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Diversified financial conglomerates are a bad idea. Shareholders become victims of the organisational tensions that follow, customers suffer the resulting conflicts of interest, and taxpayers see government guarantees used as collateral for speculative trading.
Diversification is a matter of judgment not statistics. A model will tell you only what you have already told the model and can never replace, though it can enhance, an understanding of market psychology and the factors that make for successful business.
For fundamentalists, the value of an asset is the sum of the returns it will yield over its life. For fellow travellers, an asset is worth what someone else is willing to pay for it.
In financial markets, the more complex the instrument, and the more uncertain the outlook, the greater the likely range of views of common value. More often, trading puts assets in the hands of those who think the assets are more valuable than they really are.
Four years from now, the space agency plots to send a rocket to the moon to find out whether its made of blue cheese. Today, near the fourth anniversary of Germany's 3G mobile license auction, John reminds us of a fairy tale that shows how vanity and greed can promote large-scale self-delusion.