If not for the fall from grace, he'd be a hero today. In fact, he'd also have every right to wag his finger at us smugly saying, "I told you so."
Prior to his downfall, Eliot Spitzer was the person Wall Street arguably feared the most. As the former Governor and Attorney General (AG) of New York, Spitzer developed a reputation for a vindictive and no-nonsense approach of taking white collared crime to task. Price fixing, investment bank stock price inflation, fraud, predatory lending practices and even excessive fees and compensation were some of the areas Spitzer actively pursued during his tenure as the AG--long before they became household topics in 2009.
Spitzer has finally broken his silence, granting an interview with Fareed Zakaria which was televised over CNN on March 22nd 2009, following his resignation as AG following his involvement in a prostitution scandal. It is evident from the interview that although the scandal has tainted his legacy, it has in no way diminished his expertise on financial regulation nor has it interfered with his clarity of thought. I found several of his responses to be deeply profound. Here are some of his views:
ON CAPITALISM AND THE FINANCIAL SERVICES:
"Recklessness, greed and a misunderstanding of what capitalism is all about, and a belief that financial services alone could generate wealth.
Financial services doesn't really generate wealth. Financial -- the capital markets are designed to raise money and then apportion it to industries that are creative, whether it's biotech or automotive, or anything else.
Financial services should be a conduit. Instead, we became enamored of the products themselves. And what resulted was this enormous bubble in assets, ginned up and supported by a financial services sector that, because of a series of improper incentives, got us to where we are right now."
ON REGULATION:
"...After the last round of scandals -- Enron, et al. -- we passed Sarbanes-Oxley. And we said, aha, we've solved the problem. Now we have another set of scandals.
There are enough laws, enough regulations on the books for smart, aggressive regulators and prosecutors to make all the cases. What was missing was judgment. And you can't legislate judgment. You can't regulate judgment. Either the people who are the regulators will walk into a bank and say "Your leverage is too great. We are going to take actions to pull it back," or "This type of investment is flawed," or they won't. You can't pass a law that says, you must use sound judgment... Bubbles have been there through history, through over-regulation and under-regulation. This is a question of judgment and of failure of judgment."
COMMENT: It is interesting to note that as the AG, Spitzer frequently invoked, what was long considered to be an obscure and dormant piece of legislation dating back to 1921 and known as, the Martin Act to bring action against a number of offenders. The tools are there, it's more a matter of regulators getting round to using them.
ON THE MEDIA
"And I think the media -- writ large. I mean, forget CNBC. I think the entire media -- print media, TV media, et cetera -- did not ask the hard questions as these deals were being structured, as the bubble was inflating.
We turned the Wall Street masters of the universe into these icons, who bestrode the universe and made no mistakes, when I think a more inquisitive attitude would have said, "Wait a minute, guys. This won't last."
ON THE GOVERNMENT:
"...there are many on Capitol Hill who are beating their chests so loudly, you know it's just a cover-up of their neglect and failure over the last decade. They sat there and watched and did nothing, as they clearly should have known that we were building a system that was a house of cards. And they enjoyed it and prospered from it, and there was a symbiotic relationship between them and Wall Street."
ON PRESIDENT OBAMA:
"And I think one of the largest, most difficult tasks that he has is to control the outrage that is brewing in the public -- sympathize with it and garner it, but use it to get good policy, not policy based upon anger...I'm worried that we will go to the other extreme and end up with rank populism. That could be just as dangerous."
ON THE POPULIST OUTRAGE:
"Yes, yes. The outrage is legitimate, but it is being fomented by sort of a faux populism by many on Capitol Hill who saw this coming, who knew this was going on. And so, I look at them and I say, "Come on, guys. You're supposed to be more mature. Express the anger, but then say, how do we solve it? Don't just throw more oil on the fire."
COMMENT: Is the outrage being formented? Presently, it's being directed at AIG which is paying out $160 million in bonuses despite taking taxpayer dollars. However, it is not alone in that regard and while $160 million is no small sum, it actually pales in comparison to what the other firms are recieving. Some suggest that the real welfare queen is actually Goldman Sachs. AIG is neither alone nor is it the most culpable. John Thain and Merrill Lynch win that prize.
ON EXECUTIVE COMPENSATION:
" I think I might go back to a very old tort theory of unjust enrichment -- contract theory, tort theory -- and say, you know what, guys? There's a theory in the law that says -- a couple of theories -- one impossibility saying, AIG just doesn't have the money to pay you. And absent the federal infusion, it wouldn't have it, so we can't pay.
And second I would say, unjust enrichment. You simply don't deserve it. It's an equitable argument. Some courts might go for it, some courts might not.
But as a practical matter, as the president of the United States, I think I would call the CEOs into the Oval Office. And I would say, "Guys, this is untenable. We're all going to have to suck it up a little bit and show the American people that we know what it means to be part of a community, and share the sacrifice. Let's see if we can't solve this without the legal wrangling."
ON THE FAILURE OF THE SEC
"Absolutely. The power of the federal agencies to do this stuff was unlimited.
And any time I hear the SEC say, we didn't have the power to do this or that, forget it. They had more people, more power, more money than was necessary. What they lacked was the creativity and the will."
ON THE PROBLEM
"I tried very hard not to vilify individuals, because it wasn't a mid-level executive who was the problem. It was the whole structure. And that's why the global deal was with all the banks."
ON HIS OWN FAILURE
" I never held myself out as being anything other than human. I have flaws, as we all do, arguably. I failed in a very important way in my personal life, and I have paid a price for that."
CLOSING COMMENTS:
Evidently, Spitzer himself excercised poor judgement in the events leading up to his resignation from office in 2008. Something he plainly admits. However, that should not distract us from the soundness of his reasoning, there is much we can learn from him.
I also want to leave you with another thought. It should be now obvious that regulators lacked the skills, conviction and judgement to take on the Financial Services. An effective financial regulator needs to have a sound knowledge base in law, finance and business. That is ironic because having gone to both law and business school, I have never encountered a single person aspiring to become a financial regulator. The regulatory/financial services compensation gap must be narrowed, by having such a huge disparity in compensation continue for so long is tantamount to putting Wall Street on the honor code system for decades. And it is pure fantasy to think society is better off this way. Until this changes, Wall Street will always be several steps ahead of the game and we can never safely say, it won't happen again.
The full transcript of the interview can be found here.
Better still, you can watch it here.
Monday, March 23, 2009
Wednesday, March 11, 2009
Reinstate The Uptick Rule
It is no secret that short selling is controversial, critics say it allows speculators to destroy businesses and provides incentives for the spreading of malicious rumors in order to drive the stock down.
On the flipside, supporters say price discovery is improved because negative views on the stock price can be expressed.
And this is how arguments for and against shorting basically run. However, the most convincing answer I've heard lies somewhere in between.
Shorting should be thought of as medication. Taken in the right quantities it aids recovery but overdosage is downright poisonous. What really kept shorting in the right quantities was the uptick rule. The rule mandates every short sale transaction be entered at a price that is higher than the price of the previous trade. In other words, the uptick rule prevents short sellers from adding to the downward momentum when the price of an asset is already experiencing sharp declines, there must be an uptick in the price before you can short.
This rule was of course eliminated by the SEC in July 6, 2007 because the uptick rule "modestly reduce[d] liquidity and do[es] not appear necessary to prevent manipulation." This is course the same SEC which has been asleep at the wheel for everything else.
Like most other other forms of deregulation the effects were debated and unknown in the immediate aftermath, but within 12 months, it became clear that market volatility had increased and the number of stocks declining by more than 40% in one day had doubled.
It amazes me that the SEC empowered by hindsight knowledge of the 1930's, which is always 20/20 vision I am told, could ever eliminate the uptick rule. The children have been allowed to play with matches and now the house is on fire. The uptick rule needs to be reinstated immediately, and if a few hedge funds grumble, please don't lose sight of the burning house.
On the flipside, supporters say price discovery is improved because negative views on the stock price can be expressed.
And this is how arguments for and against shorting basically run. However, the most convincing answer I've heard lies somewhere in between.
Shorting should be thought of as medication. Taken in the right quantities it aids recovery but overdosage is downright poisonous. What really kept shorting in the right quantities was the uptick rule. The rule mandates every short sale transaction be entered at a price that is higher than the price of the previous trade. In other words, the uptick rule prevents short sellers from adding to the downward momentum when the price of an asset is already experiencing sharp declines, there must be an uptick in the price before you can short.
This rule was of course eliminated by the SEC in July 6, 2007 because the uptick rule "modestly reduce[d] liquidity and do[es] not appear necessary to prevent manipulation." This is course the same SEC which has been asleep at the wheel for everything else.
Like most other other forms of deregulation the effects were debated and unknown in the immediate aftermath, but within 12 months, it became clear that market volatility had increased and the number of stocks declining by more than 40% in one day had doubled.
It amazes me that the SEC empowered by hindsight knowledge of the 1930's, which is always 20/20 vision I am told, could ever eliminate the uptick rule. The children have been allowed to play with matches and now the house is on fire. The uptick rule needs to be reinstated immediately, and if a few hedge funds grumble, please don't lose sight of the burning house.
Schadenfreude
Dodging bullets before congress on Feb 11th 2009, Vikram Pandit had to justify Citigroup's $42 million private jet order after taking billions of taxpayer bailout money. Since he couldn't, he conceded, "I get the new reality and I will make sure Citi gets it as well."--And that's the closest you will ever get to the CEO of a Wall Street firm ever coming close to saying sorry for breaking the global economy.
For once, it became a joy to watch C-SPAN, mostly a sense of Schadenfreude watching Henry Waxman and the rest of Congress tag team the Wall Street executives. You almost felt sorry for Dick Fuld. The Swiss are taking it even further and are talking about the idea of banking clawbacks and performance maluses. Imagine that, bankers actually penalized for poor performance, how novel! But why does the general populace feel this way? Are bankers overpaid? Are they to blame? Or is everyone else just jealous of them?
To begin with, people are angry because the financial industry has figured out a way to privatize gains and to socialize losses. The financial industry has profitted immensely but taxpayers bear the brunt of the burden when things go wrong. That's justified outraged in my opinion, you can only call it jealousy if taxpayers didn't have to bail out Wall Street.
Fueling that rage is Wall Street's brain drain defense. “Because if you don't, the best of us will leave the industry.” Two things spring two mind. First, what has the "best of Wall Street" given us? Toxic assets, subprime mortgages, extreme risk-taking and complicated derivatives they themselves don't understand. Two, where would you go? You would leave banking and get hired by whom, and what would they pay you? You would leave banking and start your own company doing what? Yes, Wall Street is guilty of some hubris.
So this is the new reality--for the next 5 years at least.
When I graduated from college in 2000, Investment Banking (IB), Management Consulting (MC), and Silicon Valley related jobs (Venture Capital and Start-ups) were percieved to be the top jobs for a young ambitious person. Roughly 40% of my class marched into IB and MC alone. And this was a liberal arts school where kids were almost indoctrinated to do what they love and follow their passions. By the time I graduated from business school in 2003, the freshly minted MBA seemingly filed into just one job--finance. Be it IB, hedge funds, private equity or real estate, it was all finance related. The dot.coms were by now dot.gones and even the Mckinsey and Bain jobs were looking like ugly step-sisters when all-in salaries were compared.
That's when you sensed something was awry but you couldn't quite put your finger on it. Doctors found themselves sitting for the CFA, reinventing themselves as "Healthcare Sector Stock-Pickers". Science geeks started getting MBAs and still did engineering but it was the financial kind, electrical and mechanical were suddenly so uncool. Aggressive lawyers found matching personalities in their banking counterparts and crossed-over to finance as well. I've even met a Buddhist monk reincarnated as a private banker within the same life cycle! That's when you know everything is crawling out the woodwork. Finance has outpaid every other industry for decades and that’s why it attracted people from all other industries. The cliche says that no one goes to business school for reasons other than to make money, apparently that increasingly applicable to medical, law and engineering schools also. They just decide that money is more important to them at a different stage in their life. Surely these "cross-overs to finance" must, at some level, find it hard to reconcile their new lives on Wall Street. I cringe when I think of the same person talking about wanting to go to med school to alleviate human suffering. Likewise when I think of the lawyer who was supposedly attracted to law school because he enjoyed the challenge of resolving legal problems.
So when did finance start remunerating itself to the point where people from other well-compensated professions decided to drop their careers in exchange for? Doctors and lawyers have never really starved. There are some clues in this research article written by an NYU academic, Thomas Philippon. It seems like deregulation, not simply financial genius as you might have thought, is a major reason bankers get paid so much. Bankers get wealthy, increasingly influential and they in turn are able to exert influence on the legislators leading to more deregulation. The regulators, unable to attract and retain the talent needed to match the private sector, begins deregulating and undoing the safeguards put in place after the 1930's depression. We see a huge spike in deregulation and and corresponding banking salaries in the 1980's, the wonders of Reaganomics! This continues unabated throughout the nineties and noughties until today's financial collapse.
If there is a silver lining in any of this, we might at least take some comfort that regulators are now able to sift through the ranks of the unemployed and hire highly skilled financial workers on the cheap and even the playing field with the private sector.
But just as surely as we have forgotten the dangers of deregulation in the 1980's some would argue, we'll forget them again fifty years from now and deregulate until we realize it's a mistake once again. Trust me, I can go on about this but it's easy to miss the forest for the trees. I'd rather spend my energy on understanding what went wrong, what needs to be fixed, how it will be fixed and if possible, how to prevent it from ever happening again.
There's plenty of blame to go around. Who's to blame for this? I can think of four sets of people: the insitutions that invented and perpetuated the toxic assets; the regulators; the predatory lenders; and the irresponsible borrowers. That's pretty much everyone. The only thing you can do is to forgive and move on, afterall resentment is like drinking poison and waiting for the other person to die.
For once, it became a joy to watch C-SPAN, mostly a sense of Schadenfreude watching Henry Waxman and the rest of Congress tag team the Wall Street executives. You almost felt sorry for Dick Fuld. The Swiss are taking it even further and are talking about the idea of banking clawbacks and performance maluses. Imagine that, bankers actually penalized for poor performance, how novel! But why does the general populace feel this way? Are bankers overpaid? Are they to blame? Or is everyone else just jealous of them?
To begin with, people are angry because the financial industry has figured out a way to privatize gains and to socialize losses. The financial industry has profitted immensely but taxpayers bear the brunt of the burden when things go wrong. That's justified outraged in my opinion, you can only call it jealousy if taxpayers didn't have to bail out Wall Street.
Fueling that rage is Wall Street's brain drain defense. “Because if you don't, the best of us will leave the industry.” Two things spring two mind. First, what has the "best of Wall Street" given us? Toxic assets, subprime mortgages, extreme risk-taking and complicated derivatives they themselves don't understand. Two, where would you go? You would leave banking and get hired by whom, and what would they pay you? You would leave banking and start your own company doing what? Yes, Wall Street is guilty of some hubris.
So this is the new reality--for the next 5 years at least.
When I graduated from college in 2000, Investment Banking (IB), Management Consulting (MC), and Silicon Valley related jobs (Venture Capital and Start-ups) were percieved to be the top jobs for a young ambitious person. Roughly 40% of my class marched into IB and MC alone. And this was a liberal arts school where kids were almost indoctrinated to do what they love and follow their passions. By the time I graduated from business school in 2003, the freshly minted MBA seemingly filed into just one job--finance. Be it IB, hedge funds, private equity or real estate, it was all finance related. The dot.coms were by now dot.gones and even the Mckinsey and Bain jobs were looking like ugly step-sisters when all-in salaries were compared.
That's when you sensed something was awry but you couldn't quite put your finger on it. Doctors found themselves sitting for the CFA, reinventing themselves as "Healthcare Sector Stock-Pickers". Science geeks started getting MBAs and still did engineering but it was the financial kind, electrical and mechanical were suddenly so uncool. Aggressive lawyers found matching personalities in their banking counterparts and crossed-over to finance as well. I've even met a Buddhist monk reincarnated as a private banker within the same life cycle! That's when you know everything is crawling out the woodwork. Finance has outpaid every other industry for decades and that’s why it attracted people from all other industries. The cliche says that no one goes to business school for reasons other than to make money, apparently that increasingly applicable to medical, law and engineering schools also. They just decide that money is more important to them at a different stage in their life. Surely these "cross-overs to finance" must, at some level, find it hard to reconcile their new lives on Wall Street. I cringe when I think of the same person talking about wanting to go to med school to alleviate human suffering. Likewise when I think of the lawyer who was supposedly attracted to law school because he enjoyed the challenge of resolving legal problems.
So when did finance start remunerating itself to the point where people from other well-compensated professions decided to drop their careers in exchange for? Doctors and lawyers have never really starved. There are some clues in this research article written by an NYU academic, Thomas Philippon. It seems like deregulation, not simply financial genius as you might have thought, is a major reason bankers get paid so much. Bankers get wealthy, increasingly influential and they in turn are able to exert influence on the legislators leading to more deregulation. The regulators, unable to attract and retain the talent needed to match the private sector, begins deregulating and undoing the safeguards put in place after the 1930's depression. We see a huge spike in deregulation and and corresponding banking salaries in the 1980's, the wonders of Reaganomics! This continues unabated throughout the nineties and noughties until today's financial collapse.
If there is a silver lining in any of this, we might at least take some comfort that regulators are now able to sift through the ranks of the unemployed and hire highly skilled financial workers on the cheap and even the playing field with the private sector.
But just as surely as we have forgotten the dangers of deregulation in the 1980's some would argue, we'll forget them again fifty years from now and deregulate until we realize it's a mistake once again. Trust me, I can go on about this but it's easy to miss the forest for the trees. I'd rather spend my energy on understanding what went wrong, what needs to be fixed, how it will be fixed and if possible, how to prevent it from ever happening again.
There's plenty of blame to go around. Who's to blame for this? I can think of four sets of people: the insitutions that invented and perpetuated the toxic assets; the regulators; the predatory lenders; and the irresponsible borrowers. That's pretty much everyone. The only thing you can do is to forgive and move on, afterall resentment is like drinking poison and waiting for the other person to die.
The Best Diet
Atkin's, South Beach, Popcorn, Slimfast...etc. Diet fads come and go but apparently fat people don't. The verdict is out, the only thing to do when you diet is to count your calories. It doesn't matter if you go low-fat, low-carb or high-protein, you need to create a calorie deficit if you want to lose weight. That means expending more calories than you'd consume in a day. That also means alot of discipline and you'll need even more self-control if you don't excercise.
What also helps is the concept of energy density. Certain foods that make us feel full are actually lower in calories than you'd think. Conversely, there are plenty of tasty fat laden carbohydrates that we can munch away on without realizing we've had about 5,000 calories worth.
So the best diet is really common sense. Just like everything else you'll find on this blog, everything boils down to hard work, discipline and common sense. But you already knew all this at the back of mind, this just means you've run out of excuses to not eat less and work out more. Enough already, go do it!
What also helps is the concept of energy density. Certain foods that make us feel full are actually lower in calories than you'd think. Conversely, there are plenty of tasty fat laden carbohydrates that we can munch away on without realizing we've had about 5,000 calories worth.
So the best diet is really common sense. Just like everything else you'll find on this blog, everything boils down to hard work, discipline and common sense. But you already knew all this at the back of mind, this just means you've run out of excuses to not eat less and work out more. Enough already, go do it!
Investing 101
There are tons of articles written on investing by people who are smarter, wiser, more experienced and more numerate than I will ever be. I have no chance of ever outsmarting them nor do I intend to, but I do want to stand on their shoulders.
Let me share with you my beliefs:
1. As with everything in life, you have to work hard to be successful. Investing is no exception to the rule. Actually, you can work hard and still lose money investing, the only solution to this is to work harder.
2. I have many flaws which make a bad investor. I am stubborn, impulsive, egotistical, careless, ignorant and emotional amongst many other things. But awareness of this is a good start.
3. I can be cheated. As cynical as I can be about the investment industry, I can still be taken for a ride. Although I've learnt from my lessons I can be vulnerable to the next person who understands my weaknesses. My cynicism can easily be taken to the other extreme, to the point where I blind myself to genuinely good investment opportunities.
4. In spite of all this I still have to keep on trying. Why? Because inflation doesn't care how I feel, neither do the taxes.
5. We all pursue happiness. But once you graduate from college, you will soon realize the obligation is not just to yourself, it's also to your family and those around you. Marriage and your choice of life partner will be the single most important decision you will ever make. It's harder to see why this is so in successful marriages but plain to see in failed ones.
If these statements resonate with you, it would be worthwhile for you to read on. If not, I doubt we're on the same page and there are other investment approaches which suit you better.
For anyone new to investing, I'd urge them to turn off the TV and shut out programs like "Fast Money" and Jim Cramer's "Mad Money". The problem I have with Jim Cramer is that some of what he says actually makes sense. However, his style evokes a very flippant attitude towards investing. I'm glad he is having fun at TV, but I'd be much less flippant about making decisions which shape the outcome of my retirement and children's future.
Part of the challenge in investing is to assemble a decent booklist to begin with. I'd go so far as to say that 99% of what is written on investments are are better left unread. The easiest trap for a new investor to fall into is to start reading a "How to" on stock picking. Did you ever consider that you should not be stock picking to begin with?
The caveat here is that these books have to be read and re-read and meditated upon. Speed reading through them will result in alot of lost wisdom. Also, these are investment philosophies, not point by point "How to do" lists. You need to invest time into them before you develop a strong enough conviction you can act upon (or in some cases not act upon). All are available in stores or with online retailers.
1. Winning the Loser’s Game: Charles D. Ellis
This book will get you thinking about the right issues and offers timeless investment philosophies.
2. Random Walk Guide to Investing: Burton G. Malkiel
This is actually a condensed version to The Random Walk Down Wall Street which is assigned reading in almost any investment class. It's supported by alot of convincing facts and figures and punctures alot of misconcieved notions about investing.
3. The Four Pillars of Investing: William J. Bernstein
This actually offers us a solid basic framework to investing, consultants will love this.
4. Intelligent Investor: Benjamin Graham, Jason Zweig and Warren Buffett
5. Pioneering Portfolio Management: David F. Swensen
*Millionaire Next Door: Thomas J. Stanley, William D. Danko. This is not an investment book per se but is relevant if you are serious about building your personal net worth.
**I would also highly recommend anything written by John C. Bogle. His works are not any less relevant than the other books, they are just not a natural fit in the sequence.
I would read them in the order I've presented and don't be afraid to revisit ones you think you've read thoroughly before. I'm still learning from them many years later. The challenge here is not in understanding what is written, the challenge is in applying it to your life with consistency.
Let me share with you my beliefs:
1. As with everything in life, you have to work hard to be successful. Investing is no exception to the rule. Actually, you can work hard and still lose money investing, the only solution to this is to work harder.
2. I have many flaws which make a bad investor. I am stubborn, impulsive, egotistical, careless, ignorant and emotional amongst many other things. But awareness of this is a good start.
3. I can be cheated. As cynical as I can be about the investment industry, I can still be taken for a ride. Although I've learnt from my lessons I can be vulnerable to the next person who understands my weaknesses. My cynicism can easily be taken to the other extreme, to the point where I blind myself to genuinely good investment opportunities.
4. In spite of all this I still have to keep on trying. Why? Because inflation doesn't care how I feel, neither do the taxes.
5. We all pursue happiness. But once you graduate from college, you will soon realize the obligation is not just to yourself, it's also to your family and those around you. Marriage and your choice of life partner will be the single most important decision you will ever make. It's harder to see why this is so in successful marriages but plain to see in failed ones.
If these statements resonate with you, it would be worthwhile for you to read on. If not, I doubt we're on the same page and there are other investment approaches which suit you better.
For anyone new to investing, I'd urge them to turn off the TV and shut out programs like "Fast Money" and Jim Cramer's "Mad Money". The problem I have with Jim Cramer is that some of what he says actually makes sense. However, his style evokes a very flippant attitude towards investing. I'm glad he is having fun at TV, but I'd be much less flippant about making decisions which shape the outcome of my retirement and children's future.
Part of the challenge in investing is to assemble a decent booklist to begin with. I'd go so far as to say that 99% of what is written on investments are are better left unread. The easiest trap for a new investor to fall into is to start reading a "How to" on stock picking. Did you ever consider that you should not be stock picking to begin with?
The caveat here is that these books have to be read and re-read and meditated upon. Speed reading through them will result in alot of lost wisdom. Also, these are investment philosophies, not point by point "How to do" lists. You need to invest time into them before you develop a strong enough conviction you can act upon (or in some cases not act upon). All are available in stores or with online retailers.
1. Winning the Loser’s Game: Charles D. Ellis
This book will get you thinking about the right issues and offers timeless investment philosophies.
2. Random Walk Guide to Investing: Burton G. Malkiel
This is actually a condensed version to The Random Walk Down Wall Street which is assigned reading in almost any investment class. It's supported by alot of convincing facts and figures and punctures alot of misconcieved notions about investing.
3. The Four Pillars of Investing: William J. Bernstein
This actually offers us a solid basic framework to investing, consultants will love this.
4. Intelligent Investor: Benjamin Graham, Jason Zweig and Warren Buffett
5. Pioneering Portfolio Management: David F. Swensen
*Millionaire Next Door: Thomas J. Stanley, William D. Danko. This is not an investment book per se but is relevant if you are serious about building your personal net worth.
**I would also highly recommend anything written by John C. Bogle. His works are not any less relevant than the other books, they are just not a natural fit in the sequence.
I would read them in the order I've presented and don't be afraid to revisit ones you think you've read thoroughly before. I'm still learning from them many years later. The challenge here is not in understanding what is written, the challenge is in applying it to your life with consistency.
The difference between Investing and Speculating
This is a foundational concept in investing and yet there are shockingly few who are able to articulate the difference. The only sensible comment I've read on this can be attributed to none other than the late Benjamin Graham. For the unfamiliar, Graham was Warren Buffett's mentor and one of the few people Buffett ever quotes.
Investing: That's when you buy into a business and you believe it will generate profit over time because of human effort.
Speculating: Buying into something and hoping that it appreciates over time. Buying a gold bar or a painting.
I see confusion between the two almost everytime I have a conversation about real estate. When someone buys an apartment, he has to be clear if it is for utility (a place to live) or income (an investment because you collect rent) or speculation (you just hope the price goes up when you try to sell it later). Not being clear about your objectives is like going into battle without a plan.
Investing: That's when you buy into a business and you believe it will generate profit over time because of human effort.
Speculating: Buying into something and hoping that it appreciates over time. Buying a gold bar or a painting.
I see confusion between the two almost everytime I have a conversation about real estate. When someone buys an apartment, he has to be clear if it is for utility (a place to live) or income (an investment because you collect rent) or speculation (you just hope the price goes up when you try to sell it later). Not being clear about your objectives is like going into battle without a plan.
Investment Maxims: Used and Abused
We love maxims because they are punchy, easy to use, easy to remember and they leave an impression. But they often contradict and get us into all sorts of trouble. Take the Citigroup stock priced at 99 cents just a few days ago, do you "strike will the iron is hot"? Or do you "look before you leap"? Now that you've considered both, the answer is much less clear.
In fact, there is a textbook written on the law of equity that boils the subject down into just twenty-five maxims. Imagine that, if you could apply just twenty-five maxims, you were proficient in the law of equity.
Much easier said than done.
“Here is certainly a remarkable difference of opinion. The truth is that there are maxims and maxims; some of great value, some worse than worthless. And the really valuable maxims are peculiarly liable to be put to a wrong use. A proposition, in order to gain currency as a maxim, must be tersely expressed. But the brevity which gives it currency, also in many instances, gives rise to misconception as to its meaning and application. A phrase intended to point out an exception may be mistaken for the enunciation of a general rule. An expression originally used only to state a truth may be mistaken for a statement of all truth…” --"The Use of Maxims In Jurisprudence", Jeremiah Smith. Harvard Law Review, 1895
Don’t you just love legal reasoning? This paragraph intended for legal jurisprudence was written over a century ago but rings no less true in the world of investing till this very day. You’ll find maxims thrown about by everyone ranging from hedge fund managers to relatives dispensing well-meaning but ill-informed advice over the kitchen table. That said, Maxims are a double-edged sword which are more often than not, “put to a wrong use”, and even worse, abused by some to pull a fast one over another.
Bad Maxims include:
- “You have to love a falling market.” This is a license to get investors to buy blindly every time the market falls. Here’s the counter-maxim, “Trying to catch a falling market is like trying to catch a falling knife.”
- "You have to be in it to win it." This applies to the lottery and it's frightening how gambling wisdom has creeped into the field of investing. Sure, you need exposure to the stock market to make gains, but does that mean you should be in every asset class which appreciates?
Good Maxims abused include:
- “There’s no such thing as a free lunch.” It’s largely true but I've also see this misapplied by a banker responding to a client’s request to reduce fees because they were uncompetitive. The client wasn’t asking for a free lunch, he was simply asking the banker to match the rates of his competition. If the client was asking for a free lunch, which he wasn't, he would have been asking for something unreasonable. The client was acting well within his rights.
That's not to say Maxims should be avoided entirely, we can use them if we always keep one thing in mind, "A little bit of knowledge is a dangerous thing."
There are many good ones that escape me at this time of writing. If you can think of any, please comment.
SOURCE
The Use of Maxims in Jurisprudence
Jeremiah Smith
Harvard Law Review, Vol. 9, No. 1 (Apr. 25, 1895), pp. 13-26 (article consists of 14 pages)
Published by: The Harvard Law Review Association
In fact, there is a textbook written on the law of equity that boils the subject down into just twenty-five maxims. Imagine that, if you could apply just twenty-five maxims, you were proficient in the law of equity.
Much easier said than done.
“Here is certainly a remarkable difference of opinion. The truth is that there are maxims and maxims; some of great value, some worse than worthless. And the really valuable maxims are peculiarly liable to be put to a wrong use. A proposition, in order to gain currency as a maxim, must be tersely expressed. But the brevity which gives it currency, also in many instances, gives rise to misconception as to its meaning and application. A phrase intended to point out an exception may be mistaken for the enunciation of a general rule. An expression originally used only to state a truth may be mistaken for a statement of all truth…” --"The Use of Maxims In Jurisprudence", Jeremiah Smith. Harvard Law Review, 1895
Don’t you just love legal reasoning? This paragraph intended for legal jurisprudence was written over a century ago but rings no less true in the world of investing till this very day. You’ll find maxims thrown about by everyone ranging from hedge fund managers to relatives dispensing well-meaning but ill-informed advice over the kitchen table. That said, Maxims are a double-edged sword which are more often than not, “put to a wrong use”, and even worse, abused by some to pull a fast one over another.
Bad Maxims include:
- “You have to love a falling market.” This is a license to get investors to buy blindly every time the market falls. Here’s the counter-maxim, “Trying to catch a falling market is like trying to catch a falling knife.”
- "You have to be in it to win it." This applies to the lottery and it's frightening how gambling wisdom has creeped into the field of investing. Sure, you need exposure to the stock market to make gains, but does that mean you should be in every asset class which appreciates?
Good Maxims abused include:
- “There’s no such thing as a free lunch.” It’s largely true but I've also see this misapplied by a banker responding to a client’s request to reduce fees because they were uncompetitive. The client wasn’t asking for a free lunch, he was simply asking the banker to match the rates of his competition. If the client was asking for a free lunch, which he wasn't, he would have been asking for something unreasonable. The client was acting well within his rights.
That's not to say Maxims should be avoided entirely, we can use them if we always keep one thing in mind, "A little bit of knowledge is a dangerous thing."
There are many good ones that escape me at this time of writing. If you can think of any, please comment.
SOURCE
The Use of Maxims in Jurisprudence
Jeremiah Smith
Harvard Law Review, Vol. 9, No. 1 (Apr. 25, 1895), pp. 13-26 (article consists of 14 pages)
Published by: The Harvard Law Review Association
Buffett Live on CNBC's Squawk Box March 9th, 2009
The Oracle of Omaha talked and answered questions emailed in from viewers for almost 3 whole hours on March 9th, 2009. As usual, there was plenty for us to chew on, but my main take-aways were:
- Executive Compensation and Corporate Jets: There's no point getting mad or going on a witch hunt, a bad economy won't hurt you any less. He used Bernie Madoff as an example. If you were defrauded by Madoff and trapped on a boat which had sprung leak, you were better off plugging that hole than going down with him. Getting mad is just not a productive use of time or energy.
- US Recovery: The US economy will recover. Consistent with his 2008 letter to the shareholders, he is confident that the US economy will fight it's way out of the current situation. There are 3 things that have contributed to the American economic miracle.
1) The Rule of Law;
2) A mostly free market economy;
3) A system that unleashes the human potential.
Rule of law and free market economic systems are not unique to the US. But he argues that the third limb is. The example he gave was the Nebraska Furniture Store. It was started by a Russian migrant "who worked hard, gave better deals and succeeded". You have Russians leaving Russia to become successful in the US, you don't have Americans leaving the US to become successful in Russia. Although American businesses have "misbehaved" and it was silly to give Executives a pen and "put them on the honor system", the system is largely intact and these problems are being addressed. Take-away: Have faith that the US economy will recover.
- Focus & Clarity: There is fear and confusion because we do not have clarity. We are in the midst of an economic war and not everyone recognizes this. Buffett used the Pearl Habor analogy repeatedly. In a war, the country needs to rally behind the President and focus on fighting it. After Pearl Habor, the army and navy did not engage in a finger pointing blame game of who did what wrong--which is exactly what the Democrats and Republicans continue to do. Differences have to be set aside for the greater good. Additionally, the man in the street does not know who Bernanke, Geithner or Paulson are. President Obama needs to come out and address them directly and to tell them that their money is safe.
- Gold: Buffett reiterated his belief in buying good businesses whereas gold will "sit there and look at you". He does not believe that digging something of the ground in Africa, transporting that to the US and storing it underground in the vault will do anything for you.
- Executive Compensation and Corporate Jets: There's no point getting mad or going on a witch hunt, a bad economy won't hurt you any less. He used Bernie Madoff as an example. If you were defrauded by Madoff and trapped on a boat which had sprung leak, you were better off plugging that hole than going down with him. Getting mad is just not a productive use of time or energy.
- US Recovery: The US economy will recover. Consistent with his 2008 letter to the shareholders, he is confident that the US economy will fight it's way out of the current situation. There are 3 things that have contributed to the American economic miracle.
1) The Rule of Law;
2) A mostly free market economy;
3) A system that unleashes the human potential.
Rule of law and free market economic systems are not unique to the US. But he argues that the third limb is. The example he gave was the Nebraska Furniture Store. It was started by a Russian migrant "who worked hard, gave better deals and succeeded". You have Russians leaving Russia to become successful in the US, you don't have Americans leaving the US to become successful in Russia. Although American businesses have "misbehaved" and it was silly to give Executives a pen and "put them on the honor system", the system is largely intact and these problems are being addressed. Take-away: Have faith that the US economy will recover.
- Focus & Clarity: There is fear and confusion because we do not have clarity. We are in the midst of an economic war and not everyone recognizes this. Buffett used the Pearl Habor analogy repeatedly. In a war, the country needs to rally behind the President and focus on fighting it. After Pearl Habor, the army and navy did not engage in a finger pointing blame game of who did what wrong--which is exactly what the Democrats and Republicans continue to do. Differences have to be set aside for the greater good. Additionally, the man in the street does not know who Bernanke, Geithner or Paulson are. President Obama needs to come out and address them directly and to tell them that their money is safe.
- Gold: Buffett reiterated his belief in buying good businesses whereas gold will "sit there and look at you". He does not believe that digging something of the ground in Africa, transporting that to the US and storing it underground in the vault will do anything for you.
Subscribe to:
Posts (Atom)