Offshoring

Here's an excellent, thought provoking working paper written by Princeton economics professor Alan S. Blinder on the subject of free trade and offshoring. His thesis, that information technology will allow a much larger number of service jobs to be offshored to places like India, is one I completely agree with.

Assuming Blinder's theory is correct, how does an investor respond? Does the American equity market suffer at the expense of India as more Americans lose jobs, lowering consumption and hurting the economy as a whole? Or, do American corporations profit due to lower labor costs and a larger global market for their services? I think it depends on the rate of the shift of jobs from the US to poorer countries, and how quickly those poorer countries develop and modernize. A sudden shift in jobs offshore would probably allow the US companies to move aggressively into foreign markets before local competitors could grow large enough to capture the market. A slow drift, on the other hand, would give local businesses the time to mature.

Of course, we're ignoring any possible barriers to trade that the US government may erect in the meantime. Given yesterday's announcement of new tarriffs on Chinese paper products, the Bush administration appears to be leaning toward making trade more difficult. My suspicion is that the US government, pressured by labor unions and voters in middle-class districts, will enact more and more barriers to trade, but will concentrate on protecting the farm and manufacturing industries and will generally ignore service jobs. This will probably allow foreign service industries to grow and gain market share both in the US and overseas. Perhaps going long some Indian equities would be an ideal core portfolio holding for long-term time horizons.

As a side-note, Blinder mentions security analysis as a possible industry to be offshored. I think security analysts and investment bankers are at very high risk. The sell-side is very much concerned with pedigree, particularly in i-banking. American banks will be very slow to consider offshoring. The buy-side, however, is much more concerned with results. Put together a bank in India that provides both research and investment banking that's just as good as the American alternative and costs one third as much, and you'll see a titanic shift of commissions and fees. Perhaps I should reconsider my current employment status...

Back to the CFA...

Did Cramer Just Admit to Market Manipulation?

Looks like Jim Cramer's caused a bit of a stir due to some comments made in a recent interview at The Street. I'm not sure if this is an admission of market manipulation, but he's certainly skirting a very very thin line.

Personally, I've never been a big fan of Cramer. I'm not going to speculate on whether he is really trying to help the average investor, or if he's just using CNBC as a platform to pump up stocks that he owns in his "charitable trust." What bothers me about him is that he's teaching people very bad habits about the markets and trading. The fact is that for most people, the stock market is a form of gambling. I'd guess that 95% of the people out there buying stocks have no idea how to value a company, have never read any of the financial data on the stocks they own, and probably just throw away any proxy statements they recieve. In case any of you out there had any doubt, the important part of a company's annual report are all those boring pages of numbers in the back, not the glossy pictures of happy-looking employees and self-congratulatory remarks from the CEO. (Oh, and just so you folks out there know, by the time you get that nice glossy report in the mail, people like me have already had the information sitting on our desks for about 6-8 weeks. The SEC website posts all the corporate filings in real-time, and all of us know how to use it.)

Look, if you want to make money in the markets, you're going to have to do the work on your own. It takes lots of time, tons of reading, and quite a bit of analysis. And even then, after all that, you're still likely to be wrong a good percentage of the time. Your best bet, though, is to invest in small-cap companies that aren't covered by most research firms and I-banks. If you're dilligent, patient, and persistent, you'll find a few companies that are trading at a significant discount to their true value. Find enough of these, invest over a relatively long period, and you'll probably be successful. Trying to trade in and out like Cramer is only going to get you whipsawed and cost you tons of money in transaction costs on top of the losses you'll probably take.

If you're really one of the very few people out there who can day trade well enough to consistently make profits, then go ahead and keep doing what you're doing. For the other 99% of the population out there, just stop. The next time you want to buy a stock, do yourself a favor and go online, download a copy of the company's latest 10-K filing, and read it. The whole thing. Including all the financial data and all the footnotes. Pay particular attention to the part where it talks about prior years' results and the explanation for why the numbers are trending up (or down.) Treat every assumption regarding the future as suspect. Try predicting what will happen to the company's income if you adjust those assumptions lower.

If all this sounds too burdensome, stop immediately. Managing your own stock portfolio probably isn't for you. Put your retirement fund into some index funds, and maybe a few actively managed mutual funds. If you still feel the need for some action, get on a plane and head to Vegas - your odds of making any money are about the same, and Vegas treats you a lot better when you lose. (Try getting your stockbroker to comp you a hotel room and a free meal.)

If, on the other hand, you sit down and read that filing and, to quote Obi-Wan Kenobi, you feel like you've just taken your first step into a larger world, keep going. Start reading all you can about valuation and analysis. Read more 10-Ks, read conference call transcripts, read, read, read. You just might have what it takes...

Study Time

A few months ago, in a fit of frustration about the apparent lack of traction I was feeling along my career path, I decided to sign up for the CFA exam. Despite a warning from my boss that the CFA is "the hardest test you'll ever take" and various foreboding sodomy-related similies, I decided to take the plunge. Right now, sitting on the shelves above my desk, are about 40 pounds of textbook that must be read, comprehended, and fully regurgitatable by the first weekend in June.

Clearly I must have been out of my mind when I came up with this bright idea. The sheer volume of material that must be learned is staggering. That said, none of it seems to be particularly difficult, and a good deal of it, particularly the economics and statistics sections, are primarily review. Nonetheless, reading 3500 pages of dense, poorly written, uninteresting financial text in a span of about 3 months is not my idea of a fun time. In fact, it really sucks. (Especially the accounting part - I hate accounting, and it's the largest section of the test.)

I'm sure I'll have more to say as we get closer to crunch time, but I'm already feeling the pressure. I signed up for a 3-day cram session at the end of April, which will hopefully be enough to get me past this thing.