Welcome to the CFALA e-newsletter, a periodic publication with stories about noteworthy events and programs sponsored or hosted by the society, guest articles by members, book reviews, and other items of interest to CFALA members. Click on the headlines below to read the full stories. And if you’d like to contribute a story suggestion or, even better, write an article, we’d love to hear from you. Please email Executive Director Laura Carney at laura@cfala.org.

*Please note that the content of this e-newsletter should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of  CFA Society Los Angeles.

In this issue ...

• Past Presidents Recall Joys of Leadership and Contributing

• Ethics in Finance by John R. Boatright (Third Edition). Review by Douglas A. Scotti, CFA

• Behavioral Finance Book Recommendations

• The Bitcoin Boom: Asset, Currency, Commodity or Collectible?

• Swedroe: Bitcoin & Its Risks

• Bitcoin and Bubbles

• Bitcoin: A Peer-to-Peer Electronic Cash System

• People Are Spending Millions Of Dollars On Fake Money To Buy Fake Cats 

Past Presidents Recall Joys of Leadership and Contributing

Over the years, these pages have been filled with stories about members who volunteer and make CFA Society Los Angeles (CFALA) one of the best local societies in the country. We’ve covered stories about volunteers ranging from leading a Community of Interest, to grading the Research Challenge to helping at the food bank. But what about the path to what some may think is the ultimate CFALA volunteer activity: Board President. How did they get there? Why did they choose to take on that role? What are the professional benefits of being President?
We posed these and other questions to several past Presidents, and as usual, they stepped up and took the time to talk about their role in CFALA and why they think taking on an increasing role within the Society has been beneficial to them and important to members. Board development is a never ending process, and understanding what it takes to contribute at the Board level is important for continuing with a quality board that meets the needs of the members.
Certainly ascending to the position of President is not a short-term proposition. When asked what their first volunteer role was at CFALA, the answers indicate the variety of activities within CFALA and the programs offered. Mark Harbour, CFA said, “My first involvement was as a contributing member of the Applied Behavioral Finance Group (ABFG). It was a ‘community of interest’ that emerged from a suggestion by Larry Brody. We took an active role in pursuing and sharing research and information among ourselves and building active communications/collaboration with other people and organizations who had an interest in how to develop practical applications for improving decision making.” Marla Harkness added, “Phyllis Thomas, former president of CFALA, was once Chair of the Program Committee. She asked that I help her assemble a list of companies whose managements we wanted to present and then call those companies and try to schedule a luncheon meeting.” Ken Yee’s first volunteer role was as a Level 1 Coordinator for the USC/CFALA Review Program. “I essentially introduced the lecturer of the session and made sure the computer equipment worked, the colored markers were functional, and was available to answer questions from the students. “ Roger Gewecke recalls his first volunteer role as a coordinator for Level III of the CFALA/USC review program. He said, “Like most volunteers, I took on the role because someone else asked me to—in this case, Bill Krantz.”
While all volunteers are important, and no position is too small, being on the Board is a large step in terms of commitment and responsibility. What inspired past presidents to make that leap? Harbour shared the following: “I have always said that charterholders have an unusual sense of unquenchable professional curiosity that drives them to continue learning and exploring information of value to their profession. I felt (and still do) a personal obligation to participate in and contribute to the availability of continuing to build access to and steps toward enhancing the quality of our profession, and the capabilities of those who are in it.”
The time that one must dedicate to being a Board member is significant. Harkness and Yee were straightforward when the discussing the issue of time commitment required of Board members. “Properly done, the time commitment is significant,” Harkness said. “The organization can consume as much time as one is able to dedicate to it. There are always projects that should be accomplished - bringing up a new program, Board development, training for committee members, programs for younger members, charitable work, and on and on. There's no end to what you can do if you have (or can make) the time.” Yee added, “As a new Board member, the time commitment was manageable. As I progressed thru the ranks of being an officer a couple of years later, the workload became progressively heavier. The heaviest commitment came as President, especially since CFALA later divided its Board into two pieces: a strategic and an operating board. I developed a lot of leadership skills as an officer and I enjoyed the responsibility involved with going thru the officer ranks. The challenge was finding the time to do the job effectively, balancing outside work and family. ” Gewecke did note that the time commitment now is less than it was in the past. “For board members it is one meeting quarterly; back in those days (2006-2008), they were monthly meetings that were three hours long. Today it is better.”
Considering the commitment it takes to assume responsibility of a volunteer, past presidents have solid advice for those considering getting more involved with CFALA. “Identify the specific professional topic that you are passionate about,” Harbour said. “Tapping your inner motivations would be the key to success in leadership.” Once you identify a topic that interests you, locate the committee chair or speak to a current Board member. Harkness notes, “The members are wonderfully enthusiastic and endlessly generous with their time.” Gewecke said “Chip in on a project that one of your industry friends was involved with. It is an easy way to keep up with your contacts and make new ones.”
Like any contribution of time to a project or program, the donor derives a certain benefit from the effort. Being President of CFALA is no different. In fact, when posed with the question about the best part about being involved with CFALA, the responses were far more effusive than the comments about the work. Harbour shared, “The massive networking with inspirational professional colleagues is invaluable – and continues. To mention just a few - Larry Brody’s personal exuberance for the psychology of decision-making is a prime example. To this day, he and I routinely exchange articles and research of interest on this topic. Ned Downs has always been passionate about working with young people in the research challenge. There are simply a huge number of professional colleagues who are passionate about what they do. It is energizing to be a contributor to our collective efforts.” Harkness added, “Over the 30 years I've been working for CFALA, I've treasured the friends I've made and the professional relationships we've developed. The other absolutely heart-warming thing is the number of people who have said to me: ‘You handed me my charter at the charter event,’ or ‘You helped prepare me to take the exams,’ or ‘You referred me to the person who gave me my first job in the industry.’ Having people remember my small role years later demonstrates how important those early stages of their careers were to them and how important professional relationships are to all of us.” And Yee said, “The best part of being involved with CFALA is developing relationships with my local peers and not just ‘connections.’ Relationships take years to nurture and if one does a good job in volunteering, it will be seen by others and over time relationships and respect will also develop. I was able to develop soft skills, leadership qualities and public speaking abilities that I probably would not have been able to attain had I not volunteered for CFALA.” A leadership position within CFALA has enriched the personal and professional lives of all the past Presidents we interviewed. Harbour said, “It has expanded my understanding of and appreciation for the various capabilities of people in the investment profession. It has also been uniquely valuable to my ability to grow my own expertise my role in serving clients.” Harkness has leadership experience at the CFA Institute level in addition to her roles at CFALA. “This experience has been very enriching” she said, “and has allowed me to be part of teams from around the world, the members of which are often at the top of their professions.” Yee added, “I view volunteering for CFALA as instrumental to my current career success as earning the CFA Charter. It has catapulted me into strategic and worldwide work at the CFA Institute and professional level (public company board positions) and has provided me the ability and confidence to effectively deal with situations in both business and life.” Gewecke said, “I have met many people in the investment profession I would otherwise not have known and have found almost everyone to be most ethical and caring about their clients and this profession.”
The role as a leader was also important for the past presidents, and they feel it played a part in their success and stressed the importance of developing leadership skills. Harbour shared, “The one key topic that is of huge importance in my opinion is the time that we spend working on succession plans for our leaders. The truth is that all of us eventually need to grow beyond our current roles – and ensuring that we have identified our successors, and engaged them in activities that grow their intellectual capabilities and levels of enthusiasm for their specific leadership role is a vital step in keeping the fires burning for all of us.” Harkness has an idea for the current leadership. “I would love to see the society raise some capital and/or dedicate some resources to Board development in order to allow these leaders the opportunity to expand their Board capabilities,” she said. “It will not only benefit CFALA but also so they can leverage those skills by filling Board seats at other financial services organizations eventually.”

Tom Derse, CFA Back To Top ^^

Ethics in Finance by John R. Boatright (Third Edition) - Review by Douglas A. Scotti, CFA

The world of finance is loaded with potential conflicts of interest, everything from insider trading to corporate governance. Any of these situations can tempt individuals to pursue unethical (sometimes illegal) behavior. In his recent edition of Ethics in Finance, Dr. John R. Boatright dissects each one of these and tries to offer a solution, or at least a solid framework on how best to handle these complex situations. The book covers ethics in a variety of areas including credit cards, mortgage lending, mutual fund market timing, employee trading, microfinance, socially responsible investing, insider trading, corporate governance, broker- dealers, financial advisors, hostile takeovers, high frequency trading, and trust departments.
By background, Dr. Boatright has a masters and doctorate in Philosophy from the University of Chicago and is quick to add historical significance to his topics. For example, when discussing derivatives he goes back to the time of Aristotle: “Aristotle recounts a tale about the philosopher Thales, who, correctly anticipating an abundant olive crop, paid owners of olive presses in the region to give him exclusive right of use during the harvest season so that growers would have to pay him for access to the presses.”
The book starts with a philosophical study of the need for ethics in finance. This section is quite lengthy (about 45 pages) and can be dry and rather textbook-like in nature. But he makes his point very clear that not all situations in finance are clear cut, rather most are vague with significant grey areas. He explains how a better understanding of the conflicts of interest (on both sides) could lead to less ambiguities and problems. For example, he explains the difference between a commission-based broker and a fee-based financial advisor and how the commission-based broker naturally has an incentive to recommend investments that have higher commissions and may not be in the best interest of the investor. However, Dr. Boatright acknowledges that “either compensation model is ethical as long as the method of compensation is understood and accepted by both parties.”
Dr. Boatright highlights the numerous blow ups in modern finance, including Enron, WorldCom, AIG, etc. He provides these examples to show not only the importance of ethics but also of our human nature to follow the herd and be susceptible to groupthink. Most market participants didn’t question Enron’s profitability enough as the stock continued to rise along with phony profits. An example of this is the subprime mortgage meltdown where no one wanted to stop the machine as so many businesses were all making significant amounts of money.
Going further, Boatright describes the situation in 2005 where KPMG had to pay a fine to settle charges of selling illegal tax shelters. In Dr. Boatright’s opinion “the law prohibits abusive tax shelters but offers no precise standards for judging such abuse.” Other examples include a situation where a broker is executing a non-solicited order for a client where the broker feels it is an unwise investment for the client. The broker is doing his job executing this order and has no obligation to tell the client that he feels it’s a bad investment, but from an ethical perspective he should.
On the issue of credit cards, the author goes into detail on the strategies used by credit card companies (charging different interest rates on different levels of debt) and feels strongly that these strategies, although disclosed in the credit card agreement, are unethical. He states that “[t]he possibilities for generating revenue from cards are enormous, and issuers devote considerable effort and ingenuity in exploiting these possibilities.” He uses very strong language in his interpretation of their business models adding that “[i]n the typical loan process, it is unnecessary to insist that the lender assess the creditworthiness of the borrower.” Boatright continues; “It is now in the lender’s interest to permit a borrower to assume more debt than is prudent.”
Boatright believes that credit card companies target college students in particular and feels that the fee-sharing arrangement with universities is unethical. He highlights the tables that are set up by the credit card companies at universities as “only the beginning of an assault.” He continues his tirade against this aggressive marketing to college students by citing that “in one sample, 69% of students reported receiving at least one credit card offer in the mail during the [first] week [of school], and other studies found that students had received between 25 and 50 applications a semester.” Dr. Boatright feels that the fees charged on credit cards more than offset the credit risk assumed. He cites the higher return on assets for credit card companies (5.37%) versus traditional banks (1.18%) to drive home this point. He does make a good point about overdraft fees being excessive. He cites a study where the “overdraft fees ranged from $10 to $38, with the median being $27. A card user who is charged a $27 fee on an overdraft of $20 and who repays the amount loaned within two weeks would incur an annual interest rate of 3520%. This does not fit easily into any definition of reasonableness.” Boatright acknowledges the regulations that have been put in place to counter some of these abuses but feels they do not adequately address the consumer issues.
One of the best sections of the book is on subprime mortgage lending. Dr. Boatright goes into great detail outlining the history of the subprime mortgage product, the impact of securitization, how it was misused, and how it imploded into the financial crisis. He starts with the increase in subprime lending from 1996 to the peak in 2006, noting that as a percentage of all mortgages subprime represented 9.5% in 1996 and then rose to 23.5% ten years later. He cites the innovation of securitization as the primary growth engine of subprime mortgages as securitization opened up the investor base beyond local banks, who had historically provided these types of mortgages. Boatright sums it up: “In one fell swoop, this innovation opened the world’s credit supply for home mortgages and transferred the risk to the world’s investors.”
With the advent of securitizations, the banks did not hold the mortgages on their books and as a result didn’t exercise enough care. In addition to banks looking the other way, mortgage brokers didn’t take the credit risk either and were paid based on volume. In this new world of originate-to-distribute, the mortgage broker became the intermediary between the borrower and the originator. Boatright states that “[c]ontrary to the belief of many borrowers, mortgage brokers are responsible only to themselves; they are solely intermediaries between borrowers and lenders, with no fiduciary duty to either.”
For Boatright, there were many reasons for the subprime mortgage meltdown including predatory lending, toxic products (negative amortization loans), and perverse incentives (banks originated mortgages but didn’t hold them). He acknowledges that borrowers were not off the hook either and at times conspired with the mortgage brokers to misrepresent information (i.e. stated income loans).
His chapter on mutual fund market timing illustrates the fine line between illegal and unethical. Surprisingly, prior to 2003 when Elliott Spitzer examined cracked down on the practice, market timing was legal as long as it was permitted by the mutual fund sponsor. Boatright highlights that “In a 2003 SEC survey of the 88 largest mutual fund companies, more than half admitted that they allowed market timing, and 25% admitted to allowing late trading.” Late trading is illegal in the United States. Dr. Boatright makes the case that while market timing is legal it is clearly unethical for three main reasons: First, it allows a few favored clients to have unique terms; second, it hurts long-term investors by increasing a fund’s expenses and reducing its returns; and third, mutual fund directors and executives are violating their fiduciary duty to protect investors’ interests.
In a section on the role of professionals, he describes that some of the occupations within finance have their own ethical codes including CFP, CLU, and CHFC but does not include CFA. This is a little disappointing given the focus on ethics that is incorporated into not only the CFA exam but in the annual CFA member attestation.
Overall, a very detailed book with several case studies on the importance of ethics, real life examples of where ethics was lacking, and a framework on how to improve complex situations. There are several more topics that are covered by the author but not covered here. Each chapter is done well and can be read separately making it a great reference book for any finance professional.
Link to book on Amazon
Douglas A. Scotti, CFA
Member of the Advocacy & Ethics Committee Back To Top ^^

Behavioral Finance Book Recommendations

The CFA Society Los Angeles Applied Behavioral Finance Community of Interest seeks to take a leadership role in advancing applied behavioral finance. Recently, committee members were asked for their behavioral finance book recommendations. Committee members are shown in parentheses. The results are as follows:
 

• Behavioral Finance and Wealth Management, Michael Pompian (Scott Laudeman, Madison Heights Advisors)
• Behavioral Portfolio Management, Thomas Howard (Jonathan Rugg, Charlesworth & Rugg)
• The Black Swan, Nassim Taleb (Jim Altenbach, Florentez Investment Management)
• Extraordinary Popular Delusions and the Madness of Crowds, Charles Mackay (Rishin Doshi, Affluencer Financial)
• Finance for Normal People, Meir Statman (Mark Harbour, Morgan Stanley)
• The Intelligent Investor, Benjamin Graham (Larry Brody, Independent Investor)
• The Intelligent Investor, Benjamin Graham (Luke Kulma, LourdMurray)
• Misbehaving: The Making of Behavioral Economics, Richard Thaler (Michael Porter, AQR Capital Management)
• Nudge, Richard Thaler and Cass Sunstein (Sam Miller :Signature Estate & Investment Advisors)
• Risk–Return Analysis: The Theory and Practice of Rational Investing (Volume One), Harry Markowitz (Michael Lovelady, Oceans 4 Capital Group)
• Thinking, Fast and Slow, Daniel Kahneman (Andrés Ochoa, Strategic Valuation Group)
• Your Money & Your Brain, How the New Science of Neuroeconomics Can Help Make You Rich, Jason Zweig (Ara Oghoorian, ACap Asset Management)

Scott Laudeman, CFA
Chairman of the Applied Behavioral Finance Community of Interest
For questions or comment, contact Scott Laudeman, CFA here. Back To Top ^^

The Bitcoin Boom: Asset, Currency, Commodity or Collectible?

Professor of Finance at NYU's Stern School of Business Aswath Damodaran contends that Bitcoin cannot be valued; but rather, only priced. Check out his post and its embedded video for an insightful perspective. Read more... And more...  Back To Top ^^

Swedroe: Bitcoin & Its Risks

In this ETF.com blog post, author and Buckingham Strategic Wealth Principal and Director of Research Larry Swedroe outlines six severe, inherent risks of investing in Bitcoin. Swedroe also discusses Bitcoin's tax implications, and offers his thoughts on whether Bitcoin represents an investment or a speculative bubble. Read more...  Back To Top ^^

Bitcoin and Bubbles

The Grumpy Economist's John Cochrane, senior fellow of the Hoover Institution at Stanford University, expands on the notion of Bitcoin as a speculative bubble. Read more...  Back To Top ^^

Bitcoin: A Peer-to-Peer Electronic Cash System

In this fairly readable 2008 whitepaper, the unknown person or group of people known as Satoshi Nakamoto introduces Bitcoin as a peer-to-peer network alternative to the existing financial intermediary-dependent, trust-based model. We've also included a link to a Business Insider article that examines Sakamoto's many alleged identities. Read more... And more... Back To Top ^^ 

People Are Spending Millions Of Dollars On Fake Money To Buy Fake Cats

Without once mentioning the words "tulip bulb," Kotaku Weekend Editor Ethan Gach reports on how digital collectors are gathering and breeding fictional cats whose value is tied to the minor cryptocurrency, Ethereum. Gach's article includes a link to a rudimentary kitten sale tracking site. Read more... And more... Back To Top ^^