Long or Short Capital

We have updated our site to include a history of all our past CFA Exam prep questions and study guides.

Material Non-Public Information Sample Question

Couric Noriega, CFA, is a citizen of Emerging Market Country (EMC) with no securities laws which govern the use of insider information. Ms. Noriega has clients in both Emerging Market Country and Neighboring Market Country, the latter of which has liberal securities laws with respect to the use of material non-public information. Should Couric Noriega come into the possession of material non-public information, she should:

A) Inform all her clients to assure she maintains the standard of Fair Dealing and then treat them all to a gratis meal from the Hamburguesa stand.
B) Trade on her personal account to lock down some sweet gains, and then inform all her clients of the information and guarantee them a rate of return of “Really High.” The Priority of Transactions states that a CFA holder should always put their own gains before their clients’ gains, and their clients’ gains before the law.
C) All of the above.
D) Only B.

Answer: D. While on past tests the appropriate answer would have B, and D would have made no sense or been at best redundant, the CFA institute has changed the bylaws so that when answering a question with two equally right answers, one of the two equally right answers will be arbitrarily chosen as the “correct answer.” In this case, it should have been apparent that it was D.

A is a misleading correct answer because while Couric Noriega upholds the correct standard of Fair Dealing, the distribution of hamburguesas could be seen as being used to unduly influence her clients and must be disclosed in writing to her employer, her employer’s employer and any relevenant regulatory bodies.

Following on the report from two weeks ago, on HR vs IT, Mister Juggles uncovered some choice quotes on Google’s (NASDAQ: GOOG) approach to IT.

[Douglas Merrill, VP of engineering and Google’s de facto CIO] is evasive when asked what kinds of commercial PC software are used at Google. “More important than what we put on each desktop is how we think about what to put on each desktop,” he says obliquely. “Google’s philosophy is that choice is always better than control. Tightly centralized control gets in the way of innovation.”

He then takes a jab at CIOs –which he describes as a title used by “old-world companies”– at other companies. “Most people in my job try to control. ‘Here are the three things you can buy.'” Merrill explains. “I try to control as a little as I possibly can but make it easy to work within parameters that I know how to work with.”

Merrill sees a distinction between tools that tell you something and tools that stop you from doing something. For example, he observes that some financial services institutions block instant messaging because of they way they interpret regulations. “We don’t think that’s the right approach here,” he says.

The right approach, as Merrill sees it: Talk a lot; use data, not intuition; automate wherever you can.

Basically Google aligns itself to allow technology as a tool to leverage their human capital as much as possible. That is the focus. Compared to the sentiment expressed by a reader and IT professional in the comments of our previous article:

Ed
September 4th, 2006 | 5:30 am
I’m an IT guy. And no, I’m not a skinny white guy. Do what you want with your pc at home. The company dosn’t give you one for your own personal entertainment, it’s to do the job they pay you to do. Since when do you need google search to do your job? Get back to work.

It’s a constant battle to keep the donkeys (otherwise known as users) from screwing up their computers. Just because you possibly haven’t screwed yours up yet is more due to luck than anything else.

The commenter sees his job in IT as being a virtual prison warden, keeping everything orderly and not letting anything get out of hand.

Crackdictive and fun, Dice Wars needs to be played on my Blackberry by me. I do not how to do it but there must be a way. Please help and email me at johnnydebacle@gmail.com. And if you can’t help me, spend your Friday afternoon playing this game, and by doing so let the financial markets fall apart so my short position on “Financial Markets” can start ripping. Edit: We have added Dice Wars to our site, but we will only refer to it as “Strategic Craps“.

I got this email from Amex today advertising their new Travel Delay Protection product:

From: AmericanExpress@email.americanexpress.com
To: Me
Subject: Enjoy Your Next Airline Delay

Enjoy my next delay? You sarcastic mother******. File this under bad marketing, as it made me too anxious. The best advertising is the kind that seeks to make you just anxious enough, and not one ounce more. Like how seeing hot women in beer ads instills men with a sense of inadequacy that forces them to drink away their self-loathing fattening early-thirtysomething waste of a life…but does not push them to hate the beer commercial for rendering the facade of contentment they had been living.

As an aid to prospective Chartered Financial Analysts who seek to take the CFA Exam for Level I, Level II or Level III this December or next May or next Never-ever, Long or Short has designed a series of review questions to further your edification and help you get an A++ on a pass/fail exam.

Ethics Example Scenario:

Alfonso Gonchar is a trust investment officer at a bank in a Richpersonsburg. He enjoys lunching every day with friends at Richpersonsburg’s The Country Club, where his clients have observed him having numerous drinks. Back at work after lunch, he is clearly intoxicated while making investment decisions. His colleagues make a point of handling any business with Alfonso in the morning because they distrust his judgement after lunch.

Comment:

Past exams would have stressed how Alfonso is violating ethical standards by acting unprofessionally, raising questions about his competence and misrepresenting his firm and his entire profession in front of clients. This is incorrect.

This is actually a scenario designed to demonstrate the importance of teamwork as set out in Standard VII (c(a)) Appendix Y. The last line gives this away by showing the floor of what colleagues should do to help a coworker out, e.g. scheduling the work day around their colleague’s expected level of net intoxication (ELNI). The formula for this is:

(# of beers divided by body weight) divided by duration of drinking in hours

This formula should be memorized and used according to this schedule of recommended actions:

• An ELNI of 0.15-0.30 suggests a recommended course of business as usual and covering the fact that Alfonso is wearing sunglasses in the office by saying he has “glaucoma.”
• An ELNI of 0.30-0.40 would be a situation where 1) it is appropriate to schedule around the Alfonso’s level of intoxication and/or 2) to begin doing firmwide shots of Jaegermeister so that Alfonso’s ELNI stands out less. Remember the core CFA tenant — “We work as one, thus we must drink as one.”
• An ELNI of 0.40+ requires everyone to 1) drink heavily and more importanly, immediately and to 2) clear the schedule and go out and play mini-baller roulette.

Scene from the 1st episode of the 1st season of The Wire (HBO).

McNulty: Let me undertand you. Every Friday night you and your boys, you shoot craps right? And every Friday night your pal Snot-Boogie, he’d wait ’til there was cash on the ground and then he’d grab the money and run away. You’d let him do that?

Baltimore Youth: We’d catch him and beat his ass. But ain’t nobody ever go past that.

McNulty: I gotta ask you, if every time Snot-Boogie would grab the money and run away. Why’d you even let him in the game?

BY: What? (perplexed)

McNulty: If Snot-Boogie always stole the money, why’d you let him play?

BY: You got to. It’s America man.

Past Quotes Entirely Relevant to Investing

Since last January, we have put forth the Satan’s Portfolio theory of investing (see related series of articles Satan’s Portfolio), which follows this:

Ethical and socially responsible investing has made a lot of buzz as a way of dollar voting for a better world. My instinct as an investor says that those fund flows are going the wrong way and their returns since inception back up my argument.

The more profitable questions to answer are: What does Satan invest in? How does he fund evil? Satan’s Portfolio will track the perfomance of the stocks which Mephistocles is proud to put his money into, namely, companies who benefit from suffering, death, war, tobacco, nutrasweet and fraud.

Today’s WSJ has an article (Sub required) which states that the PAX fund, the negative model for Satan’s Portfolio, is going to look to put more sin into its sinvesting:

Now, Pax wants to tone down that objective. Shareholders in August were sent a proxy statement to vote on whether to eliminate a zero-tolerance policy specifically against alcohol and gambling. The change would enable Pax to selectively invest in these industries based on a company’s “entire social-responsibility profile.”

But in other areas, the fund is trying to add new ways to screen out companies it might disapprove of. Shareholders will also vote on whether fund managers should consider a company’s record on environmental issues, for instance.

These shifts illustrate how SRI funds are trying to tweak their strategies amid sagging returns. SRI investors are sometimes willing to exchange a few points of returns for socially conscious stock picking.

…

By contrast, funds like Vice Fund — which actively seeks out sin stocks — have handily beaten most SRI funds recently. In the past three years, Vice Fund has posted a 20% average annual return.

A host of other SRI funds are also fiddling with their approaches. In December, Domini Social Investments LLC will abandon its traditional approach of passively tracking an index of socially responsible companies in its Domini Social Equity Fund, and instead will become an actively managed fund, picking its own stocks to invest in. Last year, it launched a new fund, Domini European Social Equity Fund, which was actively managed from the start. In May TIAA-CREF, the teacher’s-pension giant, announced the formation of a new social and community investing department, and Ariel Capital Management LLC started Ariel Focus Fund last year.

Recommendation: We expect Socially Responsible Investment funds to continue to be forced by their meager returns to invite more and more sin into their portfolio, but at that point, what’s the point of social investing? It either is or is not socially responsible. “Kinda” Socially Responsible Investment funds just leaves a fund with poor returns and doesn’t have the value of making your Democrat friends applaud your refined sense of social responsibility.

Hat tip to Dealbreaker.com.

…Short yourself. No one else is at work right now but you. It’s time to get out and yacht/golf/sail/scuba dive. Or kill yourself.

From CNN.com:

Republican Sen. Conrad Burns, whose recent comments have stirred controversy, says the United States is up against a faceless enemy of terrorists who “drive taxi cabs in the daytime and kill at night.”

Is this another opportunity for a disruptive combination of taxis and other services (see related report Disruptive Businesses: Taxistutes). How long until the Islamic fascist terrorists and evildoers retrofit their taxicabs with lasers and become roving transportation/terrorism providers? These guys know how to create value.

See Part 1, where we covered how HR (Human Resources) sucks. This piece makes the case for IT.

IT (Information Technology) is the official profession of skinny white and asian guys, who when they aren’t dragging their feet, are finding ways to cover their own ass. There is no more powerful innovation to information services than the internet+ computers, yet IT’s main raison d’etre seems to be to ensure that technology is never anything other than silicon enhanced handcuffs. Although left unstated officially, it’s well known that IT is in their own personal arms race with China to match “The Great Firewall” and ensure that none of the proletariats/comrades/employees can ever use the internet to go to dangerous “tasteless” content and to ensure that it blocks downloads from Google[Ed note: The download for Google Toolbar and Google Desktop Search is inaccessible on my machine for instance]. The strangest facet of IT is that left unattended, their kind will reproduce asexually, doubling in number every 6 months, while absolute department production remains constant.

Typical interaction with IT.

Me: “Norton Antivirus just made my compute explode as I logged in from standby. There are hard drive bits in my hair.”
IT Guy: “Sorry, there is nothing I can do, it’s a known problem.”
Me: “Well on my new computer can I get it without Norton Antivirus?”
IT: “No, that would not be possible.”
Me: “Why not??? You said it has a known problem.”
IT: “But if you didn’t have Norton Antivirus, your computer would be totally exposed. You could get a virus from anywhere.”
Me: “Could any virus do any more damage than Norton Antivirus just did? I have never gotten a virus in my life because I don’t open attachments to emails from people I don’t know or which look suspicious.”
IT: “If you don’t have Norton Antivirus, you would be in violation of company policy. I’d have to report you to HR.”
Me: “I hate so much of what you choose to be.”

(For more on IT, see related report Tales from My Internecine Struggle with the IT Department).

Recommendation: While my disdain for the actual IT department is far stronger, I think my disdain for all that HR embodies makes it the worse.

Long or Short Capital has spent many a summer night debating Bear vs Shark, namely which would win in a fight to the death. The answer is obviously the Bear, given a neutral setting such as a tank of shallow water with small islands of rocks for the bear to perch on (Two words: Bone density, look it up. It’s the key in any interspecies matchup.).

But in an equally matched battle of HR vs IT, who sucks harder and longer?

HR (Human Resources) is the official profession of large female mouth-breathers and people who have no ambition. It is closest thing to working for the government outside of…working for the government. The whole department is an entrenched intracorporate bureaucracy which spends its days finding cipherlike ways to spend money, mainly to justify its own existence. There is some debate as to whether HR is a haven of Large Marge types or attractive twentysomething. My own anecdotal experience is that two of the HR women by the door of their floor are large enough that they look like they need to eat other smaller people to sustain themselves, which is what I suspect happens to the odd attractive twentysomething HR hire after a fixed period of fattening and aging, of course.

A typical HR designed program would be to secure subsidized frozen yogurt from TCBY’s for all employees. This would take a typical HR department a full 6 weeks to do and cost $100k in fees from third party consultants. Then they would email this new program out to the whole firm with a clipart of an ice cream cone with three multicolored scoops and a White dude, a Black chick and an Indian chief holding hands to symbolize racial diversity or some crap and tell us all about the new MultiCultural Ice Cream Program. Never would they realize that TCBY does not serve ice cream.

Steve Jobs, CEO of Apple (AAPL) provides this insight into HR (Source: Stepwise):

Ms Smith [prospective VP of HR at AAPL] describes how Mr. Jobs was hostile from the start of the interview:

“He told me my background wasn’t suitable for the position. Sun is a good place, he said, but ‘Sun is no Apple,’ ” recalls Smith with a laugh. “He said he would have eliminated me as a candidate from the start.”

Jobs offered Ms Smith the opportunity to ask questions.

She asked, “What is the corporate strategy?” Jobs replied, “We’re only disclosing our strategy on a ‘need-to-know’ basis.”

Next, she asked why Jobs wanted a VP of Human Resources when it was well known that he was “not a big fan of HR.” According to Smith, Jobs replied,

“I’ve never met one of you who didn’t suck. I’ve never known an HR person who had anything but a mediocre mentality.”

After this, Jobs’s assistant knocked on the door, informing him that “the call you were waiting for is holding.” The interview was over, leaving Ms Smith’s emotions a smoking ruin.

We make the case for IT and give our conclusion in Part 2 of Bear vs Shark the Corporate Edition.

Some commentators and posters have posited that the JonBenet Ramsey has made substantial gains against the Elizabeth Smart (See related report Foreign Exchange Rates for Humans) based on the media attention and general hoopitydehaha that abounds the capture of suspect/confessor/alleged murderer/acquitted against his will Mark Kerr.

Front page news can be an indicator of a change in value of a human life. But digging a bit deeper reveals that this is a market where there is no liquidity, and while the media may have been offering the JonBenet Ramsey at prices substantially above 0.78 Elizabeth Smarts, there were no actual bids at that level. It’s an artificially supported market in which we recommend selling as much of the JonBenet Ramsey as you can. However we suspect that the media will not be true buyers above the 0.78-0.80 level.

From the comments on our Intraoffice Email on Mini-Baller, check out HonkyTonkSnizzlePants on MySpace.

Some choice samples:

Also – Id like to point out that I have pics of me in a striped shirt (going out look), a polo shirt with the collar up (contemplative look) and a flat brimmed hat like a rapper (thug look). This clearly makes me stylish

…

Im macin it at like a $gazillion$ dollars a year doing tech support (export my job to india my ass! this shit is hard yo!), can you say bling motha fucka? Thats why I went to a CC (community college), so I can run up my CCs (credit cards) with no regard to my FICA (foolishly incapacitated credit access) – mini-ballers HOLA BACK!

We favour the visible, the embedded, the personal, the narrated, and the tangible; we scorn the abstract.

-Nassim Taleb in the book Fooled by Randomness

Past Quotes Entirely Relevant to Investing