One of the reasons I started about learning about investing a few years back was to understand risk better, what I learned is that the information security knows next to nothing about risk, and the financial services world is not much better. But as always there are happy exceptions.
Jim Grant's writing and speeches are always of interest. For example, his recent speech at UVA's Darden school conference on value investing was wonderfully illuminating.
Lots of people use the New Year to reflect on their financial goals, and Grant's analysis is a wonderful antidote to consensus financial "wisdom." Once each year, Grant's Interest Rate Observer compiles its holiday issue and makes it available for free. The Winter Break 2010 issue contains the following
* In "Money Shows its Age" which details examples of currency debasement includes a history of a life annuity settled on a certain Frenchman and family in 1738. The annuity was originally based on 10 ounces of gold (which would be ~ €7,793 in today's euro), due to the currency debasement since 1793 the amount today works out to 0.0015 ounces of gold or €1.20 enough for the heirs to buy a small coffee on the way out from picking up the check.
* In "Warm Thoughts on a cold metal" Grant goes into some detail on why he is bullish on gold and introduces a compelling idea the "Wiki central bank" (applied to GLD), in other words the price of gold is not dependent on Trichet, Bernanke, et al. Underscoring the problems at hand for central banks the article says the real problem for Europe "is not so much the ability of France and Germany to backstop the debt of some weaker euro-zone sovereigns but, rather, whether France and Germany can backstop the various exposures that their banks have accumulated...German banks have exposures of $43 billion to Greece, $47 billion to Portugal, $240 billion to Spain, $193 billion to Ireland and $209 billion to Italy. (note - sure helps explain Germany's willingness to bail out Greece!) French banks have exposures of $79 billion to Greece, $36 billion to Portugal, $185 billion to Spain, $69 billion to Ireland, and $489 billion to Italy.
That China and India are stepping up gold purchases should not surprise
* I am primarily a bottom up guy, and as such the article "Buy beer, sell bonds" is inline with my thinking. This paper explores risk of buying Molson Coors (TAP) stock versus the US Treasury bills.
"Mr. market delights in switching labels. When he thinks nobody's looking he sticks the "risky" label on the "safe" asset, and the "safe" label on the "risky" asset. Yet, not infrequently, it's the supposedly risky asset that winds up preserving capital or even delivering capital gains. It all depends on price. At a price, junk bonds are gilt-edged and Treasurys are junk. At 20 cents on the dollar, sub prime mortgages can be- truly if unofficially- Triple A. More often that not, investment safety is what you find on the scrap heap."
John Adams book "Risk" contains this: "Risk is defined by of those who seek to measure it, as the product of the probability and utility of some future event. The future is uncertain and inescapably subjective; it does not exist except in the minds of people attempting to anticipate it. Our anticipations are formed by projecting past experience into the future. Our behavior is guided by our anticipations."
The Grant's article compares investing in a) the 10 year Treasury note "the full faith and credit obligation of a government that can materialize its own money with a computer keystroke" to b) Molson Coors which trades at 1.1 Book value, 11 times earnings (earnings yield ~9), and pays a dividend yield of 2.8% (having recently boosted its yield 16.7%).
Finally, says Grants' "However if TAP is a faith-based investment, no less are the Treasury 3.5 bonds. Bonds are inert contracts to pay dollars. Unlike the front office at Molson Coors, Timothy Geithner makes no attempt to get out in front of changing price levels and market conditions. And although he means no harm to the creditors of the United States, he's not on a mission to make them rich. To enrich the shareholders is, in fact, among the top agenda items of the executive corps of Molson Coors.
What I enjoyed about this issue is Grant's rigorous adherence to the definition of risk and his willingness to revisit previous assumptions. The future is uncertain of course and his calls could be wrong, but this type of analysis is worth learning from when it comes to applying risk management in information security.
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