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Tag: investment

Searching for a Narrative

I love the webcomic XKCD. Not only is it incredibly nerdy, its surprisingly on-point in terms of its take on reality. I found the comic below to be a good example of this:

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But whereas I find sports commentary to be somewhat plausible (because its about a specific person or small group of individuals that you might be able to interrogate and make inferences about), I think this is especially true on press describing the stock market.

Take the recent massive market downturn which occurred on Thursday, Aug 4th. Almost immediately, every press outlet had to have an explanation – people talked about fears of a Eurozone crisis, fears that the US and Chinese stimulus which have propped up global demand would vanish, fears that the US would be downgraded, and even talks that this was the media’s fault or the role of greedy banks using flawed computer systems.

The question that you never hear the press answer but which may be more relevant than all these narratives: is it even possible to know? You can’t ask the market what its thinking in the way that you might be able to ask a sports player or even a sports team, and its hard to run controlled experiments in the way a scientist might. And, while the psychology of the buyers and sellers certainly plays a big role, I think the simple truth is this: there is no real way to know, and its not only pointless to speculate but possibly counterproductive to try to explain the market’s movements. We’re all  hardwired to want a reason for something which is insightful and reveals something – but the fact of the matter is that trying to find reasons that aren’t necessarily there or even possible to validate pushes people into investing time and energy trying to control or understand things they can’t.

In my mind, its far better to take Warren Buffett’s approach: don’t waste your time on things you can’t predict or control or understand, take what you can get (the price of a stock or an asset) and make a decision based on that. Who cares why someone is offering to sell you something for $100 that is worth $200 – just make the right choice.

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The Making of an American Capitalist

buffettIf you’re interested in investing, regardless of your investment philosophy/strategy, you should be interested in Warren Buffett, potentially the most successful investor of our time. And, if you’re interested in Warren Buffett and investing, you should read Roger Lowenstein’s biography: Buffett: The Making of an American Capitalist.

Lowenstein’s biography is not “official” in the sense that Buffett did not go out of his way to authorize or support it. But, despite this (and maybe even because of this), it does a great job of delving into the psychology of the “Oracle of Omaha.” It doesn’t pretend to fully grasp the inner workings of Buffett’s mind (otherwise, I believe Mr. Lowenstein would be better suited investing full time in the stock market rather than writing biographies! :-)), but by diving into Buffett’s childhood and by closely examining what the individuals/companies who interacted with Buffett had to say, the book does a great job at painting with broad strokes a hint at Buffett’s character and thinking style.

Rather than the image of an entitled baron or a megalomaniac with a god complex that one might expect from someone with Buffett’s investment record, the biography portrays an insecure and, at times, painfully awkward person who lived in the same house for decades, seemed to subsist entirely on Cherry Coke, hamburgers, and steaks, was (and probably still is) a remarkable cheapskate, and found it difficult to communicate with his family. And yet, what is particularly inspiring is that these very human, “Main Street” traits seemed to have been at the core of his success. Where “more sophisticated” investors chased new gimmicks involving leverage and options and forecasts, Buffett stuck with very simple ideas, like making sure you have a “margin of safety” before making an investment, being patient, and not venturing out into things he did not understand. And, while those other “more sophisticated” investors came and went, Buffett has stuck through year after year delivering impressive results.

More so than that, while Lowenstein doesn’t paint Buffett out to be a saint – he is interested in making money after all – I was amazed by the degree to which Buffett has seemed to retain a moral character that so many financiers have not. Case in point: the end of the book covers Buffett’s takeover of Salomon Brothers after it was embroiled in a Treasury bond scandal that could have seen the firm collapse. Buffett played a major role in helping to save the company, instituting practices which many in the industry (and even at the firm) viewed as naïve – such as bonuses tied to actual performance, a willingness to be truly open book with regulators, and a desire to not just “not cross the line” by employing huge legal teams, but to genuinely stay “way, way away from the line.”

Heck, I’m still shocked Buffett does all of his own taxes!

But, coming back to what I took away from the book as the reasons for Buffett’s success, I saw four overarching themes:

  1. Keep it simple. Buffett’s entire investment philosophy seems to break down into three fairly simple ideas: (1) companies have an intrinsic value that their stock prices will ultimately reflect, (2) the market can be thought of as a manic-depressive named Mr. Market – on his manic days, he quotes very optimistic prices, but on his depressed days, he quotes very pessimistic prices – who doesn’t take offense if you ignore him, and (3) its hard to precisely determine a company’s intrinsic worth, but when that number and the number Mr. Market quotes are far apart, you have a “margin of safety” to make a decision. None of these ideas are particularly complicated or require extremely sophisticated analysis, and the allegory of “Mr. Market” feels more folksy than Ivy League-MBA-quant-heavy-investment-guru. Yes, there is certainly sophisticated thinking and math behind evaluating intrinsic worth, but in reading the book and even in reading Buffett’s essays, you find that his thinking often boils down to other folksy tenets like when he explained one of the main reasons he invested in Coca-Cola, “if you gave me $100 billion and said take away the soft drink leadership of Coca-Cola in the world, I’d give it back to you and say it can’t be done.”
  2. Be consistently honest and moral. I think the book, and the general investing community, focus too little on this. One reason Buffett was able to buy (or at least buy large stakes) in so many companies and inspire loyalty from those who worked with him was that people liked him because they knew he was consistently honest and moral. Its how he was invited on the board of the Washington Post despite the CEO’s initial fear of him as an investor who wanted to take over the company. Its how, in the 1980s, he was able to get into companies who wanted to avoid the aggressive and hostile overtures of the corporate raiders of that generation. And its how he was able to maneuver through the handful of times he or one of his acquisitions had to deal with legal trouble. Hard to dig up skeletons when there aren’t any, and its hard to mistrust someone who will probably always be straight with you.
  3. Be patient. If there’s one thing I’ve observed its that Buffett is remarkably patient. Many of the assets he buys/invests in, he holds for years (and in some cases, he has never let go of or sold). He is also willing to take the time to thoroughly understand a business before jumping in rather than simply jump in on a “hot stock tip” or because the stock price seems to be on an upward trend. But, and what is potentially the most important, he is willing to wait until all the conditions are right before jumping in. In the case of Buffett’s Coca Cola investment, although the stock price had been cheaper before Buffett bought in, Buffett was waiting for the right management with the right focus on growing shareholder value to be set in to invest.
  4. Read everything. One thing which Lowenstein referred to over and over again was the degree at which the CEOs Buffett invested in were surprised at how well Buffett understood the underlying business and the issues facing it. Granted, Buffett seemed to read financial reports and statements for fun, but I think the key takeaway there is that nothing can replace solid fundamental research.

If you’re interested in investing or a biography of one of the world’s most fascinating and successful people or just want a cool look at the inside of a few decades of business, I’d highly recommend the book.

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Making Macro Manageable

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On the advice of one of the members of the little investment club I am a part of, I picked up David Moss’s book A Concise Guide to Macroeconomics. I wasn’t expecting much, having taken a few introductory economics courses in college and being a casual economics aficionado, but I gave it a shot.

And, I think that the subtitle “What Managers, Executives, and Students Need to Know” is simultaneously very appropriate and a dramatic underselling of the book. Moss’s writing style and his very direct, conclusion-oriented (as opposed to “scholarly”) overview of basic macroeconomics makes the book not only accessible to people who need a working understanding of economics but not the extra academic theory, but also a great reference.

Now, if you’re an economic genius, or have even just taken basic economics, then you’re not going to learn anything earthshattering from the book, but what you may get out of it which could be just as valuable is a different way of thinking through or of explaining macroeconomic concepts.

Case in point: I had never thought of “the job of a pension system is to divide national output between active workers and retirees.” While this is a simple and obviously true statement, Moss uses that underlying “framework” to explain why moving existing Social Security/pension plans to an IRA (stock-based) retirement system is unlikely to fundamentally solve anything:

Although all of us are accustomed to thinking that we can sell our financial assets for cash at a moment’s notice and then use the cash to buy goods and services, this obviously wouldn’t work if everyone tried to do it at once. If a large number of senior citizens liquidated their financial assets at the same time, in order to buy needed goods and services, they would soon find that the proceeds were much smaller than they had expected. Simply giving the elderly more pieces of paper – more stocks and bonds – does not guarantee that there will be more output for them to consume in the future …

The key question from a macroeconomic standpoint, therefore, is not whether the senior citizens of tomorrow have IRAs or traditional Social Security benefits, but whether they (or others) reduced their consumption to prepare for their eventual retirement. Unless savings are increased today, the division of output between active workers and retirees will be no less onerous tomorrow, regardless of whether we have a fully funded pension system based on individual accounts or a traditional pay-as-you-go system based on payroll taxes …

The amount of output a country produces is its ultimate budget constraint, regardless of how many stocks or bonds or Social Security cards may be floating around. Unless its output grows, a country cannot give more to its retirees without giving less to its workers.

Maybe you didn’t hear anything new there – and if so, pat yourself on the back as you are far smarter than I am – but I was blown away by the simplicity of Moss’s explanation of what is a very complicated problem. Mind you, he doesn’t have an answer to out-of-control entitlement programs like the one the US has, but being able to break this down only pages after explaining the different things that make up and affect GDP (national economic output) was impressive to me. And the cool thing is that Moss does this several times, explaining, for instance, why boosting monetary supply (i.e. when the Federal Reserve cuts interest rates) may have a certain effect on the exchange rate in the short-term but a different one in the long-term and how an “unsustainable current account deficit” (i.e. huge trade deficits) might look like a “high degree of investor confidence” at first.

If you’re interested in macroeconomics casually or as a business-person who needs a better grasp of it in his or her job, I’d highly recommend the book.

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2011 Goals

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I made a list of New Year’s resolutions last year which I am happy to say I did fairly well at achieving.

But, when I sat down again to think up what I wanted to publically commit to, I realized something. The list borrows heavily from last year, with a few slight modifications:

    • Read and blog one scientific paper a month: It’s been a staple of this blog, a lot of fun to read/write, and has succeeded in keeping me at least partially grounded in the science world that I once came from and, to some extent, still feel a part of.
    • Instead of reading Checkmate and Pawn in Frankincense from Dorothy Dunnett’s Lymond Chronicles, this year I’m aiming to read Queen’s Play – the last book in the series which my girlfriend and good friend recommend I read.
    • Continue to expand my network – I think I’ve graduated from super-shy wallflower, but I’m still not completely comfortable with the whole networking thing. The good thing about being in venture capital is that networking not only comes with the job but comes a lot easier when people know that your company has money and connections, so I will continue to work on breaking out of my introvert shell
    • Finish a rev 1 of Benchside – I failed last year, but gosh-darn-it, I will succeed this year!

But, in addition, I want to add a few other items:

    • Build out a public version of Iggregate – In addition to Benchside, I’m also working on a project I call Iggregate which I am hopeful I will be able to take the wraps off in this new year. It’ll be tough, especially with the Benchside goal, work, and my general programming incompetence, but you gotta aim high to make it anywhere big!
    • Improve my Chinese – The venture fund I work for is unique in its strong presence in US, Japan, and China. And, while my job and interests are focused on venture opportunities in the US, our recent company offsite has convinced me that I should improve my Chinese speaking and comprehension. I don’t intend (not that I ever could get) to be as fluent as a native speaker, but my goal is to be able to understand enough business Chinese that I can participate in my fund’s China team meetings without falling back on English.
    • Build out investment portfolio with more than just index funds – My traditional investment strategy has been heavily reliant on index funds due to lack of time, lack of training/practice, and fear of conflicts of interest from my consulting career. Now that I’m no longer a consultant, employed in an investment industry, and have a good friend from college who’s very interested in deploying his capital effectively and has the time to think about this non-stop (because he’s in business school), I think its about time I graduate from the low-risk, low-reward world of index funds and reallocate so my investment portfolio is 1/4 to 1/3 in specific stocks/commodities

Truth be told I’m starting to feel a little nervous about committing to all of this – but I’m also a little excited to get started. Happy New Year everybody! And good luck with those resolutions!

(Image credit)

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