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‘Shallow Risk’ and ‘Deep Risk’ Are No Walk in the Woods

Jul 26, 2013

THE INTELLIGENT INVESTOR

‘Shallow Risk’ and ‘Deep Risk’ Are No Walk in the Woods

By Jason Zweig

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Earlier this week, the Dow Jones Industrial Average hit 15567.74, a new high. That was the 28th time this year the Dow closed at a record. At these all-time-high prices, just how much riskier stocks are than alternatives like bonds, cash or gold depends largely on how you define “risk.” William Bernstein, an investment manager at Efficient Frontier Advisors in Eastford, Conn., and the author of several books on investing and financial history, says risk takes two basic forms—and understanding the difference can help investors figure out what they should be afraid of. What Mr. Bernstein calls “shallow risk” is a temporary drop in an asset’s market price; decades ago, the great investment analyst Benjamin Graham referred to such an interim decline as “quotational loss.” Shallow risk is as inevitable as weather. You can’t invest in anything other than cash without being hit by sharp falls in price. “Shallow” doesn’t mean that the losses can’t cut deep or last long—only that they aren’t permanent. “Deep risk,” on the other hand, is an irretrievable real loss of capital, meaning that after inflation you won’t recover for decades—if ever. Read more of this post

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China has at least 36 local governments with as much debt, on average, as Detroit

China has at least 36 local governments with as much debt, on average, as Detroit

By Jake Maxwell Watts @jmwatts_ 4 hours ago

China’s National Audit Office announced on Sunday that it is conducting a comprehensive review of all local government debt, which has long been considered a potential time bomb that threatens for China’s economy. But how bad is the debt really? An audit that took a sample of 36 local governments at the end of 2012 (15 provinces, their capital cities, the municipalities of Tianjin, Shanghai and Guangzhou, and one district from each municipal city) found that those authorities had taken on a total of 3.85 trillion yuan ($628 billion) in debt, up 12.9% from 2010. That works out to $17.4 billion each—just under the $18 billion in debt held by the US city of Detroit, which filed for bankruptcy earlier this month. Read more of this post

Small Stocks Are in Eye of the Index; Inclusion in Russell 2000 May Distort Some Stock Values

July 28, 2013, 6:46 p.m. ET

Small Stocks Are in Eye of the Index

Inclusion in Russell 2000 May Distort Some Stock Values

JUSTIN LAHART

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The Russell 2000 is the benchmark for small-capitalization stocks. But some stocks in it aren’t that small. This may pose a problem for investors, even as the index has been hitting all-time highs. The argument for small stocks is clear. Research has consistently shown that over long stretches small-cap stocks beat their bigger brethren. A driver has been the fraction of fast-expanding small companies on their way to becoming large ones. Yet some of them may no longer be in the Russell 2000. Which stocks Russell designates as small cap counts. The iShares Russell 2000 ETFIWM -0.40% the ninth largest of all exchange-traded funds, has about $25 billion under management. More than 400 mutual-fund portfolios, with over $370 billion under management, use the Russell 2000, or its subindexes, as benchmarks, said Morningstar. Read more of this post

Startups Take Off in South Korea; Successful Entrepreneurs Reinvesting in Fledgling Companies

Updated July 29, 2013, 12:07 a.m. ET

Startups Take Off in South Korea

Successful Entrepreneurs Reinvesting in Fledgling Companies

JAEYEON WOO

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A package for expectant moms in their early pregnancy

SEOUL—When Paek Jin-joo was pregnant with her first baby, it was challenging for her to figure out what she needed to know and buy as an expectant mother. Spending hours looking up the Internet was too time consuming. “I thought to myself how convenient it would be if someone could offer tips and help shop for products necessary for pregnant women,” says the 35-year-old Ms. Paek, who was an office worker at an online education company in Seoul before setting up her own company, 10Box, in October last year. As the U.S. startup scene experiences a slowdown this year, South Korea is one place that is booming. The country is one of the most wired nations in the world with broadband penetration at over 100%. The number of Korean startups has nearly doubled to 28,193 in 2012 from just 15,401 in 2008, according to data from the Korean Venture Capital Association. Steady growth in the number of startups in South Korea in recent years is getting a fresh push from successful entrepreneurs reinvesting in fledgling companies, as well as commitment from the government to provide backing. But competition and scaling the business have been major challenges for some of the country’s startups. Read more of this post

Is there an Incentive for Active Retail Mutual Funds to Closet Index in Down Markets? Fund Performance and Subsequent Annual Fund Flows; Study finds there’s no big benefit to active management in down markets

Is there an Incentive for Active Retail Mutual Funds to Closet Index in Down Markets? Fund Performance and Subsequent Annual Fund Flows between 1997 and 2011

Aron A. Gottesman Pace University – Lubin School of Business – Department of Finance and Economics

Matthew R. Morey Pace University – Lubin School of Business – Department of Finance and Economics

Menahem Rosenberg Pace University

April 26, 2013

Abstract: 
Closet indexing is the practice of staying close to the benchmark index while still maintaining to be an active mutual fund manager and probably also charging fees similar to those of truly active managers. Recent work shows active mutual fund managers were much more likely to closet index during down markets. Indeed, closet indexing became so popular that it accounted for about a third of all mutual fund assets during time surrounding 2008. In this paper we set out to answer the question of whether there actually is an incentive for mutual fund managers to closet index during down markets. To do this we examine the relationship between annual fund performance and subsequent annual fund flows in both up and down markets. Using this approach we find that the relationship between fund performance and subsequent net fund flows is significantly different in up markets years as compared to down market years. Specifically, we find that fund performance does not drive subsequent flows nearly as much in down markets as it does in up markets. Indeed, in up markets, we find a strong positive relationship between fund performance and subsequent flows. Conversely, in down years, the amount of outperformance or underperformance does not significantly influence the next year’s fund flows. Hence, based on these results, there is an incentive for active managers to closet index in down markets as investors do not reward outperformance with higher flows.

Fund managers should go into the closet when markets drop

Study finds there’s no big benefit to active management in down markets

By Michael Shagrin
July 25. 2013 3:54PM

Fund managers have every incentive to mimic their benchmark when markets are down, according to researchers at Pace University and Touro College. During up years, a strong relationship exists between fund performance and net flows. However, during down years, outperforming or underperforming a benchmark does not have a significant impact on the subsequent year’s flows. This means that “there is an incentive for active managers to closet-index in down markets, as investors do not reward outperformance with higher flows,” according to the researchers, who recently conducted a study, “Is There an Incentive for Active Retail Mutual Funds to Closet Index in Down Markets? Fund Performance and Subsequent Annual Fund Flows between 1997 and 2011.”  Read more of this post

9-Year-Old Massachusetts Girl Carissa Yip Becomes Youngest-Ever Chess Expert

9-Year-Old Massachusetts Girl Becomes Youngest-Ever Chess Expert

GRANT WELKERASSOCIATED PRESS JUL. 28, 2013, 5:51 PM 1,382 4

CHELMSFORD, Mass. (AP) — Only three years or so since first picking up the game of chess, 9-year-old Carissa Yip can already look down at 93 percent of the more than 51,000 players registered with the U.S. Chess Federation. She has risen so far up the rankings that she has reached the expert level at a younger age than anyone since the chess federation began electronic record-keeping in 1991, a new level she reached in recent weeks. Her father, Percy, who taught her until she began beating him within a year, said she could reach master level in as soon as a year. “Some never reach master level,” he said. “From expert to master, it’s a huge jump.” Read more of this post

Former kindergarten teacher Keith Green started his own YouTube channel, Cakes by Choppa after Spider-Man cake video viewed 15.8 million times around the globe – earning him huge advertising revenue.

Get rich on YouTube

July 19, 2013

Larissa Ham

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Choppa making a Mickey Mouse cake.

Fancy earning $17,000 in just one hour, without leaving home? That’s what former kindergarten teacher Keith Green – known to all as “Choppa” – did after he filmed himself creating a Spider-Man cake and posted it on YouTube a year ago. It took him less than an hour to decorate the cake and edit the video but it’s since been viewed 15.8 million times around the globe – earning him huge advertising revenue. Choppa says he believes his video went viral thanks to timing – close to the release of movie The Amazing Spider-Man, and rock musical Spider-Man: Turn off the dark – but also “the fact it’s so simple”. The 33-year-old, who once dreamt of being an animator, got his first taste of cake decorating as a child while helping his mother create tasty gems from Women’s Weekly cookbooks. Two years ago, as a hobby, he started his own YouTube channel, Cakes by Choppa. It took off so quickly that six months ago the kindergarten teacher of 14 years quit his job to focus on his weekly online videos.

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