The Art of Managing Risk...

Washington Post Business Columnist Steven Pearlstein recently had two excellent articles concerning business financial risk.

The first was an interview with Dr.Vince Kaminski, who has seen firsthand how sophisticated companies systematically underestimate and ignore the financial risks they take on until it's too late.

He was at Salomon Brothers when a rogue trader used false bids at Treasury auctions to corner the market in some government bonds, a scandal from which the venerable investment bank never really recovered.

At Enron he was one of the few who tried to warn top management of the financial house of cards created by Andy Fastow's off-book partnerships and the inadequate capital the energy company had to support its extensive trading operations.

Kaminski hardly fits the mold of the corporate gadfly. He is a careful man with a Ph.D. in economics, an MBA and a nearly completed degree in mathematics. His expertise is in the relatively new field of risk management, in which sophisticated quantitative techniques are used to measure and model a business's risks and what would happen under various unpleasant scenarios. It is this "science" of risk management that supposedly gives management the ability to foresee and prevent the kind of things that brought down Enron and that now befall Citi, Merrill, HSBC and the rest. And it is this "science" that regulators rely on to protect the health of the banking system.

So why doesn't it work?

He answers that question in a second article, an online chat with Dr. Kaminski and various members of the general public who joined the online chat.

One key comment...

"First, it requires a top management that won't let itself get pushed around by Wall Street and short-term investors. and that requires compensation packages that are less tied to medium and short-term movements in the stock price.

Second, you have to change the culture and incentives within the firm (monetary and career incentives). You can celebrate the guys who bring in the big money, but you also have to celebrate the people who save you from disaster.

I think the directors are somewhat to blame as well. They are supposed to be the wise outsiders. And when they see a particular line of business is suddenly delivering outsized profit margins for what looks to be modest risk and involves no great skill or originality, a light should go off. And they should engage someone from the outside to take a look at the business and decide if there are inbedded and unacknowledged risks in the line of business that need to be addressed.

Maybe I'm naive in thinking directors can do this. But they are the best candidates I can think of who might have enough distance that, when a company is raking in the money, doesn't think that the only reason is because of the brillance of management."

Interesting reading!!

Currency Trading.... eToro!!!

Ever wonder what it would be like to trade foreign currencies?

How big is the foreign currencies market? Forex trading experiences an estimated $3.2 trillion in daily turnover—that’s ~35 times the average turnover of the NYSE!

Wish you had a safe place to play... that is, practice trading... for fun, without any money actually changing hands... and without any risk?

Looking for something cool?

Take a look at eToro!

It's a new web site that allows you to open a free practice trading account (or place real trades if you wish).

The web site requires a small download, but offers graphical ways to see your trades perform, in real time.

This is where it gets fun… There are four games to choose from:

* Forex Marathon – You pick the currency you think will go up and have it compete in a foot race against the currencies you think will go down.

* Dollar Trend – Race the US Dollar against other currencies, choosing whether it will rise or fall.

* Globe Trader – Manage your Forex trading portfolio by forging relations with other currencies on the map of the world.

* Forex Match – Choose the currency you think will go up and have it go one-on-one in a tug of rope against a currency you think will go down.

One unique aspect of foreign currency trading is that the market is almost always open (excluding some weekend hours), so you will see what is happening in real time with real data, no matter what day or time you log on.

Forex trading is definitely NOT for everyone... it is EXTREMELY highly leveraged (up to 400:1)...you certainly need to study the market very, very carefully... and place trades, even practice trades, with great care and skill... but eToro just might be a fun way to learn more about the ups and downs of this fascinating international marketplace!

Reverse Split - Example

Sun Investors OK 1-For-4 Reverse Split

ASSOCIATED PRESS/AP ONLINE

SAN FRANCISCO - Sun Microsystems Inc. shareholders approved a 1-for-4 reverse stock split Thursday, an essentially cosmetic maneuver by the server and software maker that is intended to remove the stigma of its slumping stock price. Approved at Sun's annual shareholder meeting, the move is not expected to affect its total market value, which stood at $18 billion Thursday. Sun hopes the split will help it overcome negative perceptions among potential customers about its stock price, which has been stuck under $10 since 2002.

Rational Investing and Tricks the Mind Plays

By Jane Bryant Quinn

Nov. 7 (Bloomberg) -- How good an investor are you? If you're like the average Joe or Jane, you think -- for sure -- you're better than most. You remember every one of your winners, in detail. You bury your losers. You never average the two together, which means you have no idea whether you're beating the market or not. If asked how you're doing, however, you'll probably say that you're ahead.

This confident approach to investing does wonders for your self-esteem. Where it leaves your portfolio is another story. We all know we're not supposed to trust our emotions when we buy a stock. What we didn't know is that our investing brain is a traitor, too.

We're hard-wired to kid ourselves. If you doubt it, take a look at ``Your Money and Your Brain,'' a new book by Money magazine writer Jason Zweig. He visited the scientists who study the neural circuits that switch on and off when we invest. It turns out that our brains amount to a hostile environment. To be better investors, we have to work against what our minds want most to do.

Sign of the Times...

PetroChina 1st Firm Worth $1 Trillion
Monday November 5, 6:20 am ET
By Elaine Kurtenbach, AP Business Writer PetroChina Becomes World's 1st Company Worth $1 Trillion After Shanghai Stock Debut

SHANGHAI, China (AP) -- PetroChina, a unit of state-owned China National Petroleum Corp., the country's biggest oil and gas producer, became the world's first company worth more than $1 trillion on Monday, surging past Exxon Mobil as the Chinese oil producer's shares nearly tripled in their first day of trading in China.