What I'm Thinking About

Of Candor and Conflicts: What Were We Thinking? by Marianne M. Jennings, Professor of Legal and Ethical Studies at Arizona State University

"My intention, therefore, is to discuss three factors that are typical precursors to the ethical failings that lead to such scandals:

• pressure and myths about success
• conflicts, tone, and our resistance to
both
• gray areas that are not really gray."

Annualizing Partial Returns: The Case for Valuing Twitter at $2.7 Billion

A Case for Valuing Twitter at $2.7 Billion - Digits - WSJ

Quote:
'First, it is often difficult to come up with comparables (there has never been anything quite like Twitter) and the valuations often come before such important standards as, say, profits, so investors are left valuing a business based on such metrics as future revenue. "

First, Twitter is AOL Instant Messenger with Spamming Feature. Valuing Twitter is important only to the investment bankers would earn a commission and the early investors who will cash out.

That scathing assessment aside, the professor estimates Twitter going to have one billion users by 2013? Color me skeptical.

Whether it is the early estimates of internet growth or the estimates of the number of blogs in existence that inform my skepticism, I see a global population estimate of 7 billion people around 2013. Am I truly to believe that 1 in 7 people on Earth will be a Twitter user?

Just as projecting 20% growth per annum in perpetuity will lead to a company growing bigger than the economy, to project Twitter user growth to equal 1/7th of the world population in four years does not pass the sniff test.

GIPS disallows annualizing partial year performance for a similar reason. Prediciting the future is essentially a guessing game. Taking the best week of performance an asset manager had and annualizing provides such a large number that it too won't pass the sniff test.

Real Life Application of Rule of 72

Tom Daschle: Climbing the Hill on Health Care - WSJ.com:

"Failure to address ever-escalating health costs means that a typical family will see its annual cost of health insurance rise to $25,000 by 2025 from about $12,000 now."

While this is clearly a politician's appeal, I am going to stay away from the reasoning behind using a figure 16 years in the future without discounting it back to present value.

The Rule of 72 is a back of the envelope way of figuring out how long it will take something to double. Divide 72 by the expected growth rate to get the number of years to double. If the growth rate is 7.2%, then the amount doubles in 10 years.

The former Senator has given us the final value and the number of years. We need to figure out what the current cost of of health insurance for a "typical family" is. If one assumes that cost to be $12,500, then we know it will double over 16 years. That gives an approximate health insurance growth rate of 4.5%.

The National Coalition on Healthcare says, "The average employer-sponsored premium for a family of four costs close to $13,000 a year...". To explain further gets me into political commentary I rather not explore in this forum.

A More Investor-Friendly Performance Method?

Can Rally Run Without Revenue? - WSJ.com:

"In the short-term, earnings prospects may remain favorable for the market. Aggressive expense control and modest inventory restocking could boost third-quarter numbers, while the fourth quarter has easy comparisons against an awful 2008 that will give the appearance of healthy profit increases."

Instead of comparing current numbers against the previous year numberss, why not show one-year, two-year, three-year etc comparisons?

Is Performance Measurement Dying?

Fiduciary Duty Hits the Street -- Sort Of - WSJ.com:

"The changes could transform the brokerage industry by changing the way products are sold and marketed and even how brokers are paid. Requiring brokers to operate under the existing fiduciary standard could force them to recommend more investments that are less costly and more tax-efficient."

As a performance measurement professional, I can't help worrying this is going to lead to cuts in the support functions at financial firms. One such support function is performance measurement and presentation.

As a fledgling specialty, performance measurment can adapt as it can easily be folded into those areas which it supports i.e. marketing. The difficulty will come meshing the proclivites of those who currently enjoy performance calculations with those who enjoy marketing.

As holder of the CIPM designation and an individual with experience in sales and non-profit work, I can attest that the selling/service industry and attribution analysis/heavy spreadsheet work do not necessarily attract the same type of person.

Cash For Clunkers: Changing Benchmarks

'Clunkers' Lifts Foreign Cars - WSJ.com: "Transportation Secretary Ray LaHood said the program was 'wildly successful' at bringing 'moribund' car showrooms back to life."

I was under the impression that the cash for "clunkers" program was intended to help the automakers, specifically the US-based ones (GM, Ford and Chrysler). Secretary LaHood says otherwise.

It was the after-the-fact results that demonstrated the cash for clunkers program was an auto dealer bailout, and, judging from the Top 10 models sold, one for foreign car dealers.

The top 10 models purchased under the government's 'cash for clunkers' rebate
program:
1. Toyota Corolla
2. Honda Civic
3. Toyota Camry
4. Ford Focus FWD
5. Hyundai Elantra
6. Nissan Versa
7. Toyota Prius
8. Honda Accord
9. Honda Fit
10. Ford Escape FWD

What this does show is the importance of designating a benchmark before the results are in. Investment managers committed the GIPS know this. One can't simply get to month's end, see your performance results, then find a benchmark that works.

Code of Ethics

Goldman Sachs Trading Tips Reward Big Clients - WSJ.com:

"Mr. Canaday says analysts are told that any comment at a meeting that could result in a change in a rating, earnings estimate or stock-price target "must be published and disseminated broadly to all clients." He adds, however, that it is rare that tips arising from the meetings reach that threshold. He says ratings changes after the meetings also are rare."

As someone who has been involved with the professional designations available from the CFA Institute for the past seven years or so, I can't help thinking about the ethical codes those granted the right to use the designations must abide by. What the WSJ article describes sounds like front running, which would violate said code.

I am curious how the CFA Institute views Goldman Sachs practice as described in the front page article.