I finally got around to setting up the gallery portion of the Y-Factor. I started out evaluating the NextGEN WordPress plugin. Though it is certainly a nice piece of work, it wasn’t quite what I was looking for. It didn’t handle images of various sizes and aspect ratios very well (i.e. choked on panoramic pictures), and also seemed a little heavy (in terms of functionality) for what I want right now. So, I ended up using WordPress’s built in gallery functionality. This functionality definitely has some things to be asked for, but for now, it gets me going. Check out the gallery and let me know what you think!
Many of you have been asking for an updated pic of Ria, so here it is, finally. This was taken the week before Thanksgiving, at our place in IL.
I haven’t been paying much attention to the inauguration and related proceedings today – I’ve been more concerned with the 3.6% drop in the S&P 500. However, news coverage of the event was playing on a projection screen downstairs in the cafeteria, so I watched while I ate lunch. I missed the actual address – by the time we got there the Bush family was leaving, and lunch was about to be served. Even so, watching those things, likely the most mundane of all of today’s proceedings, was pretty moving.
It’s easy to get lost in the everyday grind – the markets, children, work, life – and miss the truly historic nature of this event. I say that not with a perspective of race – to be honest, it’s great that we have an African American President, but that aspect of this inauguration’s historical significance is lost on me – but rather with a perspective of the American psyche. I view this as historic because of the hope and expectation that this inauguration carries. I, like much of America, experienced a sigh of relief as Bush left. I, like much of America, have great hopes for the next four years, and likely unfairly high expectations of the new President.
I think we as a country are distraught and are desperately seeking the comfort of a good leader to help us weather the storm and find our way out of our current problems – much like a distraught child seeks the comfort of a parent. Today’s inauguration is greatly relieving – much like a parent saying “it’s okay, I’m here now, it’ll be better”.
I hope now that the new President can deliver on these hopes and high expectations. Mind you, I don’t think it’s necessary for Obama to fix all of our issues over the next four years – I’m not entirely convinced that such a feat is even possible. Rather, I’m sure the country would be greatly satisfied and grateful if he is able to calm and comfort the nation, and initiate good policies that build us a strong foundation to pull ourselves out of the hole we’re in. Anything beyond that is icing on the cake. I wish the President luck with the enormous challenge he faces as the leader of this nation and hope that he does not falter in character or profession as he leads this great nation.
Here’s the text of President Obama’s inauguration speech:
My fellow citizens:
I stand here today humbled by the task before us, grateful for the trust you have bestowed, mindful of the sacrifices borne by our ancestors. I thank President Bush for his service to our nation, as well as the generosity and cooperation he has shown throughout this transition.
Forty-four Americans have now taken the presidential oath. The words have been spoken during rising tides of prosperity and the still waters of peace. Yet, every so often, the oath is taken amidst gathering clouds and raging storms. At these moments, America has carried on not simply because of the skill or vision of those in high office, but because We the People have remained faithful to the ideals of our forebearers, and true to our founding documents.
So it has been. So it must be with this generation of Americans.
That we are in the midst of crisis is now well understood. Our nation is at war, against a far-reaching network of violence and hatred. Our economy is badly weakened, a consequence of greed and irresponsibility on the part of some, but also our collective failure to make hard choices and prepare the nation for a new age. Homes have been lost; jobs shed; businesses shuttered. Our health care is too costly; our schools fail too many; and each day brings further evidence that the ways we use energy strengthen our adversaries and threaten our planet.
These are the indicators of crisis, subject to data and statistics. Less measurable but no less profound is a sapping of confidence across our land — a nagging fear that America’s decline is inevitable, and that the next generation must lower its sights.
Today I say to you that the challenges we face are real. They are serious and they are many. They will not be met easily or in a short span of time. But know this, America: They will be met.
On this day, we gather because we have chosen hope over fear, unity of purpose over conflict and discord.
On this day, we come to proclaim an end to the petty grievances and false promises, the recriminations and worn-out dogmas, that for far too long have strangled our politics.
We remain a young nation, but in the words of Scripture, the time has come to set aside childish things. The time has come to reaffirm our enduring spirit; to choose our better history; to carry forward that precious gift, that noble idea, passed on from generation to generation: the God-given promise that all are equal, all are free, and all deserve a chance to pursue their full measure of
In reaffirming the greatness of our nation, we understand that greatness is never a given. It must be earned. Our journey has never been one of shortcuts or settling for less. It has not been the path for the fainthearted — for those who prefer leisure over work, or seek only the pleasures of riches and fame. Rather, it has been the risk-takers, the doers, the makers of things — some celebrated, but more often men and women obscure in their labor — who have carried us up the long, rugged path toward prosperity and freedom.
For us, they packed up their few worldly possessions and traveled across oceans in search of a new life.
For us, they toiled in sweatshops and settled the West; endured the lash of the whip and plowed the hard earth.
For us, they fought and died, in places like Concord and Gettysburg; Normandy and Khe Sahn.
Time and again, these men and women struggled and sacrificed and worked till their hands were raw so that we might live a better life. They saw America as bigger than the sum of our individual ambitions; greater than all the differences of birth or wealth or faction.
This is the journey we continue today. We remain the most prosperous, powerful nation on Earth. Our workers are no less productive than when this crisis began. Our minds are no less inventive, our goods and services no less needed than they were last week or last month or last year. Our capacity remains undiminished. But our time of standing pat, of protecting narrow interests and putting off unpleasant decisions — that time has surely passed. Starting today, we must pick ourselves up, dust ourselves off, and begin again the work of remaking America.
For everywhere we look, there is work to be done. The state of the economy calls for action, bold and swift, and we will act — not only to create new jobs, but to lay a new foundation for growth. We will build the roads and bridges, the electric grids and digital lines that feed our commerce and bind us together. We will restore science to its rightful place, and wield technology’s wonders to raise health care’s quality and lower its cost. We will harness the sun and the winds and the soil to fuel our cars and run our factories. And we will transform our schools and colleges and universities to meet the demands of a new age. All this we can do. And all this we will do.
Now, there are some who question the scale of our ambitions — who suggest that our system cannot tolerate too many big plans. Their memories are short. For they have forgotten what this country has already done; what free men and women can achieve when imagination is joined to common purpose, and necessity to courage.
What the cynics fail to understand is that the ground has shifted beneath them — that the stale political arguments that have consumed us for so long no longer apply. The question we ask today is not whether our government is too big or too small, but whether it works — whether it helps families find jobs at a decent wage, care they can afford, a retirement that is dignified. Where the answer is yes, we intend to move forward. Where the answer is no, programs will end. And those of us who manage the public’s dollars will be held to account — to spend wisely, reform bad habits, and do our business in the light of day — because only then can we restore the vital trust between a people and their government.
Nor is the question before us whether the market is a force for good or ill. Its power to generate wealth and expand freedom is unmatched, but this crisis has reminded us that without a watchful eye, the market can spin out of control — and that a nation cannot prosper long when it favors only the prosperous. The success of our economy has always depended not just on the size of our gross domestic product, but on the reach of our prosperity; on our ability to extend opportunity to every willing heart — not out of charity, but because it is the surest route to our common good.
As for our common defense, we reject as false the choice between our safety and our ideals. Our Founding Fathers, faced with perils we can scarcely imagine, drafted a charter to assure the rule of law and the rights of man, a charter expanded by the blood of generations. Those ideals still light the world, and we will not give them up for expedience’s sake. And so to all other peoples and governments who are watching today, from the grandest capitals to the small village where my father was born: Know that America is a friend of each nation and every man, woman and child who seeks a future of peace and dignity, and that we are ready to lead once more.
Recall that earlier generations faced down fascism and communism not just with missiles and tanks, but with sturdy alliances and enduring convictions. They understood that our power alone cannot protect us, nor does it entitle us to do as we please. Instead, they knew that our power grows through its prudent use; our security emanates from the justness of our cause, the force of our example, the tempering qualities of humility and restraint.
We are the keepers of this legacy. Guided by these principles once more, we can meet those new threats that demand even greater effort — even greater cooperation and understanding between nations. We will begin to responsibly leave Iraq to its people, and forge a hard-earned peace in Afghanistan. With old friends and former foes, we will work tirelessly to lessen the nuclear threat, and roll back the specter of a warming planet. We will not apologize for our way of life, nor will we waver in its defense, and for those who seek to advance their aims by inducing terror and slaughtering innocents, we say to you now that our spirit is stronger and cannot be broken; you cannot outlast us, and we will defeat you.
For we know that our patchwork heritage is a strength, not a weakness. We are a nation of Christians and Muslims, Jews and Hindus — and nonbelievers. We are shaped by every language and culture, drawn from every end of this Earth; and because we have tasted the bitter swill of civil war and segregation, and emerged from that dark chapter stronger and more united, we cannot help but believe that the old hatreds shall someday pass; that the lines of tribe shall soon dissolve; that as the world grows smaller, our common humanity shall reveal itself; and that America must play its role in ushering in a new era of peace.
To the Muslim world, we seek a new way forward, based on mutual interest and mutual respect. To those leaders around the globe who seek to sow conflict, or blame their society’s ills on the West: Know that your people will judge you on what you can build, not what you destroy. To those who cling to power through corruption and deceit and the silencing of dissent, know that you are on the wrong side of history; but that we will extend a hand if you are willing to unclench your fist.
To the people of poor nations, we pledge to work alongside you to make your farms flourish and let clean waters flow; to nourish starved bodies and feed hungry minds. And to those nations like ours that enjoy relative plenty, we say we can no longer afford indifference to suffering outside our borders; nor can we consume the world’s resources without regard to effect. For the world has changed, and we must change with it.
As we consider the road that unfolds before us, we remember with humble gratitude those brave Americans who, at this very hour, patrol far-off deserts and distant mountains. They have something to tell us today, just as the fallen heroes who lie in Arlington whisper through the ages. We honor them not only because they are guardians of our liberty, but because they embody the spirit of service; a willingness to find meaning in something greater than themselves. And yet, at this moment — a moment that will define a generation — it is precisely this spirit that must inhabit us all.
For as much as government can do and must do, it is ultimately the faith and determination of the American people upon which this nation relies. It is the kindness to take in a stranger when the levees break, the selflessness of workers who would rather cut their hours than see a friend lose their job which sees us through our darkest hours. It is the firefighter’s courage to storm a stairway filled with smoke, but also a parent’s willingness to nurture a child, that finally decides our fate.
Our challenges may be new. The instruments with which we meet them may be new. But those values upon which our success depends — hard work and honesty, courage and fair play, tolerance and curiosity, loyalty and patriotism — these things are old. These things are true. They have been the quiet force of progress throughout our history. What is demanded then is a return to these truths. What is required of us now is a new era of responsibility — a recognition, on the part of every American, that we have duties to ourselves, our nation and the world; duties that we do not grudgingly accept but rather seize gladly, firm in the knowledge that there is nothing so satisfying to the spirit, so defining of our character, than giving our all to a difficult task.
This is the price and the promise of citizenship.
This is the source of our confidence — the knowledge that God calls on us to shape an uncertain destiny.
This is the meaning of our liberty and our creed — why men and women and children of every race and every faith can join in celebration across this magnificent Mall, and why a man whose father less than 60 years ago might not have been served at a local restaurant can now stand before you to take a most sacred oath.
So let us mark this day with remembrance, of who we are and how far we have traveled. In the year of America’s birth, in the coldest of months, a small band of patriots huddled by dying campfires on the shores of an icy river. The capital was abandoned. The enemy was advancing. The snow was stained with blood. At a moment when the outcome of our revolution was most in doubt, the father of our nation ordered these words be read to the people:
“Let it be told to the future world … that in the depth of winter, when nothing but hope and virtue could survive… that the city and the country, alarmed at one common danger, came forth to meet [it].”
America. In the face of our common dangers, in this winter of our hardship, let us remember these timeless words. With hope and virtue, let us brave once more the icy currents, and endure what storms may come. Let it be said by our children’s children that when we were tested, we refused to let this journey end, that we did not turn back, nor did we falter; and with eyes fixed on the horizon and God’s grace upon us, we carried forth that great gift of freedom and delivered it safely to future generations.
Ria started day care last week, and things didn’t exactly go smoothly. She goes three full days a week, and I’m sure that’s three too many for her (and, indirectly, for us too when we see her cry). It’s odd really, this is likely one of the easiest things I’ll ever do as a father – to let her go and have her take her first step of independence from us, yet it seems like one of the hardest things I’ve ever done. Every morning we drop her off, we have to leave her crying. She clings to my coat as if holding on for dear life, cries at the top of her lungs, as if asking “Daddin’, Mumma, why are you leaving me here? What did I do wrong? I’m sorry…”. It feels like a dagger through the heart each day, but it is something we must endure for her own good, and for ours.
My folks left for a two-month trip to India on New Year’s Day. Though Ria didn’t cry at all as they left (she probably had no idea what was going on), it’s been pretty hard on her since she spent most of her day with her grandparents. She’s especially close to my Mom, who has been with her just about every day of her life. That, coupled with our dropping her off in a new place with complete strangers for the whole day, has resulted in what appears to us to be a separation anxiety. She’s become very “clingy” for lack of a better word – wanting to be carried all the time and not put down. She constantly looks over her shoulder every few minutes while she plays, to make sure that we’re still there and that no one has abandoned her. I’m afraid that we may be instilling a new kind of fear in her – a fear of abandonment. I surely don’t want her feeling insecure for the rest of her life, but then I also fear that we’re doing what all new parents do the first time – possibly being over-dramatic? After all, surely all kids go through this, and everyone, on average, turns out fine, right?
We could have evaluated other options before choosing to put her in day care – maybe we could have alternated taking time off work to cover the eight-week period that my parents are gone for. Or maybe we could have hired an in-home baby sitter so that Ria is in a familiar environment, hopefully reducing her discomfort. However, we thought it important for Ria to get more social exposure to other kids. Ria is an only child and she has spent most of her 18 months of life with her family – her parents, grandparents, and uncle. Given our frequent moving lately, we haven’t been able to develop a strong social network, and so she has never really been around a lot of other adults or children. Thus, we wanted her to spend more time with other children – something that neither our taking time off work at staying home, or our hiring an in-home baby sitter would have accomplished. Yes, there is emotional trauma for her and us, and yes she is getting sicker more often due to the other children being around, but I figure it’s a small short-term price to pay for what we believe to be a long-term benefit. Besides, not only would an in-home baby sitter not give Ria exposure to other kids, it also wouldn’t allow her to develop an understanding of home versus school.
On the bright side, she is improving. Though every day is certainly different and she has good ones followed by bad ones, she is crying less with each subsequent drop off. She has gone from crying non-stop at the top of her lungs for 45 minutes after drop off and then crying on-and-off all day, to crying for about 10 minutes after drop off and then on-and-off for a fraction of the day. She has gone from crying and fighting diaper change time (she’s not used to being changed on a changing table), to quietly having her diaper changed and then going back to play. And, finally, she’s starting to progress from sitting by herself in a corner to playing with other kids. I wait very eagerly for that day when there is no crying at drop offs, no crying throughout the day, and excited engagement with the other children in all activities.
As for me – well I end up calling the day care 3-4 times a day to check in and see how she’s doing. I can’t wait until it’s time to head out and pick her up, and I speed through traffic just so I can get to her a few minutes earlier… As I think about it more, I don’t know who has more separation anxiety – her or us…
No, it’s not a typo… “Absorelative” is the term I’ve coined for what we’ve been tasked with at work for the year 2009. Our mission is to earn an absolute return, unless the market moves up, in which case we’re expected to deliver a relative return – so we’re looking for a mix of absolute and relative performance, or “absorelative performance”. Basically, this means that if everyone loses money, we must not. But if everyone makes money, we too must make money.
To better understand the implications of this, it’s important to understand how money manager performance is measured, and how managers are compensated. Basically you can measure how your investment manager is performing in one of two ways: absolute return, or relative return. Absolute return is the total return of your portfolio. If you give someone $1 million to invest and they give you back more than $1 million at the end of the year, then they have earned a positive absolute return. Likewise, if you get less than $1 million, they have earned a negative absolute return. The fact that other investments (such as a passive index fund) could have earned 30% or lost 30% is completely irrelevant – your manager gets paid if he/she makes money. Relative return, on the other hand, depends on a benchmark. Suppose you want your manager to invest in large U.S. company stock. An appropriate benchmark could be the S&P 500 – an index of the largest 500 U.S. companies, which you can invest in yourself – it’s pretty easy and cheap. So, you only want to pay your manager if he/she is able to beat what you can earn yourself – that is, beat the S%P 500. If the S&P 500 earns 25% and your manager earns 28%, then he/she has earned a 3% relative return. If he/she earns 22%, he/she has earned -3% relative return – he/she has still made money, but he made less than the benchmark, and so shouldn’t get paid. Clearly, the best compensation structure for you depends on what you’re looking for – if you want exposure to a particular asset class and are open to its risk and return, you want to set up a relative compensation structure – only paying your manager for picking those names that are better than average. However, if you’re looking to minimize risk and just want positive growth, an absolute structure is probably a better fit – an often small, but positive, return with very little chance of losses.
Certain types of money managers typically have certain kinds of compensation. Hedge funds can go long and short (that is, they can buy assets they think will make money, and borrow and sell assets they think will lose money, expecting to repurchase the sold asset later at a cheaper price to repay the loan, and keep the difference between the sale and repurchase prices), and so typically employ strategies that can profit in up markets and down markets. These strategies should make money no matter what, and so are called absolute return strategies. As you would expect, since hedge fund managers employ absolute return strategies, they are typically compensated on an absolute return basis.
Traditional money managers (think of insurance companies, mutual funds, etc) aren’t allowed to go short, and so can only buy whatever asset class they are managing (bonds for bond managers, stocks for equity managers). Thus, if you’re a long-only equity manager, and stocks are falling, your portfolio will fall too since all you can do is buy the falling asset class. The performance of these strategies is tied to the benchmark, and so they’re called relative return strategies, and the manager is compensated relative to some benchmark.
Getting back to the situation at work… Allstate is an insurance company, and as such we’re a long-only shop. Until now our performance has been measured on a relative basis. In 2008, equity markets fell sharply, as did our portfolios. By definition, if we beat our benchmarks we should still get paid, and if not, we shouldn’t. As you can imagine, the investors who give us capital may not be thrilled with this setup. On one hand they were looking for exposure to equities (and by that I mean the risk and return that comes with equities), and should be glad that we were able to provide a return greater than, albeit still negative, the benchmark they had selected. On the other hand, when 35% of your portfolio disappears, it’s hard to be excited and pay your money manager for making you one third poorer than you were at the start of the year. So, going into 2009 things changed – the investors decided that they didn’t want to take this much risk, and that they didn’t want to pay their managers if they lost money – all the ingredients of an absolute performance setup. (As a side note, I would have argued that if the investors aren’t comfortable with the risk of equities, the simpler, more direct solution is to simply not invest in equities. They should invest in a safer asset class. However, this is a suicidal argument for me since if the investors choose not to invest in equities, I’d be unemployed!)
Earning an absolute return in itself is not a big issue – see my upcoming post on negative beta. The problem comes in when the investor wants the relative dimension as well – when the investor says “don’t lose money, but if the market is up x%, you must be up about x% too”. The issue here is that in order to get absolute return, we have to eliminate all beta exposure (market beta, size beta, style beta, sector beta, etc). This way, no matter what happens in the markets, our stocks earn only alpha – their unique return after accounting for all systematic risk. This is a great positive in down markets – in fact zero beta is what allows us to not lose money (assuming we’re right about our stock predictions – our alpha). However, not having this beta exposure in up markets means that your portfolio is missing out on systematic return. That is, if everyone feels more confident about things and stock markets recover, you’ll miss the recovery because it is market-wide compensation for positive sentiment, not company-specific compensation. Thus, you will under-perform the market in up markets.
So, given that we can’t earn absolute return by neutralizing beta since that also eliminates our return in up markets, the only choice we’re left with (as far as I can see) is to be in stocks in good times (so that we’re earning alpha and beta), and be in cash (or cash equivalents) in bad times so we’re not losing money tied to our stocks’ betas. This strategy is called market timing, and it’s something that no manager that I’m aware of has ever been able to do consistently and successfully. Basically you have to know more often than not when the market will go up so you can buy stocks, and when it’ll go down so you can sell stocks.
Now, my friends, you understand the dilemma for 2009. In the absence of a crystal ball that tells us what will happen in the markets tomorrow, how do we know when to switch from stocks to cash? If you have any ideas, or see something I missed, please leave a comment and educate me. In the mean time, I’m going to roll my dice – even means market, and odd means cash!