Monday, May 18, 2009
Interview with Charlie Munger
Charlie Munger has been another consistent voice of reason. It is only fitting that Warren Buffett's long time partner at Berkshire Hathaway get some air-time. There's really not much for me to add to his wisdom, I'd recommend you go through the entire interview which can be found here. It's recent, topical and addresses many of our concerns about finance and the global economy.
Did you know Google was supplementing your brain?
The internet has revolutionized the way we find and sort information. What most of us don't realize is how it has affected the way we think, to the point where we are "infantizing" our minds.
Many of us have lost the ability to read deeply. Research that used to take us days of being holed up in a library is now available in neatly formulated abstracts at our fingertips. We quote and act upon internet extracted information without having a solid grasp of the underlying principals or the broader context. An especially dangerous undertaking in the world of investments. It's even argued that when we jump on the search engine, we are really searching for convenience rather than actual information.
This makes complete sense if you understand what the world's most powerful search engine--Google is trying to accomplish. Sergei Brin and Larry Page, the founders of Google, view working on a search engine as a way of working on artificial intelligence. Page was quoted last year as saying that Google "was really trying to build artificial intelligence and to do it on a large scale."
The more we rely on Google, the more we rely on artificial intelligence and less on our brains. Now, I am not suggesting a search engine boycott but I am contemplating a serious review of my work habits. Our challenge going forward is to continue to harness the power of enabling tools such as Google without impairing our ability to read and think.
The whole debate can be found here.
Many of us have lost the ability to read deeply. Research that used to take us days of being holed up in a library is now available in neatly formulated abstracts at our fingertips. We quote and act upon internet extracted information without having a solid grasp of the underlying principals or the broader context. An especially dangerous undertaking in the world of investments. It's even argued that when we jump on the search engine, we are really searching for convenience rather than actual information.
This makes complete sense if you understand what the world's most powerful search engine--Google is trying to accomplish. Sergei Brin and Larry Page, the founders of Google, view working on a search engine as a way of working on artificial intelligence. Page was quoted last year as saying that Google "was really trying to build artificial intelligence and to do it on a large scale."
The more we rely on Google, the more we rely on artificial intelligence and less on our brains. Now, I am not suggesting a search engine boycott but I am contemplating a serious review of my work habits. Our challenge going forward is to continue to harness the power of enabling tools such as Google without impairing our ability to read and think.
The whole debate can be found here.
Sunday, May 17, 2009
Personal Credit Crisis
Count yourself lucky if you've no debt related problems. But regardless of what your financial sitation may be, you'd still find this personal account of a credit crisis both chilling and illuminating.
You'll see just how slippery a slope the debt spiral can be. More importantly, how one can go from being financially sound to being avalanched by a mountain of debt in a short period of time.
Awareness of the onerous terms that creditors were seeking proved to an inadequate defence. The writer, believe it or not, is a financial journalist who had written about sub-prime mortgages. One emotional slip was all it took for the misery to follow.
The price of financial independence? Eternal vigilance.
You'll see just how slippery a slope the debt spiral can be. More importantly, how one can go from being financially sound to being avalanched by a mountain of debt in a short period of time.
Awareness of the onerous terms that creditors were seeking proved to an inadequate defence. The writer, believe it or not, is a financial journalist who had written about sub-prime mortgages. One emotional slip was all it took for the misery to follow.
The price of financial independence? Eternal vigilance.
Thursday, May 7, 2009
Truth, not Sophistry
For the unaware, there's a huge debate raging over how business schools should be fixed.
It is argued that business schools are the root cause of the crisis, the singular focus on the upside combined with economic imbalances have resulted in taking our eyes of the more important systemic risks. Business schools have also fueled the crisis by becoming banking factories, churning out everyone ranging from the "just following orders" financial sector rank and file to the very leadership deemed to be the most culpable. This is also a debate cutting across philosophy, education, ethics, financial incentives and many other areas of expertise which are beyond me.
However, if I had to pin down a single aspect of business school I would like to see changed, it would be this: Business schools should be institutions and purveyors of Truth, not Sophistry. We all know what truth means. But the truth (no pun intended) of the matter is, we've allowed that thin divide between truth and sophistry to disappear entirely.
So for the sake of clarity, "Sophistry" is defined by Merriam-Webster's as: subtly deceptive reasoning or argumentation.
Sophistry is now embedded in almost every aspect of modern business. Some argue that the seeds were sown with the case method, where students are essentially rewarded for finessing questions from professors and later in life, clients. Others think that it begins with the job interview process where students form dedicated teams to come up with model answers evidencing their "passion in finance".
Subtle deception, compounded over decades and practiced en masse, unchecked, unappreciated, institutionalized and internalized by students is best exemplified by the enormous build up of complex derivatives sold and held by the "too big to fail" banks over the years. Think of the number of mental contortions that transpired to get us to where we are:
1) You began by securitizing and splitting up worthless assets so they could appear to be valuable.
2) Then you had to take them off the balance sheets so they would not appear worthless at the corporate level.
3) Eventually, you sold them to other people fully knowing what you had done in 1) and 2).
4) Finally, you believe your own twisted logic and start buying worthless derivatives from other banks thinking that if they do the same and sold it to you, it might be valuable.
There is nothing particularly insightful here, you don't need sharper critical reasoning to see the madness that lay within, what you needed was conscience and strength of conviction. You needed to be focused on the truth.
It is argued that business schools are the root cause of the crisis, the singular focus on the upside combined with economic imbalances have resulted in taking our eyes of the more important systemic risks. Business schools have also fueled the crisis by becoming banking factories, churning out everyone ranging from the "just following orders" financial sector rank and file to the very leadership deemed to be the most culpable. This is also a debate cutting across philosophy, education, ethics, financial incentives and many other areas of expertise which are beyond me.
However, if I had to pin down a single aspect of business school I would like to see changed, it would be this: Business schools should be institutions and purveyors of Truth, not Sophistry. We all know what truth means. But the truth (no pun intended) of the matter is, we've allowed that thin divide between truth and sophistry to disappear entirely.
So for the sake of clarity, "Sophistry" is defined by Merriam-Webster's as: subtly deceptive reasoning or argumentation.
Sophistry is now embedded in almost every aspect of modern business. Some argue that the seeds were sown with the case method, where students are essentially rewarded for finessing questions from professors and later in life, clients. Others think that it begins with the job interview process where students form dedicated teams to come up with model answers evidencing their "passion in finance".
Subtle deception, compounded over decades and practiced en masse, unchecked, unappreciated, institutionalized and internalized by students is best exemplified by the enormous build up of complex derivatives sold and held by the "too big to fail" banks over the years. Think of the number of mental contortions that transpired to get us to where we are:
1) You began by securitizing and splitting up worthless assets so they could appear to be valuable.
2) Then you had to take them off the balance sheets so they would not appear worthless at the corporate level.
3) Eventually, you sold them to other people fully knowing what you had done in 1) and 2).
4) Finally, you believe your own twisted logic and start buying worthless derivatives from other banks thinking that if they do the same and sold it to you, it might be valuable.
There is nothing particularly insightful here, you don't need sharper critical reasoning to see the madness that lay within, what you needed was conscience and strength of conviction. You needed to be focused on the truth.
The China Paradox
China is emerging from rubble of the economic crisis looking better than any other country I can think of. In terms of policy, it is pushing all the right buttons. The fiscal stimulus packages are working: The Chinese stock market has taken notice and it is up +40% for the year; the government has announced plans for full medical insurance for 90% of the rural population by 2010--thereby unlocking the high savings rate and unleashing China's huge consumption potential; but perhaps most important of all, China does not have an insolvent banking system riddled with complex derivatives resulting in bottomless liabilities.
Yet, few in the West are willing to concede the following paradox. Communist China (as Lou Dobbs would say), appears to be better at this "capitalist game" than many would like to admit. The US and the UK have long dominated economic ideology by way of the free market system. Few could challenge this until it recently became evident that a hefty portion of the Anglo-Saxon economic miracle can be attributed to consumers and major financial institutions over-gorging at the credit buffett table. While the developed world is anticipating negative growth in 2009, China is widely expected to maintain 8% growth and that figure is forecasted to rise to over 10% in 2010.
So how has China landed on its feet while the G7 takes a painful tumble? This is the second paradox: I suspect leadership may have something to do with. And by that, I plainly mean that China has had great leadership. Western commentary on China is often blinded by political rhetoric colored by human rights, Tibet, Taiwan, the environment and a whole host of other issues. The insistence of the Western media to link ideological disagreements to every news report has led to an under reporting of China true strengths. Complex issues become oversimplified into a "we are good, they are bad" vilification, playing straight into the Chinese strategem of "Hide your capability and bide your time".
Now, I am no expert on the Chinese political system. But China it seems, for all the valid criticism about the lack of democracy and rampant official corruption, has a system which places the best people in the highest offices. Take the following interview with Chinese Premier Wen Jiabao for example, at roughly 7:00 into the video he enters into a jaw-dropping explanation of Adam Smith's classic works. Am I hearing right? Is the leader of "Communist China" quoting the bible of capitalism? At roughly 22:30 into the interview, he goes on to quote Marcus Aurelius. He knows his stuff.
This is fascinating to me because 99% of the people I know, have at best, glossed over the classics in search of soundbites. By contrast, it really seems to me that Wen has really spent time on them. Most people cite Adam Smith's Wealth of Nations and talk about the 'invisible hand' of free market systems, refusing to acknowledge (probably because they never read it) Smith's other important work, The Theory of Moral Sentiments. In the moral sentiments, Wen identified the need for a 'guiding hand' in addition to the 'invisible hand'. While this all sounds academic and irrelevant it could not be more true--a 'guiding hand' could have well prevented the senseless deregulation responsible for our current mess.
I know it sounds like a stretch when I praise Chinese leadership after watching an interview. There is also much I don't know about Hu Jintao, Zhang Zemin, Li Peng and every significant Chinese leader since Deng Xiaoping, other than the fact that they are all technocrats. What I do know is that consistently sound policy, including the lifting of 700 million people out of abject poverty; and transitioning from a planned socialist economy to a capitalist economy without the problems that plague the former USSR, over two decades is not the result of mediocre leadership. Just take a look at the eight years preceding Obama and see if you agree with me.
The transcript for the interview can be found here.
Yet, few in the West are willing to concede the following paradox. Communist China (as Lou Dobbs would say), appears to be better at this "capitalist game" than many would like to admit. The US and the UK have long dominated economic ideology by way of the free market system. Few could challenge this until it recently became evident that a hefty portion of the Anglo-Saxon economic miracle can be attributed to consumers and major financial institutions over-gorging at the credit buffett table. While the developed world is anticipating negative growth in 2009, China is widely expected to maintain 8% growth and that figure is forecasted to rise to over 10% in 2010.
So how has China landed on its feet while the G7 takes a painful tumble? This is the second paradox: I suspect leadership may have something to do with. And by that, I plainly mean that China has had great leadership. Western commentary on China is often blinded by political rhetoric colored by human rights, Tibet, Taiwan, the environment and a whole host of other issues. The insistence of the Western media to link ideological disagreements to every news report has led to an under reporting of China true strengths. Complex issues become oversimplified into a "we are good, they are bad" vilification, playing straight into the Chinese strategem of "Hide your capability and bide your time".
Now, I am no expert on the Chinese political system. But China it seems, for all the valid criticism about the lack of democracy and rampant official corruption, has a system which places the best people in the highest offices. Take the following interview with Chinese Premier Wen Jiabao for example, at roughly 7:00 into the video he enters into a jaw-dropping explanation of Adam Smith's classic works. Am I hearing right? Is the leader of "Communist China" quoting the bible of capitalism? At roughly 22:30 into the interview, he goes on to quote Marcus Aurelius. He knows his stuff.
This is fascinating to me because 99% of the people I know, have at best, glossed over the classics in search of soundbites. By contrast, it really seems to me that Wen has really spent time on them. Most people cite Adam Smith's Wealth of Nations and talk about the 'invisible hand' of free market systems, refusing to acknowledge (probably because they never read it) Smith's other important work, The Theory of Moral Sentiments. In the moral sentiments, Wen identified the need for a 'guiding hand' in addition to the 'invisible hand'. While this all sounds academic and irrelevant it could not be more true--a 'guiding hand' could have well prevented the senseless deregulation responsible for our current mess.
I know it sounds like a stretch when I praise Chinese leadership after watching an interview. There is also much I don't know about Hu Jintao, Zhang Zemin, Li Peng and every significant Chinese leader since Deng Xiaoping, other than the fact that they are all technocrats. What I do know is that consistently sound policy, including the lifting of 700 million people out of abject poverty; and transitioning from a planned socialist economy to a capitalist economy without the problems that plague the former USSR, over two decades is not the result of mediocre leadership. Just take a look at the eight years preceding Obama and see if you agree with me.
The transcript for the interview can be found here.
Tuesday, May 5, 2009
Sleeplessness = Effectiveness?
Whether you think it's a form of justification for generous compensation or not, Wall Street's veneration for exhaustion has always perplexed me.
Bill Clinton, once said, "Every important mistake I've made in my life, I've made because I was too tired."
Sleeplessness is linked to diabetes, depression, obesity and even increased mortality. Which is why I find it strange when people talk about working absurdly long hours and being sleep deprived with such pride and admiration.
Karen Dillon, the editor of Harvard Business Review, writes about the Myth of the Tireless Leader. She argues that if anything, sleep deprivation renders you ineffective.
In managers, sleeplessness signals the inability to trust, delegate and perhaps most alarming of all, the inability or unwillingness to cultivate other effective managers.
It doesn't get any better with employees. In fact, the universal red flag for fraud is to have someone perpetually in the office. Which is exactly why most firms institute a compulsory two week compliance vacation.
By all means work hard, but let's not confuse the number of hours spent flapping around the office with effectiveness. If you're done with your work, GO HOME!
Bill Clinton, once said, "Every important mistake I've made in my life, I've made because I was too tired."
Sleeplessness is linked to diabetes, depression, obesity and even increased mortality. Which is why I find it strange when people talk about working absurdly long hours and being sleep deprived with such pride and admiration.
Karen Dillon, the editor of Harvard Business Review, writes about the Myth of the Tireless Leader. She argues that if anything, sleep deprivation renders you ineffective.
In managers, sleeplessness signals the inability to trust, delegate and perhaps most alarming of all, the inability or unwillingness to cultivate other effective managers.
It doesn't get any better with employees. In fact, the universal red flag for fraud is to have someone perpetually in the office. Which is exactly why most firms institute a compulsory two week compliance vacation.
By all means work hard, but let's not confuse the number of hours spent flapping around the office with effectiveness. If you're done with your work, GO HOME!
Monday, May 4, 2009
Hedge Funds: The New Reality
*This blog entry will be a temporary departure from our usual layman investor approach*
Vikram Pandit talked about a new reality for Citi, and here is the new reality for hedge funds--investors with bloated wallets will no longer line up and swallow your 2 and 20.
Anyone harboring ambitions of launching their own hedge fund really needs to read this. That's the blueprint for hedge fund fee structures going forward. The driving force behind this is the hugely influential Larry Powell, formerly from the Texas Teacher Retirement System, and now the head of the Utah Retirement System. The industry is changing, LP passivity will diminish considerably and fees will be scrutinized more vigorously.
Given the cynicism currently levelled at hedge funds and the inability of the industry to deliver alpha and absolute returns when they were most needed in 2008, this I promise you, is no stretch of imagination.
Vikram Pandit talked about a new reality for Citi, and here is the new reality for hedge funds--investors with bloated wallets will no longer line up and swallow your 2 and 20.
Anyone harboring ambitions of launching their own hedge fund really needs to read this. That's the blueprint for hedge fund fee structures going forward. The driving force behind this is the hugely influential Larry Powell, formerly from the Texas Teacher Retirement System, and now the head of the Utah Retirement System. The industry is changing, LP passivity will diminish considerably and fees will be scrutinized more vigorously.
Given the cynicism currently levelled at hedge funds and the inability of the industry to deliver alpha and absolute returns when they were most needed in 2008, this I promise you, is no stretch of imagination.
Subscribe to:
Posts (Atom)