Business Commons^™

Traditional Vs. Roth Ira, Steven D. Dolvin

All Chapters

Aside from company sponsored 401(k) plans, investors can use either traditional or Roth IRAs to invest for retirement.investors. In a more recent development, companies have also begun offering the choice between traditional or Roth 401(k)s. So, it is important to understand the relative advantages of each type of account. See a good summary article here, WSJ.

More Evidence For Efficient Markets, Steven D. Dolvin

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The market's performance this year has surpassed that of most professional money managers. In fact, this is the worst (relative) year in three decades for professionals (see post here, The Reformed Broker). The level of competition and the high level of fees prevent meaningful outperformance. The result -- a large influx of capital into index funds.

Fee Based Compensation Aligns Interests, Steven D. Dolvin

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Retail financial professionals have increasingly moved away from commissions and to a standard fee-based structure. This change should better align the interests of clients and advisors. For example, there is less incentive to trade. Moreover, there is little need for advisors to select funds that charge a high load, as their compensation no longer depends on the "kickback" received from the fund companies. As a result, the fund flow to high load funds has turned negative. See article here, Investment News.

2015 Macro Trends, Steven D. Dolvin

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While it is still early, Goldman Sachs has posted its 10 market themes for 2015. These may be useful in top-down analysis. See article here, Barrons.

Short Term Market Indicators, Steven D. Dolvin

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For those interested in technical analysis, some traders are suggesting that the market is set for a pull back. See article and video here, Yahoo.

S&P Breaks Key Tecnical Mark, Steven D. Dolvin

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The S&P fell below its 200-day moving average, a key negative technical indicator. Investors should pay close attention to see if this level holds. See article here, yahoo.

Alibaba Ipo, Steven D. Dolvin

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Most firms that undertake an IPO subject insiders (founders, initial investors, etc.) to a lockup period of, typically, 180 days. For Alibaba, this is not the case, which suggests that many additional shares could hit the market immediately after the IPO. This may mute the initial return that new shareholders could receive. See article here, WSJ.

Update: Even with insiders selling shares, the Alibaba IPO was well subscribed, generating a 38% return on the first day. Moreover, with additional shares sold (i.e., the overallotment option), the Alibaba IPO is reportedly the biggest IPO in history, raising $25 billion. See article …

Active Managers Vs. Index Funds, Steven D. Dolvin

All Chapters

Watch this video to facilitate discussion about active vs. passive investing, as it reviews the large amount of money being invested with Vanguard.

All-Time Market Highs And Market Timing, Steven D. Dolvin

All Chapters

With the market at all-time highs, many investors are left wondering if stocks are still attractive investments. Based on PE ratios, the market's current level of 17.5 if slightly above the historical average, but not excessively so. Thus, if corporate profits remain strong, valuations could remain stable (so says some analysts). See article and video here, Fidelity. The video also discusses the difficulty of market timing, which is a good reminder for most investors.

Diversification Revisited, Steven D. Dolvin

All Chapters

Asset allocation is widely considered to carry the most weight in determining a portfolio's overall return, but we often avoid/ignore many categories that could be helpful. See article here for a discussion of why diversification matters, Fidelity.

On the contrary, though, some analysts believe too much diversification is not a good thing. See article here (WSJ) to help answer the question, "How Much Diversification Is Too Much?"

Etfs That "Mimic" Buffet, Steven D. Dolvin

All Chapters

Watch this video to facilitate discussion about ETFs that use criteria similar to those applied by Warren Buffet.

Fund Manager Performance, Steven D. Dolvin

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Fund managers, on average, have historically trailed the broad market. However, this year has been exceptionally bad for managers, with only 23% of large-cap funds outperforming the index. See this article (WSJ) for some explanation from Goldman Sachs.

Facebook Options And Ipo Expiration, Steven D. Dolvin

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After a company goes public, inside investors must hold stock until after the "Lockup Expiration." Research suggests that prices fall around this event, and investors are using options to try to benefit from this phenomenon. Watch a related video here, WSJ.

The Future Of The Nyse, Steven D. Dolvin

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Watch this video to discuss the sustainability of the iconic NYSE.

Vanguard Vs. The Industry, Steven D. Dolvin

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For years, Jack Bogle (the founder of Vanguard) has touted the benefit of passive investing, which is primarily driven by the relatively low fees they charge. Moreover, Bogle has highlighted the inability of active investors to outperform the market. Recent large investor flows into Vanguard products suggests that investors are increasingly agreeing with Bogle. See article here, WSJ.

Do Women Generate Better Returns?, Steven D. Dolvin

All Chapters

Some prior research suggests that women make for better investors, primarily because they generally trade less than men (meaning lower transaction costs). However, a new fund aims to exploit the benefit women may provide as board members. The Barclays Women in Leadership ETN will invest in companies with a female CEO or a board that has a membership of at least 25% women. See here for an article that discusses the new fund (WSJ).

See previous post (ETFs vs. ETNs) for a discussion of the fund structure.

Time To Sell?, Steven D. Dolvin

All Chapters

For technical traders, it may be time to sell. While the market has yet to make a "death cross," some other indicators are saying sell. In particular, a recent WSJ article identified three signals that recently occurred in tandem: overvaluation based on earnings multiples, extreme divergence in sector performance, and excessive levels of bullish enthusiasm. This combination has occurred six times since 1970, with each event resulting in market drops of at least 22%. Will this happen again?

Going Global, Steven D. Dolvin

All Chapters

For diversification reasons, most investors should consider investing internationally. However, many investors have limited knowledge about how to do so or about how to determine how much exposure to have internationally. Click here for a recent WSJ article that provides some guidance on these issues.

Catastrophe Bonds, Steven D. Dolvin

All Chapters

Bonds are typically viewed as very conservative investments with relatively simple terms. However, the industry is quite complicated and offers some higher risk securities. For example, catastrophe bonds (or "cat-bonds") have normal cash repayments to lenders, except if a pre-defined catastrophe (hurricane, wildfire, earthquake, etc.) occurs. In this event, all bond cash flows cease. For obvious reasons, these are popular among issuers in the insurance industry, and the primary buyers are hedge funds (primarily due to the higher risk/return profile such bonds offer). See a related article here, Bloomberg.

Roe And Leverage, Steven D. Dolvin

All Chapters

Return on equity (ROE) can be decomposed into three pieces, the so-called DuPont Identity: Net profit margin, total asset turnover, and the equity multiplier. The equity multiplier is a measure of leverage, so firms that add financial leverage (i.e., debt) to their balance sheet can increase ROE, as long as the product of the other two factors (i.e., return on assets) is positive. In the standard growth model for pricing stocks, this would generally have a positive impact on stock price, but note that it does add risk to the potential outcome, i.e., leverage. See article here, The Economist.

Fragmentação Do Conhecimento Científico Em Administração: Uma Análise Crítica, Jane Siegler, Cristiane Biazzin, Aline Rodrigues Fernandes

Scholarship and Professional Work - Business

This study aims to rescue the discussion of science fragmentation, exploring how this phenomenon manifests itself in Management Science and Business Administration and what its implications for the advancement of scientific knowledge. As an illustrative case, we used the interface between Operations Management and Human Resources Management fields. The methodology adopted was a bibliometric research through a structured mapping of the scientific production of these two major areas. The results indicated that both evolved independently, with little synergy, given the paucity of works found in two decades of research. The study highlights some factors that can enhance the fragmentation: epistemological …

Triple Crown And The Stock Market, Steven D. Dolvin

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The "Super Bowl Indicator" is widely known, as the winner of the Super Bowl has been correlated to overall stock market performance. While this does not imply causation, is does make for an interesting discussion of market efficiency. A similar item is the performance of the stock market in years when a horse wins the Triple Crown--the results are not good. So, many people may be watching how California Chrome does in the upcoming Belmont Stakes. See article here, WSJ.

Fees Matter, Steven D. Dolvin

All Chapters

A 1% annual fee doesn't sound like much, but when compounded, fees paid to advisors and managers can have a significant impact on an investor's ending portfolio value. For example, consider two investors who each invest $200,000 and earn 8%/year (before fees) for 30 years. The first investor uses an ETF that charges 0.04%/year in fees, while the second investor uses a mutual fund charging 1.25%/year. The first investor ends with roughly $2 million, while the second nets about $1.4 million. The difference is purely driven by fees -- this is a huge cost. (See article here, Wall Street …

Apple Issues Debt To Buyback Stock, Steven D. Dolvin

All Chapters

Apple has $150 Billion in cash, yet it has decided to issue $17 Billion in new debt to fund its stock repurchases. Why not just use cash on hand? One reason is that almost 90% of the cash is held outside the US, and repatriating the cash would trigger significant tax liabilities. Another reason is that interest rates are so low, and if Apple can earn a higher return than the cost, the added financial leverage will be a benefit to shareholders. (See article here, CNBC.)

All Earnings Are Not The Same, Steven D. Dolvin

All Chapters

Two companies in the same industry with the same earnings per share (EPS) may be quite different, particularly depending on how they report their earnings. For example, companies can choose different depreciation methods (e.g., straightline, accelerated, etc.) and inventory accounting approaches (e.g., LIFO, FIFO, etc.). However, while these choices all fall within generally accepted accounting principles (GAAP) and are relatively easy to reconcile, business also have many choices with regard to reported adjustments to earnings, which are more opaque. Click here for a recent article discussing the discrepancies.

How Many Stocks Are In The S&P500?, Steven D. Dolvin

All Chapters

Traditionally, the answer is 500, as the index was constructed using the 500 largest companies. However, Google's upcoming stock dividend will change all this. As of April 3, 2014, Google is undergoing a 2:1 split via a stock dividend, as owners of record will receive an additional share -- but of a different nonvoting class stock. This means that there will be two Google share classes being traded. To keep the value in place, the S&P will retain both share classes, meaning there will now be 501 stocks in the S&P500. See article and related video here, CNBC.

The Benefit Of Financial Advisors, Steven D. Dolvin

All Chapters

Many individual investors believe that the primary role of a financial advisor is to "pick stocks." However, research shows that not only are active managers not able to outperform the market consistently, but that the security selection piece is really not the most important determinant of portfolio return. The key issue is asset allocation. A recent report (see article here, InvestmentNews) suggests that financial advisors can add value, but primarily from activities unrelated to security selection: determining asset allocation, helping clients avoid behavioral errors, facilitating rebalancing, reducing fees, and managing taxes and withdrawals.

High Frequency Trading And Market Efficiency, Steven D. Dolvin

All Chapters

Arbitrage is, essentially, taking advantage of mispricing across (or within) markets to earn a risk-free profit. In an efficient market, such opportunities would be rare. A recent Fed report (see article here, Bloomberg) finds that high frequency traders have effectively reduced the number of arbitrage opportunities, thereby improving market efficiency.

Active Vs. Passive, Steven D. Dolvin

All Chapters

Market efficiency suggests that passive funds are the way to go, and average returns tend to support this. However, other investors prefer active strategies. Maybe the answer is not "either....or." As a recent Wall Street Journal article reports, both may provide benefits. See article here.

Technical Analysis, Steven D. Dolvin

All Chapters

While many investors (particularly those who subscribe to market efficiency) suggest that technical analysis is worthless, market participants still generally track charts, including resistance and support levels, as well as moving averages. With the market recently testing its support and bouncing to higher levels, technical analysts will continue to monitor charts to see if the positive momentum can continue. See article here, Reuters.