for that portmandeau). Until I do, I’ll stick to index funds.

Will over at Clicked had an interesting link: 50% of all BitTorrent Downloads are TV shows. And not only that, streaming television shows (where you don’t have to download anything) seem to be replacing BitTorrent, with many of the major networks actually streaming their own content free of charge. It got me thinking about the future of television as it merges with internet media.

It seems like a few forces are coming together for internet media:

Targeted advertising – We already have text and banner ads that target audiences based on content. That’s not new; the same thing happens on television: there’s a lot more geek commercials on Heroes than Charlie Rose (although… ).

What we also have though is a tendency to categorize individual people as potential clients, such as Google is doing with their massive database of what we all search (I can only imagine what my distorted profile looks like to them) and, most effectively, Facebook’s recent Beacon system. When I’m on facebook, I get ads about hiking trips in Iceland because I list my hobbies as ‘travel’ and ‘hiking.’ This is huge.

Streaming Video – With 2008 being the year large companies start wising up to the nascent crowd of people that watch TV on their computers, we’re seeing some really promising (and legal) Streaming Video sites links like www.Hulu.com and ABC’s Full Episode Player. Apple is coming out with rentable movies as well through iTunes.

They’re mainly advertising it as ‘if you missed a show, you can see it online’ right now because people prefer to watch something on a real television. But anecdotally, most people my age and younger watch a great deal of television on their computers. And why not? It’s on demand, it’s got less commercial, and the quality is starting to catch up with the rise of DIVX technology (for DVD-quality movies) and streaming videos (so you can watch directly off of a website without having to risk a download or anything.

Mega-bandwidth and tech improvements – Verizon FiOS is starting to be installed in a lot of neighborhoods (at least on the East Coast), which dramatically improve consumer bandwidth: with 30 to 50 Mbps/sec for residential properties in some areas.

Of course, none of this is particularly new to the tech industry and the ‘combined tv/computer’ experiments of the past have failed to catch on. But this seems like it’s only a matter of design - nobody wants to have a mouse on their tv screen or a computer in their living room. There’s some evidence that the two mediums are blending together though. For example, a group of tech giants -Adaptrum Inc., Microsoft Corp., Motorola Inc. and Philips Electronics North America Corp. - are testing a device that allows the transmission of high speed internet service over unused tv waves.

So what’s this lead to? Naturally, targeted video advertisements for television shows.

Basically a network company streams a show or movie onto your computer, you flip a switch, and a crystal clear digital signal hits your tv screen.

Consumers benefit:

1. Choice: free, high quality TV shows and movies whenever you want to see them.
2. Increased Variety of Shows: consumers will have the ability to watch great old shows like Arrested Development or Bewitched long after they’re canceled
3. On-Demand Movies: Any movie you want on-demand, directly into your house
4. Increased national competition with Cable Companies: there won’t be a need to install cable boxes, satellite dishes, etc., which could lead to much lower monthly costs.

 

Producers benefit:

1. The Golden Age of Marketing- Every marketer’s dream: the ability to target tv commercials to extremely specific audiences. For example, a company could target a commercial to the following group of people: (a) women age 25-30, (b) income bracket $xx,xxx; (c) have recently watched three or more movies with Cate Blanchett. There’s certainly an argument that companies would pay more for this.
2. A much higher rate of Commercial-watching – Commercials are not tivo-able (meaning you can’t skip them) in streaming video. You force the consumer to watch them. (And honestly, I’m fine with that. I’m watching a free show). There’ll also be less channel flipping.
3. A better profit margin for older sitcoms – Like I mentioned Arrested Development above; they’ve already paid for production. The rest is all gravy.

So perhaps networks should not be so worried about their declining ratings. With these advances coming together, it certainly seems like an exciting time in the television industry.

Welcome to the Monastery! Over the past couple of months I’ve begun actively following a good number of blogs, and I feel I am starting to understand what all the geek-pundits have been talking about so positively. There are a lot of talented people contributing to a great online dialogue.

I would like to take part in the conversation. A blog entry seems to be a great medium to present ideas: a crisp presentation of no more than five paragraphs, with pictures. It’s perfect format for fostering a discussion. So I begin ‘The Finance Monk.’

My reference to being a “monk” is a bit tongue-in-cheek; it was originally coined by a friend of mine as a joke after I decided to take two CFA exam levels back to back in December and June, which caused a slight withdrawal from social life (as anyone who has taken the exam can attest). I think, though, that the name really fits well with several other aspects of my philosophy and outlook on life—namely my feelings on the virtue of living frugally, the influence of ‘impermanence’ on my life, and my admiration for the quiet study that monks spend their lives following.

In Stone Age Economics, Marshall Sahlins proposes that the materialism and accumulative nature of our society is not inherent in all cultures, and that the concept of ‘wealth’ is actually a lot more fluid than we think in the Western World. In some nomadic cultures, less really is more since the more you own, the more difficult it is to move. As a 25 year old financial analyst living and working in Washington DC, I can hardly describe myself as a nomad. But an ascetic life (or at least a frugal one) is found to be a virtuous one in so many cultures that there’s bound to be some truth in it.

Of course, another aspect of monastic life is a genuine curiosity and respect to the world in which we live and a pursuit of knowledge for its own sake. So with that reflection I hope that this blog will be as I envision it: an open-minded analysis of the world through the lens of an economist and financial anthropologist, and a platform of thoughts that can encourage discussion.

So welcome, thanks for reading, and I look forward to hearing from you!