Price and Money: Wag the Dog?
Milton Friedman famously claimed, “Inflation is always and everywhere a monetary phenomenon.” Does this relationship also hold in reverse?
Decades ago, when everything and everyone from unions to cartels were blamed for inflation, Friedman rejected the conventional wisdom and posited on the basis of empirical data that money supply drives price levels. He argued that prices increased not due to price and wage increases, but because the federal government made the supply of money grow faster than the real economy created value. This groundbreaking theory, while highly controversial and almost revolutionary at the time, appeared to be vindicated by the “Great Inflation” of the 1970’s, and has since become the core tenet of monetarism and modern policymaking. However, in a mark-to-market world, a price may act insidiously to drive money supply and amplify boom-bust cycles.
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Not-So-Dire Diagnosis
Warren Buffett once famously stated that “Berkshire [Hathaway] buys when the lemmings are headed the other way,” conjuring up visions of rodents blindly following one another off a cliff. But the idea that lemmings participate in mass suicide is a myth, propagated by a Disney documentary. The widespread misuse of the lemming metaphor by investors to illustrate herd behavior itself reveals the herdlike behavior of investors and the scarcity of original insight.
Original insight is also uncommon among doctors. Physicians are trained through rote memorization, and independent views are often ridiculed by peers and prosecuted by malpractice attorneys. The hiring of physicians as consultants by investment firms seeking unique perspectives has instead led to a greater tendency toward consensus thinking.
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Barron’s: What the Doctor Ordered
A doctor-turned-stockpicker says he’s bearish on stents.
By MARK VEVERKA
YOU DON’T HAVE TO BE A MEDICAL DOCTOR to pick healthcare and biotech stocks, but it doesn’t hurt.
Joon Yun has been managing money for only nine years, but his 12 years as a radiologist — mostly at Stanford University Medical Center — have served him well in his second career as a partner of Palo Alto Investors in Palo Alto, Calif., an 18-year-old hedge fund with about $1.5 billion under management, focused mostly on small-cap growth. “Radiology is sort of similar to investing,” he says. “You’re making decisions based on limited information and looking for patterns.”
The graduate of Harvard and of Duke Medical School hadn’t been looking to leave his day job. But when a colleague had to bail on an interview with Palo Alto, which was seeking a doctor to oversee healthcare investing, Yun filled in on a whim. The rest is history.
Since joining PAI, Yun has never had a down year. The three-year return of Palo Alto’s $250 million micro-cap fund, heavily weighted toward healthcare and biotech, is nearly 23%. Over five years, the return is close to 30%.
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Darwin in Medical School
Some scientists call for a bigger dose of evolution in doctors’ educations
By MITZI BAKER
Joon Yun, MD, began considering how evolution applies to human health a decade ago when his first heart disease patients died. These cases disturbed Yun, then a Stanford radiology resident. But they also intrigued him.
Having studied evolutionary biology in college, Yun tried fitting these medical failures into that framework.
His mind wandered to the early days of humans when heart disease was a rare trigger of death. In the prehistoric era, a more likely cause of death would have been an attack by a predator. The human body’s response to trauma handles this type of assault by immediately springing to action: The blood forms clots and the blood vessels tighten, together with slowing blood loss, and inflammation kicks in to combat infection. The genes governing these responses to trauma presumably were favored during evolution and have become the “factory setting” in modern humans.
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