Sunday, February 15, 2015


The Nov/Dec 2014 issue of the MIT alumni magazine, Technology Review, had a long cover story on inequality, "Technology and Inequality", by editor David Rotman. While it isn't particularly surprisingly that MIT thinks more spending on education is the solution to all problems I nonetheless found it irritating in this instance. Misdiagnosing a real problem is harmful not just because it encourages spending on solutions that will not work but also because it discourages investigating solutions that might work.

The problem with the MIT article (and many similar ones) is that it correctly notes that people who have completed more levels of education tend to earn more money in their subsequent careers and then jumps to the almost certainly false conclusion that the additional years of schooling are why they are more valuable employees. It seems far more likely that some people have more natural academic ability than others and that the traits that make them good students also make them good employees. So the educational system is just identifying students who will make especially good employees. For the most part students who do poorly in school do so because they lack natural academic ability not because their schools are especially bad. There is confusion on this point because average academic ability varies widely between schools so some schools have lots of high ability students who do well and other schools have lots of low ability students who do poorly. It is natural to think that schools where most of the students are doing well must be far superior to schools where most of the students are doing poorly. But in the United States this is not the case, schools (within the range commonly found) make little difference. Move a poor student to a "good" school and they are likely to continue to do poorly, move a good student to a "poor" school and they are likely to continue to do well. Furthermore what differences do exist are predominantly due to peer effects, it is better to be surrounded by good students than by poor students. And of course it is not possible for everybody to have mostly high ability classmates.

One of the traits which helps you do well in schools is of course intelligence or IQ which the article doesn't mention at all. I do not find it surprising people with IQs of 115 do better in school and in their work careers than people with IQs of 85. But schools (in the US) have little effect on IQ and more spending on education cannot be expected to significantly reduce IQ differences and hence income inequality stemming from them.

Nor do I find it surprising that IQ is becoming more important in the job market. In 1920 there were over 25 million horses and mules in the US, by 1960 this number had fallen to slightly more than 3 million (see here). Pure muscle power used to be worth a lot in the economy, now not so much. There is a real issue here but more education isn't the solution.

Thursday, February 5, 2015

Super Bowl XLIX

I usually don't watch the Super Bowl but this year I did. It was quite entertaining. Especially if you were rooting for New England as I was.

Obviously Seattle's decision to pass on the critical play was debatable and it certainly didn't work out. But the level of criticism the Seattle coaches have received seems unreasonable. I doubt the claim that this was the worst play call in Super Bowl history. Instead it appears to me it was likely the unluckiest play call in Super Bowl history in terms of the actual effect of the play on Seattle's winning chances as compared to the expected effect. The level of vitriol does demonstrate why coaches are reluctant to go against the conventional wisdom. If they do and it doesn't work out they get crucified.

Tuesday, February 3, 2015

Portfolio Review

In 2014 my brokerage account increased in value by 12.17% (which breaks down to 9.69% from price increases and 2.48% from dividends).  This compares to a 13.44% return (11.38% price, 2.06% dividends) for VOO (Vanguard's S&P 500  ETF).  So my absolute performance was worse but my relative performance was better than in 2013.  I still lagged the market however.  As in 2013 this was primarily because I wasn't fully invested and secondarily because my stock and ETF picks underperformed.  Ironically while I bought 3 stocks during the year (dropping my cash position from 9.51% to 6.59%) they all lost money so I would have better off staying in cash.

Ensco PLC (ESV) which I bought early in the year was my worst performing stock with a total return of -33.92%.  I also bought two foreign banks near the end of the year,  Westpac Banking (WBK) a big Australian bank and Bank of Nova Scotia (BNS) a big Canadian bank.  They were both down at year's end, -3.45% and -1.38% respectively. 

I didn't make any other changes.  My existing positions tended to either significantly underperform or outperform.  In the underperforming group were my other energy picks, VDE, XOM and COP which had total returns of -9.97%, -5.98%  and 1.77% respectively.  Also underperforming were BBL (-26.88%), IBM (-12.20%), CAT (3.58%) and JPM (9.68%).  IBM continues to struggle so being forced to sell most of my position has worked out well so far.

VYM (13.38%) basically matched the market.

On the positive side my utilities outperformed in 2014.  ED was up 23.97% and PSEG was up 33.86%.  Similarly VNQ (another interest rate sensitive pick) was up 29.99%.  These positions had underperformed badly in 2013.  Two more solid outperformers were TGT (22.98%) and my other US bank WFC (23.72%).  Aetna (AET) my best position in 2013 continued to do well (up 30.82%).  My best performing stock in 2014 was Intel (INTC) with a total return of 43.29%.

Stock prices of course fluctuate however the dividend stream a diversified portfolio provides should be more stable and hopefully will increase over time.  In this regard my dividends (weighted by my initial 2014 positions) increased by 8.29% for 2014 versus 2013.