Quote of the Day

"Sight is about the eyes

Vision is about the heart"

LLCoolJ

To Fly or not to Fly..

I'm what you might call a "frequent flyer". And that's putting it mildly. These last few months i've been boarding planes like average Joe gets the bus... What troubles me is that rather than feel more at ease with the whole concept of floating in mid-air: the more airmiles I collect, the more vivid the reality that accidents do happen.

For instance, in the past three months alone, two pilots failed to land the plane the first time around. I can't remember the technical term for it, but in a nutshell, just before the wheels hit the tarmac, the plane takes off again. The deafening silence that follows is what gets me. Is an immediate announcement really too much to ask? It would certainly spare me the 15mins of anguish, "flash forwards" and "worst case" scenarios...

The first time (once grounded), the pilot apologized for the "incident" revealing that he was too close to another plane. Why was it only apparent in the last minute? Isn't there a control tower in the vicinity paying attention?

The second time happened just a couple of hours ago on an Aerlingus flight back from Cork. Once again i was grinding my teeth trying to preempt the inevitable whip lash experience of most landings, when a sudden jolt was followed by a re-escalation into the night. It all feels very dramatic at the time and once again, silence ensues... This time there was a change in wind which made it too dangerous to land, consequently they closed that particular runway. The fact that this all happened in the last minute, I find slightly disturbing: obviously there is no way of anticipating such a slight change of circumstance... And God knows you can't trust the weather channel...

I used to only worry at take offs and landings. Lately i find myself superstitious over things I say before the flight and during. Even certain thoughts are off limits. Two weeks ago, on my way back from Cannes, this boy queuing behind me (boarding group B as always, no matter what time i get there!) was going on and on about how "you have more chance of dying in a car crash than on a plane". And all I could think was: "famous last words....".

My worst experience was on an Aerarann flight from Luton to Waterford; one of those mini propellor planes (whatever they're called). Two thirds of the way through, the pilot announced our return to Luton. There was a malfunction with the wheels: he didn't know if they were out or in, or just partially out. Luton was better equipped to deal with a potential crash. Needless to say, i was petrified and in total ignorance asked (nobody in particular) "how can they not know if the wheels are fully out?". thank God for the englishman beside me who said in a heavy East London dialect: "Well what's he gonna do?... look out the bloody window?". At least that turned my fear into hysteria, and the landing sequence went by in a breeze.

I hope i haven't created an epidemic of aviatophobia, but they say its best to share your fears... To be honest though, I'd be happy just to pass mine on...

What frightens you?

Quote of the Night

"I tell you everything that is really nothing,

And nothing of what is everything,

Do not be fooled by what I am saying.

Please listen carefully...

And try to hear what I am not saying."

Charles C. Finn

Quote of the Day: Pablo Picasso

"We artists are indestructible.

Even in a prison cell or a concentration camp,

I would be almighty in my own world of art.

Even if i had to paint my pictures with my wet tongue on the dusty floor of my cell."

Pablo Picasso

Tedtalks: Ideas worth spreading

If you have ten minutes this video clip is really worth a look. My sister sent me the link this morning and it certainly qualifies as "food for thought". Journalist Andrew Mwenda has spent his career fighting for free speech and economic empowerment throughout Africa and here delivers a poignant and provocative critique of Western Aid in Africa, in particular the effects of Aid on the development process.

Whilst the video clip may be slightly outdated (2007), the topic at hand is ever-relevant; which in itself is rather disturbing. Uganda continues to receive Aid, which in turn continues to be distributed in the most corrupt of means. In the last 50 years, Africa has received over 600bn dollars, where has it all gone?

Mwenda highlights the necessary challenge of shifting from a poverty reduction agenda to one of wealth creation i.e. by supporting both domestic/foreign investment in Africa as well as research institutions rather than charitable donations for temporary food relief and health care. "Rather than sitting with Ugandan entrepreneurs, Ghanaian businessmen and South African enterprising leaders, our governments find it more productive to talk to the IMF and the World Bank. (...) Aid tends to accentuate ethnic tensions as every single ethnic group now begins struggling to enter the state in order to get access to the Foreign Aid pie".

My favourite part of the speech was towards the end, broaching the subject of Bono and all his charitable work. Well this was a critique by all means. I understand the trend of celebrities promoting charitable organizations to raise awareness etc, but Mwenda certainly put these contributions into perspective:

"A recent government of Uganda study found that there are 3,000 four-wheel drive motor vehicles at the Ministry of Health headquarters. Uganda has 961 sub-counties, each of them with a dispensary, none of which has an ambulance. So the four-wheel drive vehicles at the headquarters drive the ministers, the permanent secretaries, the bureaucrats and the National Aid bureaucrats who work on the Aid projects, while the poor die without ambulances & medicine" (Andrew Mwenda 2007).

What do you think?

Jose Marti: "I Cultivate a White Rose"

I cultivate a white rose

In July as in January

For the sincere friend who

Gives me his hand frankly.

And for the cruel person who tears out

The heart with which i live

I cultivate neither nettles nor thorns

I cultivate a white rose.

Written by Jose Marti (1853 - 1895)

note: Albeit a renowned poet and writer, Jose Marti was a leader of the Cuban Independence movement from Spain, and to date widely regarded as the Cuban National Hero.

Auctions Versus Private Sales

Whilst the concept of auctions can be traced back to 500B.C., art auctions appeared during the 17th Century following the french revolution as buyers and sellers met on a daily basis in taverns to trade. They are similarly executed today, and trade is conducted through a process of bidding; producing a quantitative value for an item of previously undetermined price.

Over the last decade, auction houses such as Christie's or Sotheby's have been at the height of much speculation and contemplation. Their promotion of trade is deemed proactive and favorable to the art market as it increases awareness and popularity of artists, and achieves record-breaking bids.

It is thus intriguing that the latter encapsulate only 1/3 of all art sales; transactions are generally of a private nature through dealers and galleries (Brewster 2006); a process that emerged in the 17th Century. Velthuis (2004) explains that within the primary market, artists are habitually represented on a commission basis, although on occasion the galleries might choose to purchase the works for resale at a profit.

Auctions have furthermore been viewed by critics as negative to the valuations of artists. From their viewpoint, the art market is very much a "sellers' market", in so much that the gallery-owners and dealers exert most control (Lewis 2004:1-8). According to Art Review (November 2006), galleries are widely considered the muscle of the art world. "With the market for art works constantly on the rise, the commercial gallerist takes the strange thing called art and converts it into cold, hard cash, and loads of it..." (Art Review 2006:59).

The "power" in question relates to the far exceeding demand versus supply; there are waiting lists for paintings that don't exist (Lewis 2004:1-8). "Galleries don't have to sell the art; they have to decide who not to sell it to" (Lewis 2004:4). What this theory emphasizes is that the value of a piece and the regard of the artist will increase depending on who buys it i.e. if it is part of the "right" collection; success is the result of skill-full reputation building (Art Review 2006:56-120).

Under those terms, the value will decrease should the piece lose its rarity; if it is bought and then immediately auctioned off at a profit the effects are minimal, however occurring on a larger scale this could cause an immediate downturn for the artist, should the paintings flood the market (Lewis 2004:1-8).

Valuations: The Secret Language of Prices

In the art world, the topic of pricing is nearly taboo. One is not intended to question the "value" of an art object nor the rationale behind the asking price. Central to microeconomic theory, prices are viewed as an expression of one's willingness to pay for a specific good and the monetary value of that good (Hall, Lieberman 2003). Which begs the question: what factors justify the valuation?

Judith Benhamou-Huet (2001) describes those factors that she believes to be the most relevant in determining value. Firstly, the basic objective "quality" of the work is critiqued; line, colour, drawing, format, forms, thickness of paint and technique in general. These aspects are judged in comparison to established industry standards and will ultimately determine the overall quality of the object. This type of evaluation is the only form of objectivity one can adopt; all other factors involved are based on subjective reasoning.

The identity of the artist, his/her reputation and the historical value of the artwork have a substantial effect on valuation and the commercial appeal of each object; "It is the artist's entourage that establishes his reputation" (Benhamou-Huet, 2001:15).

The author illustrates this claim by pointing to artists such as Michelangelo, whose lasting notoriety is, in very large part, a consequence of the prolific writings of contemporaries Vasari and Pope Julius II, who created a mythology behind the artist and placed his art in an historically significant framework.

She extends this theory to the public appetite for artists as myths: "An artist's work is interpreted through the prism of the myth associated with his life. (...) Artists are allowed the freedom to fail (...) all that is asked of them is that they embody a myth. (...) The painting becomes not only a sign of the artist's redemptive suffering, but also, to a certain extent, a relic of that suffering." (Benhamou-Huet, 2001:93). By obtaining art objects, the public are able to own an original piece of the artistic genius that overcame adversity and torment. Van Gogh is the perfect example of the isolation and suffering necessary to create such deeply moving masterpieces.

In 1956, Andy Warhol said: "If you want to know all about Andy Warhol, just look at the surfaces of my paintings and films and me, and there i am. There's nothing behind it".

Olav Velthuis (2004) describes the hidden language of the pricing system. He dismantles the meaning evoked through prices, in addition to relative pricing practises and finally price shifts. He takes into account the social status of dealers and the use of pricing as a means of signaling to the market. Members of the art world are highly knowledgeable of pricing norms and therefore interpret and draw meaning from any observable shifts. Furthermore, he highlights the importance of social context and surroundings (identity of the producer, consumer, distributor): "Prices (...) serve as status symbols for these actors; and enable these actors to enact their role in the market" (Velthuis, 2004:191).

An interesting perception was that prices are never decreased (Velthuis 2004), contradicting the law of price elasticity in economic theory; the proportionate change of either supply or demand in response to a change in the other (Hall, Lieberman 2003). "These forces do not influence the aesthetic or cultural valuation of art because the price and value inhabit independent spheres" (Velthuis, 2004:182). The theory is that dealers consider price drops as unproductive in the market as they convey suspicion to collectors, therefore tend to drop the artist rather than the price.

In an attempt to rationalize the irrational, an artist's work is expressed in monetary terms. The irony being that the intrinsic value of art is unquantifiable; the effect on each individual is entirely emotional and therefore cannot be measured. However, in comparison to other works, the value of a piece does reflect "the identification and identity of the artist, the format and period of the work, and its degree of rarity and state of conservation" (Benhamou-Huet, 2001:17).

The "Value" of Art: An Introduction...

Having read an article in the Financial Times concerning the investment potential of art and the endless growth of the contemporary market; I was inspired to examine this phenomenon from a financial perspective (for my dissertation). Thought i'd share some tidbits from my research... That one might intercept the elitist, close-knit community that is the art world as we know it, and determine its "value" through a series of standardized performance measurement techniques, was intriguing and controversial all at once.

We live in a consumption driven society, where daily news reports record increasing sales and investment in art at record-breaking prices. It is almost impossible for an outsider to fathom the validity of such investments, yet more and more people are getting involved. The past decade has seen the art world boom into a million pound industry with a culture so utterly consumed in a buying frenzy, that the snowballing effects can be viewed on a larger scale. Aside from the ever increasing demand thoroughly outweighing supply, more and more art specific magazines are lining the shelves as their respective subscriptions increase, art colleges are as popular as ever, and owning a commercial gallery seems the new business venture.

To those outside the art world, theories and reasoning with regards to pricing, valuations and such, may seem absurd if not obscene. What is a canvas worth, and why is it worth that? How does one establish prices nd how are prices justified in relation to other asset classes? In an interview with Vanity Fair, Tobias Meyer, worldwide head of contemporary art at Sotheby's in New York, stated that "there is something about when you buy a great work of art; it will transport you into another sphere. (...) That is ultimately why people buy art, regardless of how much it costs. The prices are not prices; they're relationships to individual worth." (Vanity Fair 2006: 196).

REIT: A portfolio diversifier?

REITs provide an important diversification benefit to investors based on their low correlation to other asset classes; this has been the focus of many academic studies. The structure was approved in 1960 and as an indirect form of property investment it experienced explosive growth throughout the 1990s; in particular equity REITs. The latter contain many of the advantages of property company shares in terms of lot size, liquidity, public trading and price information, with the added advantage of tax transparency. Although generally outperforming both direct property investments and real estate operating companies, they exhibit higher volatility than the direct market (Ball, Lizieri & MacGregor 2001).

Researchers at SNL Financial (2000) maintain that the weak pricing of the REIT industry during the 90s was due to the scarcity of capital and investors engaged in other asset classes. However, REITs have demonstrated an ability to stabilise real estate markets throughout property cycles and thereby the defensive properties of the asset class to market swings. This relationship has important implications for portfolio managers in terms of the diversification potential of REITs; it is assumed that more and more investors will include such stable income-oriented stocks in their portfolios as time goes on.

What is "Beta"?

in the six years i spent at university, a term that never failed to enter discussion was that of "beta", relative to both the finance and real estate industries. While baffling many a student, the concept itself is fairly basic once you see the bigger picture. Perhaps this brief description that i wrote as part of an investment markets assignment (Msc) last year might help to lighten the load.

In finance, the term "beta" is used to represent systematic risk i.e. the risk affecting the market as a whole which is non-diversifiable. The beta of a company measures the extent to which a movement in the general market will translate into movements of the company's stock i.e. the relative volatility of a stock's returns to those of the market. This relationship is illustrated through linear regression analysis; whereby beta effectively represents the slope of a linear equation.

Stock analysts refer to beta in order to determine risk profiles of stocks in terms of price risk. By definition, the market has a beta of 1.0, and individual stocks are ranked according to how much they deviate from the market. A beta of 0 would mean that a company's stock is independent of the overall market, while a high beta (>1.0) would suggest that the stock magnifies market movements. High beta stocks are regarded as riskier investments; however, they provide the potential for higher returns. Hoesli & MacGregor (2000) suggest that in bull markets, investors tend to look for high-beta companies, while in bear markets, they look for low-beta.

Chiang, Lee & Wisen (2004) state that past price movements are very poor predictors of future events; in line with Random Walk theory and thereby the semi-strong efficient market hypothesis: "Betas are merely rear-view mirrors, reflecting little of what lies ahead". However, analysis of beta over time does give some indication of a stock's relationship to a chosen index or benchmark and consequently any tendencies to trend can be evaluated.

A quote from Warren..

Warren Buffett once said:

"I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years."

As pragmatic as it may seem, surely a true visionary must be more of an optimist than a pessimist, if nothing else to believe in one's own ability - the backbone to success...

Active portfolio management draws on the assumption that markets are fundamentally inefficient, and a superior level of research should enable the exploitation of those inefficiencies to increase performance and control risk.