Felix Salmon

WATCH the euro crisis explained with lego

Felix Salmon
Sep 15, 2011 18:49 UTC

Michael Cembalest’s idea of explaining the euro crisis with lego was pure genius. So, of course, I had to go out and find some lego myself; the above video is the result. If you look very closely, you might even be able to see the French banks!


who is the dinosaur?

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Felix TV: Time to chill out

Felix Salmon
Aug 5, 2011 17:26 UTC

Jason Varone was not impressed by this video. “I guess you don’t know anyone trying to retire?” he tweeted in response.

Actually, I do. But retirement isn’t — or shouldn’t be, in any case — a day on which you suddenly liquidate your entire stock portfolio and go from risky stocks to safe cash. As we get older and more risk-averse, we should hold fewer risky stocks and more safer bonds. (Although the idea that bonds are particularly safe is something you might want to reconsider, these days.) Retirement is the point at which you stop putting money into your retirement account — and therefore the point at which you stop buying more stocks. But not-buying isn’t the same as selling.

What’s the optimal asset allocation for someone who’s retiring right now? The answer there depends on a huge number of variables — whether you own your own home, what kind of a mortgage you have, what your monthly expenditures are, what kind of Social Security income you have, etc etc etc. But one thing I can say: the amount of stocks you have the day before you retire shouldn’t be vastly different from the amount of stocks you have the day after you retire.

Yes, there’s always a small number of people who are genuinely hurt by a big stock-market sell-off — people who for some reason have to sell now and who would in hindsight have been much better off selling a few weeks ago. But I don’t see a lot of forced selling in the market right now, and I don’t think there are all that many people in that position: while unemployment is still at very high levels, the amount of new unemployment — people being laid off, and forced to live on their savings — is quite low, and the economy is gaining jobs, not losing them.

As for the rest of us — the employed majority — we should just continue to dutifully put aside a chunk of money every paycheck, and invest it in the broad stock market. Sometimes our retirement account will go up, and other times it will go down. But over the long term, simply putting money in every month is the most important thing of all — that and not panicking when the market gets volatile.


“You have a lot more faith in companies’ reported earnings than I do.”

Depends on the company, JayCM, but I suppose I do…

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Felix TV: Do you want real food or clean food?

Felix Salmon
Jul 30, 2011 11:14 UTC

After I wrote my post about restaurant grades on Thursday, my fabulous video producer, Ayana Morali, discovered that the Ritz-Carlton on Central Park South — one of the grandest hotels in New York — received a whopping 77 violation points in its latest inspection. So naturally we went up there to check it out, and got surrounded by hotel security guards who weren’t happy with us filming there.

At one point — you don’t see this in the video — the manager came out and told us we weren’t allowed to film outside the hotel. But when I started asking him about those violation points, he scuttled back into the hotel through a side door, mumbling something about not knowing what I was talking about.

It turns out that the Ritz-Carlton kitchen is operated by one of those celebrity-chef franchises, in this case BLT Market. Laurent Tourondel does seem to be making a habit of racking up enormous numbers of violation points: BLT Steak, on 57th Street, received a mind-boggling 91 violation points back in October, before getting its act together and bringing that score down to 2 in November.

When restaurants start getting scores in the upper reaches of the C ranking, it’s definitely worth getting worried. Here’s the chart, again, to remind you how restaurants with 77 or 91 points rank relative to their peers:


I’d definitely think twice before eating at a restaurant with 77 violation points. But my question in the video is a serious one: even knowing about the 77 points, would I really rather eat at a McDonald’s with no violation points at all? Ultimately, I’d still plump for BLT Market, I think. If I can eat street food in Quito, I should be able to cope with the Ritz-Carlton on Central Park South. Even though it’s living proof that there’s no correlation at all between price and cleanliness.


You eat out too much if you think real food is served at restaurants. There are some (few) that shop daily, provide from ‘live’ real food (which is the only real food) and do not provide you with twice your daily caloric limit in an appetizer that has been frozen prior.

More expensive doesn’t mean value and the Ritz Carlton food doesn’t mean good food even with an A rating in cleanliness. An elitist “star” chef is more likely to be hated by staff, insist no one but he knows good food, and return it if you send it back.

Having eaten in too many different hotels and restaurants I now can choose only those I trust will give me a better food experience than I can offer myself, and so I choose neither the Ritz nor MacDonald’s and you can’t make me!

I am also betting you spoke to a hotel manager who really didn’t know anything about the restaurant’s rating.

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Felix TV: The triple-A bond chart

Felix Salmon
Jul 22, 2011 19:13 UTC

I still haven’t been able to get an updated version of the triple-A bond chart, but I did manage to blow it up to six feet tall and do my best weatherman impression in front of it at the Nasdaq Marketsite in Times Square.


I agree with Starkman. To me the interesting question will be when the bond holders figure out that when the government needs 5 or 6% inflation, what will happen.

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Felix TV: Action bias

Felix Salmon
Jul 20, 2011 19:22 UTC

After my post on financial advisors last week, Josh Brown, a/k/a the Reformed Broker, got in touch saying that at some point he and I should discuss action bias — the way in which advisors feel the need to do something just to make their clients think they’re earning their keep. I was happy to oblige.

Josh is convinced that the new Pimco Total Return ETF is going to be the big game changer in the battle between mutual funds and ETFs: I think he’s right about that, since there’s no conceivable reason why you’d want to pay a 1% fee on a Total Return mutual fund when you can pay 0.55% on a Total Return ETF instead.

In the short term, this means a loss of income for Pimco, as investors rotate out of their mutual funds and into cheaper ETF flavors of substantially the same investment pool. But as Ari Weinberg will tell you, the main job for Pimco is to gather up as many assets under management as it can; the income flows from there. And the ETFs mean many fewer headaches for Pimco, too:

Mutual funds no longer have to divide the rents from buying/selling mutual fund shares on their behalf. In fact, with in-kind creation, they don’t even have to pay commissions internally to collect assets. Assets just walk in the door through creation.

Funds operating this way can now keep even more of the expense ratio and, theoretically, spend more of it on doing what they are supposed to be doing: providing returns for investors.

One of the ugliest parts of the mutual-fund world is the way in which many fund managers essentially bribe brokers to push their funds by loading them up with enormous fees and then kicking back commissions to the broker in question. ETFs don’t have that problem. But they do pose another risk: they’re so easy to buy and sell that many brokers and advisors are tempted to trade in and out of them far too much. That’s the action bias.

Frankly, you don’t want a broker or advisor keeping an eye on a fluctuating market and actively investing on your behalf. You want someone who will tell you that you’re overreacting, and that the best thing to do is nothing. That’s a truly valuable service.


How I fight action bias for my clients (from my 8 rules):

7) Rebalance the portfolio whenever a stock gets more than 20% away from its target weight. Run a largely equal-weighted portfolio because it is genuinely difficult to tell what idea is the best. Keep about 30-40 names for diversification purposes.

8) Make changes to the portfolio 3-4 times per year. Evaluate the replacement candidates as a group against the current portfolio. New additions must be better than the median idea currently in the portfolio. Companies leaving the portfolio must be below the median idea currently in the portfolio.

By limiting the number of times that I trade, I make better, more rational, and fewer decisions. I act more like a businessman, and less like a stock jockey. I end up with a portfolio turnover rate of ~30%/year, rather than 130%/year more common to mutual funds.

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Will the world ever have open borders?

Felix Salmon
Jun 30, 2011 07:16 UTC

My favorite bit in this video comes towards the end, when I ask Charles about the wonderful tweet he sent out last Friday, after the gay marriage bill passed the New York senate.

One day we’ll see legal discrimination by *place* of birth as evil as discrim. by other features of birth –gender, orientation, color.less than a minute ago via web Favorite Retweet Reply

I wanted to know, was this just a lovely sentiment, or does Charles really think this is going to happen? The answer is the latter, and Charles gives two strong reasons why that might be the case.

One is the way that the world is getting smaller and more interconnected. Countries make hundreds of agreements with each other, they set up organizations like the UN and the EU, and in general behave much more pleasantly towards each other than they ever have in the past. And at some level that has to be because doing so is what their people want.

Charles’s second point was about mobility and immigration, and it’s a great one. Greater levels of immigration aren’t just a fantastic idea from a national-security standpoint and a fiscal standpoint, they’re also demographically necessary for an aging America which has a lot of labor-intensive needs in a service sector which can’t be outsourced. “The self-interest of people will weaken the effects of borders,” says Kenny, which is surely true. Americans don’t like immigration, but they love the low prices that immigration brings for their golf courses and swimming pools and McMansions.

There’s a long distance between appreciating the upside of immigration, on the one hand, and extolling the idea of completely open global borders, on the other, where everybody has the same right to work in the US, no matter where they were born. There’s many people who would push for the former, and almost nobody who would push for the latter. But as the economic distance between countries shrinks, the problems associated with such a policy will get smaller. And Charles points out too that there will be increasing numbers of Americans who want to live abroad; those Americans would in principle be quite happy to sign bilateral open-border agreements with the countries they’d like to live in.

None of this is going to happen in our lifetimes, but if you look at how far the world came over the course of the last century, there’s reason for optimism about how much more progress it can make in this one. Countries already go to war with each other much less frequently than they did in the past; the insane cost of war alone is one good reason why that might be. And without wars to make us hate each other, we’ll surely continue to get friendlier towards each other.

Sometimes, too, change can happen astonishingly fast. David Schlesinger touched on this in his chat with me yesterday — look at the way in which the Chinese government is successfully serving the interests of the Chinese people today, compared with 20 or 30 years ago.

The main official obstacle to Chinese people traveling around the US today is not China’s government, it’s America’s. And while we fear China in many ways, the spectre of mass Chinese immigration to the US is not one of them — to a large degree, America could and should welcome an influx of Chinese entrepreneurialism, which could quite possibly be funded with some of China’s trillions in foreign exchange reserves. From a US perspective, much better all that investment and job creation happen here than in China.

They put something in the water, here in Aspen, which makes people very optimistic. (Although maybe it’s inactive early in the morning: both Steve Adler and I were unimpressed by the latest demographic analysis purporting to find a centrist, consensus-driven majority in America.) But the world really is getting better, and has been for a couple of centuries now, and it’s very likely to continue doing so, in its lumpy and unpredictable way. Which means that, sooner or later, there’s a good chance that Charles’s dream will come true.


The concept of open boarders is stupid. It embraces the idea that you and your 5 brothers and 3 sisters can royally screw up the place you were born, see the impact of your culture / communities lousy decisions and then bolt for greener pastures where the locals plan smarter and work harder.

Good fences make good neighbors.

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Debating financial speculation with speculators

Felix Salmon
Jun 23, 2011 18:31 UTC

On Tuesday I moderated a panel at the New York Forum which featured, inter alia, Duncan Niederauer, the CEO of the New York Stock Exchange, and Richard Robb, the CEO of Christofferson Robb, a money management firm which does its fair share of speculation.

My question at the beginning of this clip, for Niederauer, didn’t come entirely out of the blue. Amar Bhidé had previously talked about the casino aspect of markets, and Andrew Ross Sorkin had talked about the distinction between speculation and investment. But Niederauer was not happy when I pushed him on these concepts. Wall Street is increasingly a game of speculation rather than investment, I said, and asked how a casino operator pushing people to make bets over the course of a millisecond was not part of the problem. Rather than engaging with the question, he simply shut me down: “I thought my job description was quite different than what you just described,” he said. “So you must be talking to someone else.”

Niederauer then used all his media training to pivot and give a mini-speech instead about how self-regulation was better than Dodd-Frank. But Richard Robb, to his credit, engaged, even if what he said doesn’t stand up to scrutiny. “I don’t know what the difference between investing and speculation looks like,” he said, throwing up a straw man of everybody working at peoples’ tractor collectives. Robb’s prescription was essentially to do nothing but ban a few of his competitors: stop big banks from doing what he does, leave him alone to do anything he wants, and “let innovation find its own way, and if it’s parasitic and unproductive, it will not be rewarded by the capitalist system.”

That’s clearly false, of course: we can all think of parasitic and unproductive Wall Street innovations which have made millions of dollars for bankers and traders and money managers. Richard Robb himself gave a good example earlier on in the panel: structured investment vehicles.

And so Sorkin jumped in, making the good and obvious point that “it’s actually very easy to see what speculation is and what investing is.” Here’s one simple distinction: speculation is where you buy something in the expectation that it will rise in price, where investment is where you put money into something so that over the long term you can make a profit from the resulting cashflows, be they coupon payments or dividends. And as Sorkin said, if you make an investment for two seconds, that’s clearly speculation.

Robb’s response to Sorkin I think was one of the most telling points of the panel. “How about two days?” he asked. “Two weeks? Two months? Where would you draw the line?”

I could barely believe what I was hearing — was Robb really suggesting that holding a position for two days might be considered investment rather than speculation? Or even two months? All of them are speculation — and the fact that the likes of Niederauer and Robb can’t see that is I think a big part of the problem.

The subject of the panel was financial innovation, and Robb genuinely believes that he’s something of a centrist on the issue: he makes great play of agreeing with his friend Bhidé, for instance. But the fact is that if you’re talking to alumni of Goldman Sachs (Niederauer) or the University of Chicago (Robb), or someone who used to run the derivatives desk at a too-big-to-fail bank (Robb, again), then their idea of what’s good for the world is always going to be pretty skewed. They’ve made millions of dollars in the Wall Street casino, and they’re precisely the people being put on panels to ask whether the casino is a good thing. It’s reasonably easy to predict what they’re going to say — and to discount it heavily.


Without reading all the comments, I will say the “investment is good and speculation is bad” construct is fatally flawed. I’m a big supporter of more regulation of the finance industry, but I think pure, greedy speculation can have a lot of upside, particularly through increasing liquidity in certain instruments.

In the commodity markets, for example, it would be tough to see a market for hedges for airlines, farmers or food producers without traders constantly trying to make a buck. The old-fashioned market-makers on the NYSE floor also do the same thing, doing nothing except trying to buy low and sell high. I read once that most guys still on the floor read the New York Post rather than the WSJ. They couldn’t really care less about the long-term fundamentals of a company, but they still help grease the wheels for investment.

The real issue is how speculators could take systematically dangerous risks. Do you remember all the CME traders threatening the downfall of the international markets? Neither do I. On the shadow market, on the other hand, counterparty risk can be extremely unpredictable and subject markets to bank runs. The real way to help make financial markets robust is not to demonize “speculation,” but the system robust to too much speculation.

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Joe Weisenthal is right about the Ira Sohn conference

Felix Salmon
May 25, 2011 17:57 UTC

Joe Weisenthal says I’m wrong about the Ira Sohn conference. But that doesn’t mean he thinks that David Gaffen is right. Gaffen reckons that people go to these events so that they can trade in and out of stocks in the space of 10 minutes. Weisenthal, by contrast, sees value somewhere else entirely:

It’s not often that you get to hear the thought process and reasoning employed these financial professionals. Within the broader scope of financial media, you hear a lot of managers and pundits making their arguments in broad strokes, with lines like “We’re bullish on US banks because of low rates, yada yada yada…“And that kind of stuff really is useless. But these are professionals who usually have portfolios of just a handful of stocks, who have done a tremendous amount of research on each one before pulling the trigger, and frequently they do have original insights.

So you shouldn’t go out and by MBIA just because a manager likes it. But if you’re looking for original thinking on stock selection, the speeches, presentations, and letters of big hedge fund managers is frequently some of the best stuff around.

This is a good point. The best way to extract value from Ira Sohn presentations is to concentrate not on the stocks that the hedge fund managers are talking about, but rather on their methodology. At the very least, you’re likely to learn a few ways of looking at a company that you hadn’t thought of before. These fund managers, then, can improve the way that investors do their own research on companies, even if they’re not going to be delivering up great investment ideas on a plate. Use their methodology on a stock which none of them are looking at, and you might just be able to find a hidden gem.

There’s another way to look at the fund managers’ investment techniques, and that’s as a way to evaluate the managers. The idea here is that the managers who have the smartest techniques are likely to be the best managers to invest in. On this front, I’m far from convinced: as I told Gaffen, the analyses presented to the Ira Sohn conference are really sales pitches more than they are transparent views into how hedge fund managers think and invest in the real world. For all their joined-up thinking at Ira Sohn, most successful fund managers in reality use techniques which they would hesitate to admit to in public.

But in any case, you’ll never get the important nuance about how these fund managers think from reading news reports about the conference. So I still don’t see the point in sending a bunch of reporters to cover it.


“Most successful fund managers in reality use techniques which they would hesitate to admit to in public.”

Felix, oh, c’mon.

Just because most people aren’t winning in the market doesn’t mean nobody is. These winners aren’t fairies and leprachauns — there are a number of them and we know many of their names.

Just because someone is making money, they must be a crook?

You can read many many years of Warren Buffett’s letters if you want. There are dozens or hundreds of ways of analyzing whether a company will do well over the long haul found in his letters and speeches alone. All legit and this just from one man! If you work really hard and keep just his openly shared strategies in your head all at once, you will do very well.

Warren Buffett has been outstanding but he is not alone; a significant number of other managers are smart enough, creative enough and hard working enough to outperform over the long haul.

Hedge fund managers, with the possible exception of Rennaissance Technologies, aren’t day traders anyway. Day trading doesn’t work well when you are so big that you move the market.

Well, these men certainly don’t need your approval to be winners. Most people are humble enough to feel very grateful when smart people share their ideas. Buffett’s annual meeting is full of such people (many very good investors already) who aren’t too proud to admit that they have much more to learn.

So what motivates these people?
(1) Ego. If you are one of the smartest, most talented people around and few people know it, that is not much fun.
(2) Attract more investors, I agree.
(3) Light a fire under your good ideas. If you have a great idea, buy some shares, and don’t tell anybody, it may take a long time for the market to discover these insights. If you help investors see what you saw, that could be a trigger to help move the stock.
(4) Take criticism. If your grand thesis has holes you didn’t see, its better to have smart people tell you then to suffer losses in the market later.

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Felix TV: The Ira Sohn conference

Felix Salmon
May 24, 2011 16:51 UTC

It’s the Ira Sohn conference tomorrow, with well over a thousand people paying four-digit sums, and sometimes more, for the privilege of listening to boldface fund managers talk about their investment ideas. The conference gets a lot of press, not least from Reuters, but these presentations are not the kind of thing that individual investors — or even financial journalists — are really qualified to judge.

Hedge funds — and venture capitalist funds, and private-equity funds — have a certain mystique which rubs onto their managers, especially when those managers have posted impressive investment returns over the past few years. The Ira Sohn conference has even more mystique, since with many of these fund managers it’s the only time they speak in public, and as a result the audience is primed to expect something very special.

But as with any investment, it’s important not to get caught up in hype. Precisely because the Ira Sohn conference has so much hype and mystique, everything coming out of it should be treated with extreme prejudice. If you find a great investment idea in an improbable and unexpected place, that’s likely to be a much better bet than if you think you’ve found a great investment idea coming from a professional fund salesman in a highly-artificial context.

Investing in hedge funds is hard enough; investing in individual hedgies’ ideas is pretty much impossible. The only people who should even try are other hedgies, or possibly endowment managers who see a lot of idea flow and have significant experience of getting caught up in a story and then seeing how it plays out. Sometimes the highest-conviction ideas are also the worst ideas. Unless and until you’ve lived through those kind of experiences, you’re probably best off simply ignoring everything coming out of the Ira Sohn conference.