Friday, July 31, 2009

Enter the Algorithm

In this occasional paper, I echo Dr David Berlinski's view that the proliferation of powerful personal computers during the late twentieth-century accelerated the quest for algorithms as drivers of technological and human progress. While calculus is creditworthy of bringing high order to the physical sciences, it is now the algorithm that thrives as the intelligent artifact of the new millennium.


Thursday, July 30, 2009

The Spreadsheet Reinvented

My father was an accountant, and I vividly recall his working on spreadsheets (also known as ledger sheets) on the dining room table late at night. He once gave me a short lesson about how to make proper entries onto a spreadsheet. I recall his emphasis on neatness and penmanship, selecting the proper pencil (my father preferred the Ticonderoga No. 3), and having a serviceable gum eraser nearby for making clean erasures. In the early 1980’s, he introduced me to electronic computing. At the time, VisiCalc was all the rage. Later, Lotus 1-2-3 came into vogue. Today, Excel is the most widely-used spreadsheet program in the world, and has almost completely replaced ledger paper in professional practice (though some small businesses still rely on paper ledgers to this day).

Of course, the essential features of the electronic spreadsheet are inherited from its paper lineage, and the ontological purpose of all spreadsheets is the same, regardless of whether one is using an electronic or paper version of the tool. Nevertheless, it's interesting to compare the paper spreadsheet to its electronic successor in an effort to better understand why the spreadsheet remains essential to the practice of finance and accounting.

Below, you will find a short definition of the term “spreadsheet,” together with two download files – one is a facsimile of a paper spreadsheet, the other an electronic spreadsheet. Once you have downloaded both files, place them side-by-side on your monitor screen and then ask yourself the following question: Can one replace the spreadsheet without reinventing the spreadsheet? I look forward to your comments.
spread·sheet n. 1. A piece of paper with rows and columns for recording financial data for use in comparative analysis. 2. Computer Science An accounting or bookkeeping program that displays data in rows and columns on a screen.
Paper Spreadsheet

Electronic Spreadsheet

Wednesday, July 29, 2009

Small Investors Beware

High frequency (or algorithmic) trading was one of the major investment innovations to emerge in the late 20th century. Given the effectiveness and profit potential of such methods, it comes as no surprise to learn that 46 percent of daily volume originates through high frequency strategies.
Powerful computers, some housed right next to the machines that drive marketplaces like the New York Stock Exchange, enable high frequency traders to transmit millions of orders at lightning speed and, their detractors contend, reap billions at everyone else’s expense… High-frequency specialists clearly have an edge over typical traders, let alone ordinary investors… Powerful algorithms — “algos,” in industry parlance — execute millions of orders a second and scan dozens of public and private marketplaces simultaneously. They can spot trends before other investors can blink, changing orders and strategies within milliseconds… These systems are so fast they can outsmart or outrun other investors, humans and computers alike. (Duhigg, “Stock Traders Find Speed Pays, in Milliseconds,” NYT, 23 Jul 2009)
Unfortunately, the methods of high frequency trading are neither available nor assessable to the average investor. My advice to most investors is to invest in public companies only with funds that you can afford to lose. My recommended investment strategy of choice for serious investors is to target companies in which you are an active owner, partner, or director in order to ensure you have full access to the fundamental information you need to monitor your investments wisely (which incidentally is the same strategy apparently used by Warren Buffet, George Soros, and Carl Icahn).

Institutional investors and other major players dominate modern day investing with sophisticated methods and technologies that the average investor cannot hope to match. Unless regulators can find a way to level the playing field, small investors should beware of the markets.

Tuesday, July 28, 2009

The Ascent of Money

From Main Street to Wall Street, the ongoing financial crisis has changed the very nature of society and enterprise. The PBS production, The Ascent of Money with Niall Ferguson, can now be viewed online. The four-hour documentary seeks to trace the evolution of money and its impact on society throughout history. I commend the film to my readers.

The Ascent of Money on PBS