Friday, November 30, 2012

The infallible portfolio?

In this short essay, Ricardo Fenholz of Columbia University makes what seems (to me at least) to be a rather incredible claim: that it's relatively easy to construct a portfolio that is guaranteed to outperform the S&P 500 over one year (or any other interval you like) and also has a limited downside during that year. The idea is the take the S&P 500 Index and tweak it a little, creating a portfolio with less weight in stocks with higher capitalization, and more weight in those with less capitalization, and presto -- you have something guaranteed to outperform the S&P 500, he claims. Is that possible? That easy? Here's a little more detail:
To understand how this works, let’s consider the S&P 500 U.S. stock index. Suppose that we wish to invest some money in S&P 500 stocks for one year. Currently, Apple has a total market capitalization of roughly $500 billion, making it the largest stock in the S&P 500 and equal to approximately 4% of the total capitalization of the entire index. Suppose that we believe it is very unlikely or impossible that either Apple or any other corporation’s capitalization will be equal to more than 99% of the total S&P 500 capitalization for this entire year during which we plan to invest. As long as this turns out to be true, then it is actually pretty simple to construct a portfolio containing S&P 500 stocks that is guaranteed to outperform the S&P 500 index over the course of the year and that has a limited downside relative to this index. In essence, we can construct a portfolio that will never fall below the value of the S&P 500 index by more than, say, 5% and that is guaranteed to achieve a higher value than the S&P 500 index by the end of the year.[1]
This is not a trivial proposition. If we combine a long position in this outperforming portfolio together with a short position in the S&P 500 index, then we have a trading strategy that requires no initial investment, has a limited downside, and is guaranteed to produce positive wealth by the end of the year. According to standard financial theory, this should not be possible.[2] Furthermore, the assumptions that guarantee that our portfolio will outperform the S&P 500 index appear entirely reasonable. After all, not for one day in the more than 50-year history of the S&P 500 has one corporation’s market capitalization come anywhere close to equaling even 50% of the total capitalization of the market. A 99% share of total market capitalization would essentially amount to there being only one corporation in the entire U. S. for an entire year. This seems like neither a likely outcome nor one that investors should take seriously when constructing their portfolios.
What does a portfolio made up of S&P 500 stocks that is guaranteed to outperform the S&P 500 index look like? There are many different ways in which such a portfolio can be constructed, but one feature common to all such portfolios is that relative to the S&P 500 index itself, they place more weight on those stocks with small total market capitalizations and less weight on those stocks with large total market capitalizations. The weight that an index such as the S&P 500 places on each individual stock is equal to the ratio of that stock’s total market capitalization relative to all stocks’ total market capitalizations taken together. In the case of Apple, then, the S&P 500 index would place a weight of roughly 4% in this individual stock while those portfolios that use HFT to outperform this index would instead place a weight of less than 4% in Apple stock.
The only condition for this to work, he suggests, is that the assumption that no stock in the market comes to dominate the market in the sense that its market capitalization comes to be a high fraction of that of the entire market. This is, as he notes, a fairly weak assumption, although the weaker you make the assumption, the longer the time interval over which this idea apparently works.

Now, I'm not doubting the veracity of this claim. I'm just stunned that such a simple recipe could work, and can't see the intuition behind it. What if the high cap stocks happen to perform brilliantly next year, relative to the lower cap stocks? Wouldn't this portfolio with underweighted high cap stocks then underperform the S&P Index? I've had a quick look at the paper Fernholz references as a detailed support of his claim, and there he explains the conditions for the theorem to hold in slightly different terms:
The conditions mandate, roughly, that the largest stock have "strongly negative" rate of growth, resulting in a sufficiently strong repelling drift away from an appropriate boundary; and that all other stocks have "sufficiently high" rates of growth.
That sounds very different from the quite plausible assumption about no market dominance of a single stock. Indeed, this seems like saying that, if one assumes that large cap stocks will perform poorly, and small caps stock better, then we can build a portfolio guaranteed to outperform the S&P 500 Index by weighting small cap stocks more heavily. Isn't that like assuming we know the future?

But maybe I'm wrong. I'd be interested in the thoughts of others. The paper is quite dense and light on intuitive discussion of the logic. Fernholz suggests that perhaps the existence of these superior portfolios -- which require continuous rebalancing by high-frequency buying and selling of many stocks -- explains some of the very high profits consistently earned by quantitative high-frequency hedge funds such as Renaissance Technology's Medallion Fund. I think I find more convincing the analysis of Lo and Khandani which seemed to suggest that much of the performance of quant hedge funds over the past decade or so can be accounted for by fairly vanilla long short equity strategies, with increasing use of leverage in the mid 2000s (used to maintain high reported earnings even as raw earnings fell off due to competition).

Hannah Green in Thinkprogress on Renewable Energy in India

She writes:

This August, power shortages in India that left 300 million in the dark made it very clear that one of the world’s fastest growing economies was facing an energy crisis. Less clear is how realistically to solve it. Many firms are looking for new sources of oil to fulfill India’s growing energy demands, but this could prove to be painfully expensive.  On the brighter side, solar energy and other renewable resources are already being rapidly harnessed in the non-Western world, and they are becoming cheaper and cheaper.
As of June 2012, 31 percent of India’s energy came from renewable resources, including hydroelectric power, while only 9 percent of the United States’ did as of the end of 2011. In a 2009 McKinsey & Company survey, India was rated the top producer of solar energy in the world, just above the United States, with an annual yield of 1,700 to 1,900 kilowatt hours per kilowatt peak (kWh/KWp). However, demand for energy in India will only continue to grow, and the question is whether energy will continue to come mainly from fossil fuels or from renewable energy sources...

Food Reward Friday

This week's winner... the Starbuck's Double Chocolaty Chip Frappuccino!

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Thursday, November 29, 2012

Miss Diana - Opéra - Paris

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      Miss Diana - "Absolutely Fabulous Blog" - Opéra - Paris
        Photos by Fred - Easy Fashion Paris

Wednesday, November 28, 2012

before & After: A Client's Home Featured In Small Rooms Decorating Magazine

A while back, I shared some before & midstage photos of a client's DC rowhouse.  When I was just about to have our third son (this past Spring) I did a photoshoot with my good friend & photographer Helen Norman & her assistant, F.J. Hughes.  I was so happy with how my clients' home turned out & the house ended up getting shot again for Small Room Decorating Magazine right after.  My clients actually fell for a new home in another area of DC & moved a couple of weeks after the shoot and so we're now onto the next project!  It was pretty much a whirlwind for my clients & I'm so appreciative of them for letting us invade their home for photoshoots multiple times. 

Here are a couple of 'before' pics of the home:

{My clients' dining room: They already had a GORGEOUS chandelier by Oly and really beautifully done window treatments.  The dining room functions as both a dining room and a sitting room and the dropleaf dining table itself moves under the window and becomes a console when the room transitions into a sitting room.  My clients purchased the settee so it could function for both spaces.}

Here's what their living room looked like before:

{As you can see, they already had some amazing pieces to work with & I love their style.  My goal was to warm up the space & to get it just right for them.}

One of the first things we did was repaint the main areas of the home in ivory & to repaint the doors black for some contrast & interest & to bounce the black accents throughout the room:

We used many of their own pieces & added new pieces to create a sort of modern mix of old & new.  To see all of my plans for the spaces, click here. 

Here's the before:

And here's the 'after':

We rearranged the furniture & floated the daybed so that it coule be accessed from both sides.  We added a pair of clean-lined linen wing chairs for a cozy spot to hang. 

We added a mix of textured, patterned and hand block-printed fabrics for some energy & interest:

{Dark brown & white pillow fabric & ottoman fabric by Raoul Textiles, and center paisley pillow is one of mine, "live paisley."}

We flanked the existing sofa with two large iron & cement tables to hold loads of books & magazines. 

Below, the lamp is a custom creation by my friend, lighting designer, Rick Singleton.  The photographs are taken from the oversized German Magazine, The Manipulator, and I found them at Avery Studios.  The frames were beautifully hand painted by another friend, artist, John Matthew Moore.  I wanted them hung so that they intersected slightly with the wing chairs for a more layered, relaxed look.  I love how the little kitty is peeking out from between the two chairs.  We went with a clear glass cocktail table because even though the room looks open & expansive, it's really fairly small & we wanted to keep it feeling open & airy.

A little workspace is carved out of the living room:

Here's the view from their loft bedroom above, which I really love. The wood floors transition to the deck floors just outside:

Here's the dining room below:

Here's the dining room "after"--

The vintage BRNO chairs we found were covered in hairy cream cowhide.  The painting is from one of my favorite Natural Curiosities collections by Paule Marrot, the French painter, engraver & textile designer who did most of her work between the 1920s and 1950s.  As a decorator, there's nothing more exciting than when you find clients who are willing to go outside the box and who are open to atypical things.   

Here's another view of the dining room:

The leaves on the table were honeysuckle branches from my yard and I really love how they looked & smelled.  I don't have any at our new house & think I need to get some.

To see the rest of the photos of other areas of the home (including a little sprucing up we did in the master bedroom) and the dining room set up as both a sitting room and a dining room, check out the current issue of Small Room Decorating Magazine.  The article was produced by Charlotte Safavi & shot by Helen Norman.  I haven't been able to pick up my copy yet & it doesn't seem like the magazine is sold everywhere but I have seen it at my grocery store & in bookstores.  Thanks so much to everyone who put the article together & especially to my clients for being so open to the design process & for letting it all happen!!

Hope you enjoyed!!

If you'd like help creating a home you absolutely love, contact me about our design services.
ps- All of the pretty photos in this post were taken by Helen too ;)

Tuesday, November 27, 2012

Incredulous Blue Eyes - Opéra - Paris

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      Blue Eyes - Opéra - Paris
        Photo by Fred - Easy Fashion Paris

Stripes and Check Pattern - Opéra - Paris

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      Stripes and Check Pattern - Opéra - Paris 
        Photo by Fred - Easy Fashion Paris

Shades Serie 1 - FW - Paris

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     Shades Serie 1 - FW - Paris
       Photos by Fred - Easy fashion Paris

Shades Serie 2 - FW - Paris

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      Shades Serie 2 - FW - Paris
        Photos by Fred - Easy Fashion Paris

Monday, November 26, 2012

Our kitchen

Our kitchen is coming together- and true to the impatient child that lives inside of me- I've moved in. 

 I found a bunch of my vintage oil paintings & hung them above the sink as I've been planning to do for months and it makes me soooooo happy.  Yes, I know, there's still painting & electrical to be done & cabinets to attach, but my artwork is up.  I try to ignore the blue painter's tape, open electrical outlets & such and just focus on the finished parts of the kitchen.  (It works surprisingly well when you are cooking for the first time in 3 months!!! yay!!)

Our island- which will be covered in reclaimed wood from the Lorimer Workshop in Rhode Island- and topped in honed marble- will be finished in a few weeks.  For now, I got a piece of navy gingham oicloth to put over our plywood.  (I think I'm going to keep it for really messy days- ie kids' art & craft projects & pizza parties ;)

{Our contractors worked really hard to make our kitchen functional for us on Thanksgiving & stayed late -when I know they wanted to be at home with their families- getting the appliances hooked up the night before.  We did a turkey (rotisserie style ;) in the oven & are just so thankful for everything.  I know there are many out there who are dealing with storm damage & who are trying to piece back together their homes, which is really tough & our thoughts have been with them.}

Here's a photo of the main wall in the kitchen, where the range is (and hood will be)...

{I love my range.  I didn't think it was possible to love an appliance but I sort of do.  It looks good and cooks food faster than any oven/stove we've ever had before.  We've always inherited our appliances with our houses and so this house is the first time we've done research & purchased what we really want.  There is SUCH a difference, I had NO IDEA. Crazy.}

Here's a picture of a beef (before we cooked it) on Saturday for some friends...

Now, more about this range.  (The Smeg Opera--- discontinued but I was able to find one.  There is a newer model available, but as far as I've been able to tell, it doesn't come with the rotisserie function.  BUT...  there are stands you can buy to put in any convection oven to make rotisserie-style food.)  It's Italian as was pointed out to me.  (I thought it was Australian because in my serach for rotisserie Smegs, I could only find them on the Smeg Australia site so I got completely confused.)  BUT-  THIS THING IS AMAZING.  Again, I've never purchased my own appliances before and I've never cooked on any high-end appliances before so what I'm comparing it to is generally the lowest available range from Home Depot, but hot damn!!  It's crazy!!! 

We overcooked the scrambled eggs on the first morning because we didn't know eggs could even cook that quickly.  We turned around & they were done.  (We had gas burners at our last house too but this one has much higher BTUs I guess...  I got it because it was pretty. ;)  (And came with good reviews.)

I searched for hours for this thing and looked at lots of different brands- all online- before coming to my decision.  I wanted an affordable professional style range (which for us, ruled out many of the higher-end brands like Wolf or LaCanche- MY DREAM ;) that looked good & had good reviews.  Having a rotisserie function was something on my dream wish list and I pretty much flipped out when I found one that had it all.  (To check out some more ranges I found that looked good, go here.)

I am really liking some of my other appliances too, so when I get the chance, I'll post on them too. 

And finally, just wanted to share a quick pic I snapped (when I was in my Norman Bates rocker holding the baby this morning) out our loft window...  Watching the sunrise with the boys has become one of my favorite things...  It's so peaceful and recharges me somehow:

I hope your Thanksgiving was special & that you find some quiet time in the holiday whirlwind we're now entering into!!

If you'd like help creating a home you absolutely love, contact me about our design services.

Miss Oksana - Opéra Garnier - Paris

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      Miss Oksana - Glamour Russia - Opéra Garnier - Paris
      Dress by CHLOE 
        Shoes by PRADA
      Photos by Fred - Easy Fashion Paris

Sunday, November 25, 2012

The housing cycle is the business cycle--again

Ed Leamer said so.  I said so.  And I continue to think it so.

Run a simple bi-directional Granger Causality model of change in residential investment and GDP.  It turns out a model with one and three lags best fits the data going back to 1969.  That model's four quarter forecast for GDP growth is 2.6, 2.5, 2.1 and 2.5 percent; for residential investment growth is 6.2, 5.0, 4.9 and 4.9 percent.  (BTW, the model passes the stationarity test).

But residential investment has grown by between 8.5 and 20 percent over the past four quarters.  Let's say that an exogenous shock (kids moving out of their parents' houses) leads residential investment to grow by 10 percent.  The forecast for GDP growth now increases to 2.6, 2.9, 2.6 and 2.9, or about .4 percentage points higher than the baseline case.  This increase in GDP reflects more than the direct impact of residential investment on GDP.

What is Apple's objective function?

Walter Isaacson's biography of Steve Jobs is a lot of fun--at least in part because it is not a hagiography.

One of the most striking things about the book is that Jobs never pushed profit maximization per se--he pushed "great products."  When John Scully pushed out Jobs and ran the company, he did push profit maximization--and Apple nearly went out of business.  Re-enter Jobs with his products-first philosophy, and Apple eventually becomes the most valuable company in history.

When economists model firms, we inevitably assume profit maximization, and then allow firms to compete either through price or quality.  The exception to this is a principal-agent set-up, where managers are seeking to maximize their own compensation.  But this doesn't really work for Apple, where Jobs was both a principal and an agent.

Maybe none of this matters--that making great products is a sufficiently strong proxy for profit maximization.  But Job's desire to make great products led him to care a lot less about cost minimization than, say, Dell--the chapter on how fanatical Jobs was about the plastic case molding for the original Macintosh underscores how Jobs tended not to think about marginal revenue and marginal cost when making decisions.

Friday, November 23, 2012

Eléonore - Rue de Turenne - Paris

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      Éléonore - Rue de Turenne - Paris
      Photo by Fred - Easy Fashion Paris

Pierre - Rue de Turenne - Paris

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      Pierre - Hairdresser - Rue de Turenne - Paris
      Perfecto by H&M
      Slim Pants and Bag by ASOS
      Vintage T-Shirt
      Sneackers by VAN'S
      Photos by Fred - Easy Fashion Paris

Food Reward Friday

This week's winner: poutine!

While not as appetizing looking as the Monster Thickburger, poutine is probably more popular.  For those who aren't familiar, poutine is a large plate of French fries, topped with gravy and cheese curds.  It originated in Quebec, but has become popular throughout Canada and in the Northern US.

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Steph and Jess - Fashion Week - Paris

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     Steph and Jess - Bloggers - Fashion Week - Paris
     Photo by Fred - Easy Fashion Paris

Miss Barbara Von Enger - Les Tuileries - Paris

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     Miss Barbara Von Enger - Art Advisor-Creative Director
     Outfit by Atelier Haldenwang
     Photos by Fred - Easy Fashion Paris

Charlotte - Rue de Turenne - Paris

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     Charlotte - Stylist Student - Rue de Turenne - Paris
     Perfecto by MAJE
     Vintage Jeans Shirt
     Jeans and Boots by ZARA
     Shopping Bag by Claudie Pierlot
     Photos by Fred - Easy Fashion Paris

Thursday, November 22, 2012

Miss Natalia Alaverdian - Les Tuileries - Paris

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     Miss Natalia Alaverdian -  Harper's Bazaar Russia - Les Tuileries - Paris
     Photo by Fred - Easy Fashion Paris

Wednesday, November 21, 2012

It turns out Harry Hopkins didn't say it

After Mitt Romney's "gifts" comments, I couldn't help but remember that I thought FDR advisor and WPA director Harry Hopkins said "we shall tax and tax, and spend and spend, and elect and elect."  But it turns out this is likely apocryphal--indeed, Hopkins denied having said any such thing.

Here is a nice chronology from Bartleby:

AUTHOR:Harry Lloyd Hopkins (1890–1946)
QUOTATION:We shall tax and tax, and spend and spend, and elect and elect.
ATTRIBUTION:Attributed to HARRY L. HOPKINS, administrator of the Works Progress Administration.

  Although Frank R. Kent mentioned the subject of “spending, taxes, and election” in reference to Hopkins in his column, “The Great Game of Politics” (Baltimore, Maryland, Sun, September 25, 1938, pp. 1, 16) he first attributed “we are going to spend and spend and spend, and tax and tax and tax, and elect and elect and elect” to Hopkins in the Sun, October 14, 1938, p. 15.

  Joseph Alsop and Robert Kintner in their column, “The Capital Parade” (Washington, D.C., Evening Star, November 9, 1938, p. A–11), elaborated Hopkins’s “probably apocryphal” words to: “Now, get this through your head. We’re going to spend and spend and spend, and tax and tax and tax, and re-elect and re-elect and re-elect, until you’re dead or forgotten.”

  Arthur Krock, in his column, “In the Nation” (The New York Times,November 10, 1938, p. 26), reported the wording as “we will spend and spend, and tax and tax, and elect and elect.” He also repeated this wording in an article in The New York Times, November 13, 1938, sec. 4, p. E–3. A letter by Hopkins denying this attributed quotation and a response by Krock were published in The New York Times, November 24, 1938, p. 26.

  Over the years the quotation attributed to Hopkins has evolved into the wording above.

Miss Hanneli Mustaparta - Opéra - Paris

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     Miss Hanneli Mustaparta - Opéra - Paris
     Photos by Easy Fashion Fred

Tuesday, November 20, 2012

Karen Chapple on the most reasonable way to create affordable housing

Housers need to listen to this:

Our Stair Rail is in!!

Our iron stair rail went in and I wanted to share some pics with you.  I spent a lot of time pouring over images of railings and figuring out just exactly what I wanted.  We worked with Tom Owens of Herndon Ironworks and his railing is truly beautiful.  It's really special to be able to work with true craftspeople on our home and to be able to do things that are a bit outside of the "box."

 {Tom Owens- bottom left- & his team of craftsmen. They are all so good at what they do!!}

For our railing, I wanted something that felt both modern & old at the same time.  It's simple & clean and spare and has a beautiful patina. 

When I visited Herndon IronWorks (literally a mile away from our old house) Tom & I looked around the shop so we could determine the finish I was after. 

We soon found out that I was drawn to the metals that had aged naturally over time vs. any faux aged finishes.  Everything I liked was outside & had weathered to a rusty black. 

To get the finish I wanted, Tom set the new iron for our railing outside & let it weather for a few weeks. 

{We used 1/2 inch square pickets for our rails, seen at the top left of the above photo}

The end of the top rail is a lamb's tongue that gently swirls into a sort of vine around the post:

It's the slightest bit of curve & "pretty" & quirk in an otherwise very spare & clean design.  I love little elements like this & it's sort of a microcosm for how I like rooms to feel. 

You might remember that our stairs were originall very steep, and so to make them a bit more manageable for our boys (and us! ;)  CarrMichael Constrution put new stairs in.  I wanted to be able to see the sides of the stairs & to have the drywall go right into the steps themselves without a stringer, so Mike Carr (owner of CarrMichael) made it happen.  Here's what the stairs looked like before:

{Justin, my very sweet little man}

...And here they are now:

{two other sweet ones- Dave & Ashby} 

 The temporary door at the top of the stairs & the wooden horizontal old railings will both be removed & we've got lots of cleaning up to so (walls, woodwork, etc.) but we're on our way!!  I love how the pickets attach directly into the drywall.  The curve into the drywall and are out farther than the stair treads, so they actually make the stairs even wider than before because there's so much more usable space on them. 

I'm so happy with how everything turned out & I really can't thank everyone who was involved enough.  It takes so many hours & brains to really come up with something good & it's definitely worth it!!  To read more about my stair inspiration, click here.

If you'd like help creating a home you absolutely love, contact me about our design services.