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Showing posts with label Finance. Show all posts
Showing posts with label Finance. Show all posts

February 11, 2018

The Quants (Scott Patterson)

Here's the vocabulary list for The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It.

ISBN 978-0-307-45337-2
Patterson, Scott. The Quants. Crown Business, 2010.

Representative Quotes

"The very real crash on Black Monday left very real scars on the psyches of the traders who witnessed it.... Meltdowns of such magnitude and ferocity were not supposed to happen in the world's most advanced and sophisticated financial marketplace. They especially weren't supposed to happen in a randomized, Brownian motion world in which the market obeyed neat statistical rules. A 27-standard-deviation event was tantamount to flipping a coin a hundred times and getting ninety-nine straight heads." (p. 54)

"Prices can gyrate wildly over short periods of time - wildly enough to cause massive, potentially crippling losses to investors who've made large, leveraged wagers." (p. 59)

"The value and momentum strategies they'd studied in academia could actually work for entire countries. It was a monumental leap. They would measure a country's stock market, divide by the sum of the book value of each company in that market, and get a price-to-book value for the entire country. If Japan had a price-to-book value of 1.0 and France had a price-to-book of 2.0, that meant Japan was cheap relative to France. The investing process from there was fairly easy: long Japan, short France.
"The applications of this insight were virtually endless. Just as it didn't matter whether a company made widgets or tanks, or whether its leaders were visionaries or buffoons, the specifics of a country's politics, leadership, or national resources had only a tangential bearing on the view from a quant trader's desk. A quantitative approach could be applied not only to a country's stocks and bonds but also to its currencies, commodities, derivatives, whatever. In short order, Asness' team designed models that looked for cheap-versus-expensive opportunities around the globe. Momentum strategies quickly followed." (pp. 134-5)

" 'We are seeing things that were 25-standard-deviation events, several days in a row....' According to quant models, the meltdown of August 2007 was so unlikely that it could never have happened in the history of the human race." (p. 239)

"Greed + Incompetence + A Belief in Market Efficiency = Disaster.... In their desire for mathematical order and elegant models, the economic establishment played down the inconveniently large role of bad behavior... and flat-out bursts of irrationality. The incredibly inaccurate efficient market theory was believed in totality by many of our financial leaders, and believed in part by almost all.... 'Surely, none of this could be happening in a rational, efficient world,' they seemed to be thinking. And the absolutely worst part of this belief set was that it led to a chronic underestimation of asset bubbles breaking." (pp. 290-1)

"In a September 2009 article titled 'How Did Economists Get It So Wrong' in the New York Times Magazine, Nobel Prize-winning economist Paul Krugman lambasted EMH [the efficient market hypothesis] and economists' chronic inability to grasp the possibility of massive swings in prices and circumstances that Mandelbrot had warned of decades earlier. Krugman blamed 'the profession's blindness to the very possibility of catastrophic failures in a market economy.... As I see it, the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth.' " (p. 291)

"Banks and hedge funds employ mathematicians with no financial market experience to build models that no one is testing scientifically for use in situations where they were not intended by traders who don't understand them. And people are surprised by the losses!" (p. 292)

"The Ph.D.'s might know their sines from their cosines, but they often had little idea how to distinguish the fundamental realities behind why the market behaved as it did. They got bogged down in the fine-grained details of their whiz-bang models. Worse, they believed their models were perfect reflections of how the market works. To them, their models WERE the Truth. Such blind faith... was extremely dangerous." (p. 292)

"To ensure that the quant-driven meltdown that began in August 2007 would never happen again, the two uber-quants developed a 'modeler's Hippocratic Oath:'
* I will remember that I didn't make the world, and it doesn't satisfy my equations.
* Though I will use models to boldly estimate value, I will not be overly impressed by mathematics.
* I will never sacrifice reality for elegance without explaining why I have done so.
* Nor will I give the people who use my model false comfort about its accuracy. Instead, I will make explicit its assumptions and oversights.
* I understand that my work may have enormous effects on society and the economy, many of them beyond my comprehension." (pp. 294-5)

"Markets are far less well-behaved than standard financial theory held. Out at the no-man's-land on the wings of the bell curve lurked a dark side of markets that haunted the quants like a bad dream, one many had seemingly banished into subconsciousness." (p. 296)

"A river of money had flowed into hedge funds in recent years, turning it from an industry with less than $100 billion under management in the early 1990's to a $2 trillion force of nature. But the actual amount of investing opportunities hadn't changed very much.... The edge had diminished, but hedge fund managers' and bankers' appetite for gigantic profits had only grown more voracious. That led to massive use of leverage - in other words, overbetting. The inevitable result: gambler's ruin on a global scale." (p. 299)

" 'The available edge has been diminished,' Gross agreed, nothing that Pimco, like Warren Buffett's Berkshire Hathaway, used very little leverage. "And that led to increased leverage to maintain the same returns. It's leverage, the overbetting, that leads to the big unwind. Stability leads to instability, and here we are. The supposed stability deceived people." (p. 300)

"As the financial panic of 2007 and 2008 had shown, liquidity is always there when you don't need it - and never there when you do." (p. 312)

SAT Vocabulary Words

Godfather: a man who is influential or pioneering in a movement or organization.
"Ed Thorp, godfather of the quants" (p. x)

Haut monde: fashionable society
"high-finance haut monde" (p. 2)

Cabaret: a nightclub or restaurant where entertainment is performed.
"singing folk songs in a funky cabaret" (p.5)

Savoir faire: the ability to act or speak appropriately in social situations.
"Though he lacked Muller's savoir faire, Asness was far wealthier" (p. 5)

Scourge: a person or thing that causes great trouble or suffering.
"Asness had been the subject of a lengthy and glowing profile in the New York Times Magazine. He was a scourge of bad practices in the money management industry, such as ridiculously high fees at mutual funds." (p. 5)

Wry: using or expressing dry, especially mocking, humor.
Self-effacing: not claiming attention for oneself; retiring and modest.
"wry, self-effacing sense of humor" (p. 5)

Noir: a genre of crime film or fiction characterized by cynicism, fatalism, and moral ambiguity.
"An old poster from a 1960s film noir by Jean-Luc Godard called Alphaville hung on the walls of PDT's office" (p. 9)

Catcall: a shrill whistle or shout of disapproval, typically one made at a public meeting or performance.
"Griffin rained catcalls on Muller" (p. 10)

Kitty: a fund of money for communal use, made up of contributions from a group of people.
"Citadel's kitty topped $20 billion." (p. 11)

Anabolic steroid: a synthetic steroid hormone that resembles testosterone in promoting the growth of muscle. Such hormones are used medicinally to treat some forms of weight loss and (illegally) by some athletes and others to enhance physical performance.
"trillions more in leverage that juiced their returns like anabolic steroids" (p. 12)

Puckish: playful, especially in a mischievous way.
"Many of the msot important breakthroughs in quant history derived from this obscure, puckish mathematician, one of the first to learn how to use pure math to make money - first at the blackjack tables of Las Vegas and then in the global casino known as Wall Street." (p. 15)

Swing shift: a work shift from mid-afternoon to around midnight.
"the swing shift at Doublas Aircraft" (p. 16)

Croupier: the person in charge of a gaming table, gathering in and paying out money or tokens.
"croupiers take bets after the ball is in motion" (p. 17)

Glad-handing: (especially of a politician) greet or welcome warmly or with the appearance of warmth.
"all smiles and glad-handing" (p. 24)

Absinthe: a potent green aniseed-flavored liqueur, originally made with the shrub wormwood.
"too much absinthe" (p. 30)

Touchstone: a standard or criterion by which something is judged or recognized.
"A quant touchstone, it soon became one of the most influential how-to books on investing ever written." (p. 32)

Stochastic: randomly determined; having a random probability distribution or pattern that may be analyzed statistically but may not be predicted precisely.
"Scholes and Robert Merton, an MIT professor whose ingenious use of stochastic calculus had further validated the Black-Scholes model, would win the Nobel Prize for their work on option pricing." (p. 40)

Heady: having a strong or exhilarating effect.
"Thorp and Regan were managing about $130 million, a heady increase from the $10,000 stake Thorp had received from Manny Kimmel" (p. 41)

Peripatetic: traveling from place to place, especially working or based in various places for relatively short periods.
"After Merrill, the peripatetic Tartaglia went to five other firms before landing at Morgan in 1984." (p. 42)

Agog: very eager or curious to hear or see something.
Pointed: (of a remark or look) expressing criticism in a direct and unambiguous way.
"Adams was agog. Griffin was smart and focused, and he asked penetrating and coherent questions about the market - questions that were so pointed they made Adams stop and search for a coherent answer." (p. 70)

Scotch: decisively put an end to.
"scotched the plan" (p. 76)

Grizzled: having or streaked with gray hair.
"grizzled traders" (p. 77)

Brogue: a strong outdoor shoe with ornamental perforated patterns in the leather.
"Boston brogue" (p. 77)

Chino: a cotton twill fabric, typically khaki-colored. Casual pants made from chino or a similar fabric.
"a loose-fitting blue cotton button-down shirt and tan chinos" (p. 77)

Flatly: in a firm and unequivocal manner; absolutely.
" 'The evidence shows that trying to pick stocks is a complete waste of time,' Fama said flatly." (p. 78)

Crackerjack: exceptionally good.
Crack: very good, especially at a specified activity or in a specified role.
"crackerjack quant combo" (p. 80)

é·mi·nence grise: a person who exercises power or influence in a certain sphere without holding an official position.
"Samuelson was becoming an é·mi·nence grise of the economic community" (p. 83)

Acolyte: a person assisting the celebrant in a religious service or procession.
"It's a paradox that continues to baffle [efficient market hypothesis] acolytes." (p. 84)

Warren: a network of interconnecting rabbit burrows. A densely populated or labyrinthine building or district.
Storied: celebrated in or associated with stories or legends.
"Weinstein would visit after hours and roam the warrrens of the storied bank" (p. 91)

Swap: an exchange of liabilities between two borrowers, either so that each acquires access to funds in a currency they need or so that a fixed interest rate is exchanged for a floating rate.
"In theory, hundreds of swaps, or more, could be written on a single bond."

Hotbed: an environment promoting the growth of something, especially something unwelcome.
"At the time, the quants were known as rocket scientists, since many came from research hotbeds such as Bell Labs, where cell phones were invented, or Los Alamos National Laboratory, birthplae of the atomic bomb. Wall Street's gut traders eventually proved to be no match for such explosive brainpower." (p. 103)

Schlep, schlepper: an inept or stupid person.
"poor schleps at the end of the line" (p. 104)

Nefarious: (typically of an action or activity) wicked or criminal.
"The suit also hinted at a nefarious swaps deal that he described as a 'massive scam' " (p. 116)

Philosopher's stone: a mythical substance supposed to change any metal into gold or silver and, according to some, to cure all diseases and prolong life indefinitely. Its discovery was the supreme object of alchemy.
"the holy grail, the philosopher's stone - the secret mythical Truth of the financial markets" (p. 117)

Unstinting: given or giving without restraint; unsparing.
"unstinting success" (p. 120)

Hamlet: a small settlement, generally one smaller than a village.
"hamlet of the queen" (p. 122)

Faux: not genuine; fake or false.
"faux village" (p. 122)

Apocryphal: (of a story or statement) of doubtful authenticity, although widely circulated as being true.
"One story - perhaps apocryphal" (p. 137)

Credenza: a sideboard or cupboard.
"water kept in an office credenza" (p. 137)

Auspicious: giving or being a sign of future success.
"a very auspicious, and lucky, start" (p. 138)

Beau: a boyfriend or male admirer.
"future beau of the supermodel Elle Macpherson" (p. 142)

Mentalist: a magician who performs feats that apparently demonstrate extraordinary mental powers, such as mind-reading.
"a magician and mentalist" (p. 144)

Gunslinger: a forceful and adventurous participant in a particular sphere.
Preternatural: beyond what is normal or natural.
"Hunter had a reputation as a gunslinger, doubling down on trades if they moved against him. He was preternaturally confident that he would make money on them in the long run, so why not?" (p. 155)

Mogul: an important or powerful person, especially in the motion picture or media industry.
"Hollywood mogul David Geffen" (p. 156)

Magnate: a wealthy and influential person, especially in business.
"publishing magnate S. I. Newhouse" (p. 156)

Filet mignon: a small tender piece of beef from the end of the tenderloin.
Tenderloin: the tenderest part of a loin of beef, pork, etc., taken from under the short ribs in the hindquarters.
"The dinner included lobster, filet mignon, and baked Alaska" (p. 158)

Tony: fashionable among wealthy or stylish people.
"tony, aging resort" (p. 165)

Hothouse: an environment that encourages the rapid growth or development of someone or something, especially in a stifling or intense way.
"a nerdy band of hothouse quants" (p. 176)

Regale: entertain or amuse (someone) with talk.
"regaling the table with tales of 'correlation' " (p. 179)

Byzantine: (of a system or situation) excessively complicated, typically involving a great deal of administrative detail.
"One of the problems with the Byzantine practice of carving up CDOs into all these slices was figuring out how to price them." (p. 180)

Fantasia: a thing that is composed of a mixture of different forms or styles.
"increasingly complex derivatives fantasia" (p. 191)

Veritable: used as an intensifier, often to qualify a metaphor.
"veritable quant fantasyland of riches" (p. 197)

Rout: a decisive defeat.
"The Chinese market began to collapse, falling 10 percent in a single day and triggering a global stock market rout that saw the Dow Jones Industrial Average drop more than 500 points." (p. 198)

Pantheon: a group of particularly respected, famous, or important people.
"highest pantheon of the investing universe" (p. 208)

Scion: a descendant of a notable family.
"due to give birth to the first scion of the Griffin dynasty" (p. 246)

Hard-scrabble: involving hard work and struggle.
"a product of Chicago's hard-scrabble south side" (p. 253)

Brook: tolerate or allow (something, typically dissent or opposition).
Wrought: (of metals) beaten out or shaped by hammering.
"Asness had surrounded himself with yes-men... and brooked no deviation from the carefully wrought models that had made him wildly rich." (p. 255)

Manic: frenetically busy; frantic.
" 'We've got to act fast so this financial tsunami doesn't wash us away,' Fuld said to his underlings, a manic tone in his voice." (p. 256)

Red-eye: an overnight or late-night flight on a commercial airline.
"red-eye back to New York" (p. 258)

Patina: a green or brown film on the surface of bronze or similar metals, produced by oxidation over a long period.
"A patina of sweat glistened on his egglike dome." (p. 263)

Beholden: owing thanks or having a duty to someone in return for help or a service.
"banks would be far more beholden to bank regulators and would be subject to more restrictive capital requirements" (p. 275)

Mendacity: untruthfulness
"anonymous mendacity on the Internet" (p. 284)

Prosaic: having the style or diction of prose; lacking poetic beauty. Commonplace; unromantic.
"The answer, at the end of the day, may be as prosaic as this: The people in charge are smarter than everyone else." (p. 287)

Hobnobbing: mix socially, especially with those of higher social status.
"Griffin was in Beverly Hills hobnobbing with former junk bond king Michael Milken at the Milken Institute Global Conference, where rich people gathered for the primary purpose of reminding one another how smart they are." (p. 301)

Clearinghouse: a bankers' establishment where checks and bills from member banks are exchanged, so that only the balances need be paid in cash.
"Progress had been made in setting up a clearinghouse for credit default swaps to keep better track of the slippery contracts." (p. 312)

January 8, 2018

The Great Depression: A Diary (Benjamin Roth)

Here's the vocabulary list for The Great Depression: A Diary.

The Representative Quotes section is unusually long because this book is full of nuggets of wisdom written by someone in the midst of the Great Depression, not after the fact. I want to keep a record of what I learned for future reference.

I've preserved numerous spelling and grammar errors that appeared in the original diary (and, therefore, in the published work).

Knowing more about the Great Depression has helped me better appreciate elements of our popular culture like the songs Happy Days are Here Again (1929, pre-Depression, with Barbra Streisand's post-Depression, post-WWII performance in 1962) and Somewhere Over the Rainbow (1939).

Roth, Benjamin. The Great Depression: A Diary. PublicAffairs, 2009.

Representative Quotes

"In 1929 when the crash came all sorts of people were into the market on margins over their heads - doctors, lawyers, merchants, bootblacks, waitresses, etc. They bought stocks on tips, did not know what the company sold or made and did not know how to investigate a stock even if such a thought had occurred to them." (p. 6)

"June 5, 1931: The sheriff has been selling recently at public sale many vacant lots on which accumulated taxes amount to $500 or more. At these sales the lots are selling as low as $25 apiece clear of taxes. One of my clients bought ten of them ranging from $10 to $50. Of course they are mostly located in undesirable neighborhoods. Another client had 10 buildings razed because he could not collect rents and the taxes are exorbitant. This is a popular way to reduce taxes.... The constant supervision required by real estate, the costly upkeep, its illiquidity, the danger of a deficiency judgment - all have cooled me considerably." (p. 9)

"July 30, 1931: Magazines and newspapers are full of articles telling people to buy stocks, real estate etc. at bargain prices. They say that times are sure to get better and that many big fortunes have been built this way. The trouble is that nobody has any money." (p. xii)

"August 9, 1931: Professional men have been hit hard by the depression. This is particularly true of doctors and dentists. Their overhead is high and collections are impossible. One doctor smoothed a dollar bill out on his desk the other day and said that was all the money he had taken in for a week." (p. xii)

"October 10, 1931: Again and again I am forced to the conclusion that in prosperous times a man must be cautious and preserve his capital and be careful not to over-expand his business or to go too deeply into debt relying on a continuation of good business to pay the debt. In time of depression a man can be brave and if the depression is nearing an end he can invest his money or expand his business or open a new business with confidence that he is facing 5 or 10 years of prosperity. He can feel sure that the road will be up - not down. Many great and prosperous businesses were founded on the ruins of depression....
"A great many losses and failures in business and in investment are due to the reversal of this policy. At the height of prosperity they rush in to buy stocks or real estate or businesses and assume enormous indebtedness which can be liquidated only if the boom spiral mounts higher and higher. Then comes an abrupt end to prosperity - a crash - and down go these businesses and investments purchased at top prices. If the purchase was made mostly with borrowed capital as so often happens - then you can write finis to the chapter." (p. 28)

"April 6, 1936: I read an interesting thing today about Floyd Odlum and the building up of his Atlas Investment Trust. Started with $40,000 in 1924 - ran it up to a million in 1929. Sold out for cash and held on to cash until the bottom of depression was reached in 1932. With his cash he bought heavily in 'special situations.' Mostly in investment trusts hard up for cash. Stocks in these trusts were selling for less than 50% of their asset values. Since the assets were stocks quoted at depression levels - the buyer of such an investment trust bought the assets at 1/2 of depression values. He then held on and later liquidated at huge profits. He never took over the active management of a business but sold the stock to those who could run it. There were many such 'special situations' during the depression. He was actually buying stocks under the hammer. The same thing happened with railroads and other companies such as Continental Shares when they went into receivership. The person who had enough money to liquidate them could have had the assets for a song. Same principle as buying real estate at a foreclosure sold for price of the mortgage. Assets of the Atlas Corporation are now over $100,000,000 and they have literally become private bankers." (p. 171)

"April 28. 1936: For the last two weeks the stock market has been slowly sinking. Yesterday a bad break brought losses ranging as high as 10 points. It is funny how when the stock market is rising every piece of news is regarded optimistically and bad news is ignored. Now the reverse is true." (p. 171)

"August 24, 1936: It is an interesting sidelight on this depression that many companies which went into receivership during the depression are now being reorganized. In most cases the common stock was wiped out but bonds or preferred are good. In 1933-4 these preferred stocks could be bought for as low as 25 cents per share ($100 par) and are now worth as high as $14 (Continental shares). Here again a man with liquid capital and courage could have made a fortune on a comparatively small investment. Some who bought at low prices did not have the courage to hold on and sold at a nice profit of $4 or $5 per share. The real winnings went to those who held onto the receivership shares throughout the whole reorganization." (p. 176)

"January 2, 1937: "1932-1936 were bad depression years for the lawyer and even tho prosperity has returned for most people it has not yet returned for the lawyer. It will be a year or more before people will have enough money to buy real estate and do other things that require a lawyer. The lawyer who specialized in bankruptcies, receiverships and reorganizations reaped a harvest throughout the depression....
"Cash is king in every depression. A small investment in real estate or stocks or bonds in 1932 would be worth a fortune today.... Even though good stocks, bonds, and real estate were selling at giveaway prices but few men had both the cash and the courage to buy when things looked the blackest.
"When the final upturn came in 1935 it came very quietly and suddenly and kept going up.... the full effect cannot be appreciated unless you look back to see what progress was made in 1935-1936.
"During past depressions prominent bankers, business men, etc. were all wrong in most of their predictions. Use your own judgment and do your own thinking." (p. 194)

"March 11, 1937: President Roosevelt is still hell-bent for reform and his latest proposal is to pack the Supreme Court so it will hold constitutional his New Deal laws." (p. 197)

"October 12, 1937: During the past 2 years of general recovery, the law profession lagged behind. We are still badly in debt and have not yet had a chance to recover. It has been a long, hard pull." (p. 201)

June 24, 1938: Stock prices have continued straight up for more than a week now and many gains amount to 50% or more. Just as in 1932 the rise came after a lull of several weeks and a falling down in volume of sales - but no indication of improvement in business indices. It caught the economists flat-footed.
"Both 1932 and 1938 indicate there is no way to catch the bottom of the swing because it comes without warning. When liquidation has dried up and the situation looks hopeless - that is the turn. Your guess is as good as anybody's." (p. 213)

"July 20, 1938: In this depression at least the stock upturn came several weeks before business indexes showed any improvement. For the past two weeks these indexes have been turning slowly up. At the time of the stock market upsurge the indexes were very slowly moving down and some were stationary. Same with stocks. Volume was low and there were many indications of a sold-out market." (p. 214)

"March 10, 1939: Talked to W.W.Z. today. He said: During the past 10 years I lost half my life savings in local banks and corporations. The directors were personal friends and they advised my investments. I thought they were high-minded men and would look after the business. When the companies were broke I found out they had protected themselves and nobody else. If I had to do it over again I would invest only in outstanding national corporations with stocks listed on the N.Y. Exchange so I could sell when trouble threatened." (p. 216)

"October 16, 1940: From time to time people tell me of their experience in the stock market. For the most part they were within reach of large profits but did not take them. Dr. S.D. said: In 1929 I held $180,000 in stocks subject to a 40% margin. The crash caught me and I rushed in to sell but my broker strongly advised against it. Later I had to put up $10,000 additional margin. I finally sold out in 1930 and salvaged only the $10,000 margin. I put this $10,000 in the Home Savings Bank. It closed in 1931. In 1932 when the market was at low ebb I sold my pass book on the Home Savings for $4000 - and bought high grade stocks at 1/10 their real value. I determined to hold these until the market came back to normal. I did hold on until the first part of 1935 but then I needed money so badly I sold these stocks for about $10,000. Six months later these stocks shot sky high and I would have made an extra $50,000 if I had been able to hold on." (p. 235)

"July 9, 1941: As usual the law profession drags along in the vanguard and has reflected very little of the war boom." (p. 248)

"December 15, 1941: Stocks are selling today on a 20% earning basis. Even if taxes go higher they are a good buy for the long pull." (p. 251)

"December 31, 1941: This is the craziest business year I have ever been through. We are at war, steel mills have been humming, wages are high and everybody working - yet my law practice was worse in 1941 than in 1940. Because of war, high taxes, threat of inflation, government restrictions, etc. etc. business men are afraid to expand, buy real estate or do anything constructive and there is very little for the lawyer except an occasional divorce case or other domestic business.... Some businesses do record business and others go broke. It is all a matter of luck. Auto dealers sold a record number of cars in 1940 and now there are no tires to sell. Tires have been rationed - so dealers in new tires are out of business while second-hand dealers and re-treaders are busy. There may be a few people who are making money but I do not know who. This is truly a 'profitless' prosperity and it takes a strong heart to remain in business." (p. 252)

SAT Vocabulary Words

Racketeer: a person who engages in dishonest and fraudulent business dealings.
"Youngstown's steel industry was booming again, and racketeers were getting rich on illegal gambling." (p. x)

Receivership: the state of being dealt with by an official receiver.
Receiver: a person or company appointed by a court to manage the financial affairs of a business or person that has gone bankrupt.
"Fannie Mae and Freddie Mac had to be taken into receivership [in 2008]." (p. xii)

Kitty-cornered (cater-cornered): situated diagonally opposite someone or something.
"Visit the nicely appointed library or historical society at Youngstown (they are partically kitty-corner across Wick Avenue from one another)" (p. xx)

Palimpset: a manuscript or piece of writing material on which the original writing has been effaced to make room for later writing but of which traces remain.
"As if constructing a kind of economic palimpset, Roth would occasionally go back and annotate his earlier entries and did not hesitate to prove himself wrong." (p. xxi)

Rouge: a red powder or cream used as a cosmetic for coloring the cheeks or lips.
"in the latter stages of the [1922-1929] delerium [women] wore their stockings rolled and their bare knees rogued" (p. 4)

Scalper: a person who resells shares or tickets at a large or quick profit.
Par: the face value of a stock or other security, as distinct from its market value.
"The scalper then sold these bonds on the market at par and with the money scalped some more bonds." (p. 6)

Pot: a toilet.
"June 28, 1962: The U--- family bought half of East Federal St. at sheriff sales in the 1930s. However down-town real estate has gone to pot because of the growth of suburban shopping centers. The U--- family still owns half of E. Federal St. but the buildings are empty and cannot sell." (p. 13)

Rabid: having or proceeding from an extreme or fanatical support of or belief in something.
"He was particularly rabid against his investments in real estate." (p. 17)

Stogy: a long, thin, inexpensive cigar.
"2 for 5 stogies are again in popular favor" (p. 20)

Vicious: (of language or a line of reasoning) imperfect; defective.
"This scarcity of money is what makes people think if more money were printed business would be better. This is a false and vicious theory." (p. 24)

Millinery: women's hats.
"millinery store" (p. 25)

Fraternity: a group of people sharing a common profession or interests.
"The whole banking fraternity is in public disfavor" (p. 26)

Bated: in great suspense; very anxiously or excitedly.
"with bated breath we asked 'What next?' " (p. 32)

Ways and means: the methods and resources at someone's disposal for achieving something.
"a meeting... to consider ways and means.... the choir has been fired and other economies affected but this does not seem enough" (p. 41)

Go to the wall: (of a business) fail; go out of business.
"Many old businesses are going to the wall" (p. 44)

Dub: give an unofficial name or nickname to (someone or something).
"dubbed themselves the Bonus Expeditionary Force" (p. 51)

Extraction: the ethnic origin of someone's family.
"of German extraction" (p. 56)

Plead: present and argue for (a position), especially in court or in another public context.
"pleading 'state rights' on the Prohibition question" (p. 63)

Shantytown: a deprived area on the outskirts of a town consisting of large numbers of crude dwellings.
"burned down the shantytown where some 15,000 veterans had camped" (p. 65)

Semi-annual: occurring twice a year; half-yearly.
"unfavorable semi-annual reports" (p. 66)

Thrall: the state of being in someone's power or having great power over someone.
"nearly one-third of the value of farms was in thrall, mainly to banks and insurance" (p. 79)

Magnate: a wealthy and influential person, especially in business.
"car magnate Henry Ford" (p. 90)

Indict: formally accuse of or charge with a serious crime.
"Indictment of bankers and investigations are the order of the day." (p. 104)

Terrific: of great size, amount, or intensity.
"Everything depends on the President. It is a terrific responsibility." (p. 108)

Brain trust: a group of experts appointed to advise a government or politician.
"Pres. Roosevelt's advisers are a group of college professors called 'the brain trust.' " (p. 116)

Piece work: work paid for according to the amount produced.
"the girls claim they work long hours on piece work" (p. 116)

High finance: financial transactions involving large amounts of money.
"A great deal of rotten-ness in high finance has been discovered." (p. 119)

Come to a head: reach a crisis.
"I believe the issue of more direct inflation will come to a head soon. In the meantime my law practice remains stagnant while commodity prices go up at a dizzying pace." (p. 131)

Tory: an American colonist who supported the British side during the American Revolution.
"The U.S. Chamber of Commerce takes a public stand against President Roosevelt's gold policy and demands a return to sound money and the gold standard. The President strikes back by calling them a bunch of 'tories.' Remembering that George Washington would not accept Continental currency in his business dealings I do not quite see the parallel implied by the use of the term." (p. 140)

Ejectment: the action or process of evicting a tenant from property.
"Radical socialism seems rapant in every class of society but mostly ministers and college professors. This has spread to the working class. They no longer ask for favors but 'demand' government work, cancellation of mortgages, reduction of debts, etc. They feel the courts will not permit foreclosure of mortgages or ejectments, etc." (p. 156)

Demagogue: a political leader who seeks support by appealing to popular desires and prejudices rather than by using rational argument.
Panacea: a solution or remedy for all difficulties or diseases.
"the voice of the demagog began to be heard throughout the land. Socialism, Communism, more equitable distribution of wealth, new currency and other panaceas became ordinary table talk." (p. 159)

Avarice: extreme greed for wealth or material gain.
"avaricious and not satisfied with a fair investment return" (p. 179)

Scurrilous: making or spreading scandalous claims about someone with the intention of damaging their reputation.
"scurrilous anti-Semitic literature" (p. 182)

Pump-priming: the stimulation of economic activity by investment.
"March 1, 1938: After 8 years of pump-priming and other trick methods of bringing back prosperity, it is my conclusion that none of them are any good. In our capitalistic system we must let the forces of competition and demand and supply work things out in a natural way. No man or group of men is smart enough to control prices or supply and demand or currency in a nation so large as ours." (p. 210)

Cash and carry: a system of wholesale trading whereby goods are paid for in full at the time of purchase and taken away by the purchaser.
Embargo: an official ban on trade or other commercial activity with a particular country.
" 'cash and carry' embargo" (p. 223)

Ebb: (of an emotion or quality) gradually lessen or reduce.
"morality and religion have been at a low ebb" (p. 225)

Bait: torment (a trapped or restrained animal), especially by allowing dogs to attack it.
"Wilkie [FDR's opponent in the Presidential election] promises to hold on to the social gains but to put a stop to the baiting of big business; to the trend toward government ownership and national socialism." (p. 236)

Firm: (of a price) rise slightly to reach a level considered secure.
"a firming of money rates" (p. 240)

Harden: (of prices of stocks, commodities, etc.) rise and remain steady at a higher level.
"interest rates will not harden in the next 6 months" (p. 243)

June 5, 2017

Think Beyond California

Most people go to college because it's they path they've been told to follow. If, on the other hand, you view school as a step along the path to getting rich, you have to make deliberate choices.

To give you some context, I have some experience in business. I developed an educational Web site in 2005 and sold it for a profit. I left California in 2006 at the top of the real estate bubble and moved to Oklahoma City, one of the most undervalued housing markets in the country at the time. The Oklahoma market had been in a twenty-year slump and was just starting to come back, and it managed to avoid the real estate crash that plagued most of the country from 2007-2012. The private school I'd been working for in California laid off a significant fraction of its teachers during that time.

I worked for a real estate company developing quantitative models to value properties and taught science and ACT at a private school, then back to California in 2016 after seeing oil (and Oklahoma oil companies) crash in 2014-15.

Good timing has helped my career as an educator indirectly. I've had all the work I can handle, and I've never had to watch my co-workers get fired due to a recession.

If you want to get rich, you have to take greater risks than I did. You have to borrow money to go to business school, to buy rental properties, or to start a company. Your chances of success will be much greater if you minimize your debt, keep your living expenses low, and buy assets in an undervalued market that's unlikely to crash.

California, with its high cost of living, is a risky place to get rich. The problem is magnified if buying residential or commercial real estate is part of your plan. Housing prices are so high in the Bay Area that the income from a rental property won't even pay the taxes and interest on an 80% loan.

Of course, there's a reason prices are so high. Some people who live here are already rich. Others need to be close to high-tech opportunities in Silicon Valley.

If, on the other hand, you want to be a real estate mogul or open a chain of restaurants, your start-up costs will be lower and your cash flow higher if you move away from the coast. If you're in an undervalued real estate market and your properties appreciate in value, you'll experience higher gains with lower risk.

Real estate is a relatively illiquid market. People buy homes even when they know they're too expensive, and they wait to sell until they absolutely have to. Most people won't buy property out-of-state or move somewhere just because rental properties are cheap. Overvalued and undervalued areas take years, if not decades, to correct to fair values.

If I were a high school student wanting to get rich, I'd choose a college in an undervalued real estate market, something that's gone down for the past twenty or forty years and has just recently started to recover. A college in a depopulated area like that is going to be eager to get students and might offer me a scholarship. I'd have years to find the local business connections I needed, and my living expenses would be low. If I had the money, I might even buy some houses and rent them out to college students.

The map below, from 2014, suggests that the overvalued markets are on the West Coast and in the oil patch (Texas/Oklahoma) markets. A 2016 Forbes article suggests the same pattern.

If I were 18, I'd consider moving to Detroit. The median home value is only $40,400. That's 1/22nd of San Jose's $885,000! The median rent is $750/month or $9,000/year: 22% of the median home value.

Detroit has just started coming out of a forty-year slump. The charts below show that the collapse in its real estate market continued well past 2008. The market has just turned around with a 19.2% year-on-year change.


Detroit as of June 5, 2017

Residential Median Home Values: Detroit, 2007-2017

Residential Median Home Values: Detroit and San Jose, 2007-2017

An undervalued housing market looks a lot like a value stock. A multi-year collapse in prices leads to favorable financial ratios and the potential for capital appreciation.

Detroit isn't the only city that's undervalued, of course. It just happens to be a market I've watched since 2008. I've waited for it to start coming back, and it looks like it finally has.

If you decide to pursue this plan, expect a lot of resistance from people you know. Being a contrarian isn't easy, and that may be why most people don't take advantages of the opportunities that are in front of them. You need a college admissions counselor who can think outside the box and recommend schools in areas that people don't want to live in (yet). Most of all, you need to define your own goals and bring them to your counselor. You're paying her, so you're the boss. Tell her about your long-term plans and ask her to help you reach them.

If you move forward, contact me so I can hear your story. After you become famous, I can say that I knew you when you were still in college!