Tuesday, June 30, 2009

Malcolm Gladwell's critical review of FREE and Chris Anderson's response

I'm a fan of both Malcolm Gladwell and Chris Anderson, so this exchange is pretty interesting to me. Links to:


Related previous post: Chris Anderson's FREE Speech

Monday, June 29, 2009

Opening Keynote Malcolm Gladwell Draws Capacity Crowd

When it comes to learning," Gladwell said, "what you get is a simple function of what you put in. That is the beautiful and powerful idea behind learning... Sometimes the struggle to learn something is where the actual learning lies."

He also contrasted two learning strategies: capitalization, or leveraging your strengths; and compensation, or focusing your effort on weaknesses. Gladwell contends we spend too much time capitalizing when we'd find much more success by compensating.

Is The Smart Money Betting on Inflation?

Great compilation of notable inflation comments from The Manual of Ideas: HERE


Examiner Interview with Janet Tavakoli about Warren Buffett

Tavakoli should know a thing or two about the value of lunch with Buffett. She dined with the Berkshire chief in 2005 and wrote a book, "Dear Mr. Buffett," partly about the experience. Tavakoli, who still communicates with Buffett periodically and was in Omaha, Neb., for this year's annual meeting, is founder and president of Chicago-based Tavakoli Structured Finance, a financial consulting firm.

Examiner: What did you two talk about during the lunch?

JT: We covered dozens of topics. Warren is a highly intelligent polymath, and he has a fabulous memory. His wide base of general knowledge and life experience enable him to add interesting color to almost any topic. He switches topics quickly, and he picked up speed as the afternoon progressed. It is mental work to keep up with Warren. He will go as fast as you can handle.

Warren is proud of the fact that he has created wealth for his shareholders, his long-term partners. By the time Donald Othmer, a chemical engineer, died in 1995, his investment in Berkshire Hathaway was worth around $750 million. He has a keen sense of the enormous responsibility of managing the hard earned money shareholder entrusted to him. The idea of building value is not only wholesome, it is life-affirming. During our meeting, I got the sense of what a totally decent person Warren is. The blow-up in the global financial markets that was just starting to occur, and it was partly due to malicious mischief. Contrasting Warren Buffett's philosophy with the shenanigans of phony assets combined with inexcusable leverage and cover-ups was all the more poignant as the crisis unfolded.

I mention some of the many topics we discussed in my book, but my personal take-aways have to do with Warren's sane approach to the markets. We hear a lot of black swan quackery making claims that Warren Buffett's investment style is dead. Yet, the "black swan" funds have poor track records, albeit that has not been widely reported, and in fact, it has been inaccurately reported. It is nothing more than a PR stunt. If one wants to buy insurance, i.e., put options, one does not have to pay 2% in fees and 20% of the upside to a mediocre manager with no exit strategy. The funds may have one good year followed by years of consistently losing money. The loss of that money is permanent value destruction. More than that, what kind of person wants to spend their entire life curled up in a corner with their fists balled up in front of their faces in a defensive posture? It's a ridiculous way to spend your life, and you create nothing of value in the economy other than buying insurance. No wonder they have not held onto their insurance payouts and have poor track records.

When one invests in value, there is no permanent destruction of value. Stock prices may go up or down, but the underlying companies have value, and they make products that people want and need. These companies keepgenerating earnings and value and when the economy recovers, they are positioned to soar. Warren doesn't distinguish between "value" and "growth" companies because they are one in the same to a value investor. He wants to buy companies at a fair price-better yet, at a cheap price-and he wants to buy companies that have a potential to grow.

While it is true that Berkshire Hathaway may not achieve the high returns of its past due to its enormous size, it will continue to achieve future satisfactory returns. Investors focus more on book value and other metrics rather than the fickle market price. People said value investing was dead in the 1970's when Berkshire Hathaway's share price was down two years in a row (more than 15% for the fiscal year then ending March 1974, and down more than 35% for March 1975). The share price was $51 on March 31, 1975, down from $93 on March 31, 1973. Even if you had "bad timing," and had bought the stock at $93, you would be a happy investor today (BRKA closed yesterday at $86,705). Long-term value investing works if you know the principles of finance and know how to value a company.

The philosophy of value investing seems very healthy to me. One generates value by investing in society and creating permanent value in the economy.

Another thing that struck me about Warren is that he does not dwell on past mistakes. He is not a brooder. He freely admits that mistakes will be made, and that you may never figure out what complicated mix of psychology led you to make them. The key is to avoid making big ones. This is where the idea of building a margin of safety comes in. He skews the probability of success in his favor by limiting the probability of disaster and increasing the probability of a high future gain. He doesn't rely on random luck, he is using conditional probabilities. Given that he knows the principles of creating value, he has stacked the odds in his favor of a satisfactory outcome. No one can guarantee you a successful outcome, unexpected events will occur, and mistakes will be made. Knowing all of that, one can still improve one's odds, and Warren Buffett excels at stacking the deck in favor of his investors.

Examiner: What are some things that you have observed about WEB during the lunch or subsequent interactions that the public doesn't know about him?

JT: Warren does not talk down to people, and he doesn't try to impress people with his intelligence. As a result, many people underestimate him. For example, one reporter wasted an interview with Warren by repeating a myth that he doesn't carry a cell phone. Warren whipped out his cell phone and joked that Alexander Graham Bell had given it to him. He would never belittle someone for wasting his time (and theirs), but he also won't tell the reporter what to ask. He can like a Wimbledon winner playing tennis with a child. He won't slam the ball at the feet of an inexperienced player. But when he meets a skilled player, he increases his level of play to match the other player.

Warren's command of derivatives and financial principles is deep, but his explanations are so elegantly simplified that experts sometimes deceive themselves into thinking he is not as smart as they are. I call it the "I am a genius, and you're not" syndrome. Warren doesn't suffer from that. When Warren appears on television, he makes things sound simple. When he hesitates, it is as if he is translating complex material to simple language for public consumption. A less secure man might try to impress the audience with jargon or with details. He is not competing with anyone else, and he respects his audience. I would like to be more like him when I grow up.


Book: Dear Mr. Buffett: What An Investor Learns 1,269 Miles From Wall Street

Thursday, June 25, 2009

The Austrian Economics Newsletter's 1996 Interview with James Grant

AEN: Your argument about business cycles in The Trouble with Prosperity rests heavily on the work of the Austrian economist Wilhelm Röpke instead of the more well-known Austrians.

GRANT: I am an observer of the contemporary scene, a journalist, rather than a theorist. I picked up Austrian economics almost everywhere except in school. It came to me, and I to it, in the way that the Austrians say that so many good things happen, that is, by accident, rather than by design.

Over the years I read Mises, Hayek, Rothbard, and others on interest rates, capital, and the business cycle. I've long been inspired by Henry Hazlitt's career, someone who wrote as well as he did, and as long. To think that this man professed the ideas he did in the pages of the mainstream press is certainly startling and revelatory.

I chose to feature Röpke because of his book Crises and Cycles, which appeared in English during the Great Depression. He offers a clear and forceful exposition of the mechanics of the Austrian interest-rate and business-cycle model, and the very difficult but rewarding structure of the theory itself. Vera Smith must have done a great job in translating the work. By the way, I recommend Vera Smiths book The Rationale of Central Banking as a further elucidation on Röpke's already clear theory. I know there are all sorts of holes in my bibliography; there might be better and more faithful explanations than Röpke offers. But I really do recommend this to people for its simplicity.

AEN: How do you sort out short-term glitches from structural distortions?

GRANT: What we do is look for extremes in markets: very undervalued or very overvalued. Austrian theory has certainly given us an edge. When you have a theory to work from, you avoid the problem that comes with stumbling around in the dark over chairs and night stands. At least you can begin to visualize in the dark, which is where we all work.

The future is always unlit. But with a body of theory, you can anticipate where the structures might lie. It allows you to step out of the way every once in a while. So I'd like to put in a plug, not just for the theory itself--as elegant as it is--but for the application of the theory for calling the turn of cycles in the workaday world.

AEN: Will the newly-created indexed bond improve our discernment abilities?

GRANT: The theory is that it will reveal future inflation to policymakers. But they will be severely disappointed. There are a number of different inflations. Whichever one they focus on will be the wrong one. And will not improve the information available to the Fed to run monetary policy. Moreover, it doesn't excite me at all as a speculative or investment vehicle. Any securities innovation coming from the government leaves me cold as a first principle. You can have my share of any and all future indexed bond issuance.

AEN: Is it another example of the attempt at monetary central planning?

GRANT: It is worse. It is a symptom of Greenspan's fundamental failing that will prove to be his undoing. Before this is all over, there will be a big speculative upset, a loss of faith in financial assets, and a loss of faith in the steward of financial markets: Greenspan himself. His tragic flaw is that he thinks--contrary to the teachings of the Austrian masters--that there is some piece of data that will allow him to see the future clearly and head it off at the pass. He really believes that, notwithstanding what he knows about Mises.

There is no worse error. Somebody once told me that when Greenspan went to Washington, he felt that at last he would have the information he needed to make him a great economic forecaster. He evidently thought that in the upper-left-hand drawer of his desk, there was going to be a chart book that would show him everything.

AEN: Do you think the consumer credit market is itself a creation of loose credit?

GRANT: It has been subsidized and encouraged by the central bank, and the rise of debt that has come with it, but it has a life of its own--by and large a successful life, I might add. Wilhelm Röpke criticized all consumer credit as being a product of the inflationary age. He couldn't have anticipated how fully developed the market would end up.

In Germany today, consumer credit is only a minor fixture in the financial markets; the main use of credit cards is to debit ones bank account, not to run up balances. Americans think Germans have it all backwards; the purpose of credit cards is to get yourself in debt and go to Aruba.

AEN: Does the American practice have advantages?

GRANT: America has shown that a bank can stay open 24 hours a day. It has shown that you can conduct business without a teller discovering the details of your personal financial life. That's great. The technique of consumer finance in America is wonderful. Has it opened the way to abuses? Certainly. Has it changed the nature of the economy? Certainly, for better and worse.

AEN: Yet under the gold standard, the availability of credit was severely restricted.

GRANT: Correct, and only by degree did bankers come to trust ordinary working men and women. There is nothing incompatible between the gold standard and a democratic regime of credit. Nineteenth-century bankers miscalculated and overlooked a great business opportunity when they overlooked the average American worker. Had World War I not happened, the markets would have discovered, through trial and error, that consumer credit is a legitimate and lucrative business. As it turns out, consumers collectively have presented a much better credit risk than corporations individually. That's not likely to remain true indefinitely.

The purpose of markets is to test the limits of ideas, and sometimes take them to absurd extremes. Markets tested the absurd extremes of financial leverage in the 1980s. They've tested the absurd extremes of the equity market in the 1990s. They've tested various structures of corporate finance during various cycles. Markets will test the extreme limits of consumer credit too.


Related books:

Mr. Market Miscalculates

The Trouble with Prosperity

Related link: The Mises Online Store

Wednesday, June 24, 2009

Monday, June 22, 2009

Ben Franklin and the Junto

From PBS online:

Ben Franklin was a gregarious person, who loved sitting down and having long conversations with friends and acquaintances. In 1727, Franklin organized a group of friends to provide a structured forum for discussion. The group, initially composed of twelve members, called itself the Junto.

The members of the Junto were drawn from diverse occupations and backgrounds, but they all shared a spirit of inquiry and a desire to improve themselves, their community, and to help others. Among the original members were printers, surveyors, a cabinetmaker, a cobbler, a clerk, and a merchant. Although most of the members were older than Franklin, he was clearly their leader.

Franklin describes the formation and purpose of the Junto in his autobiography:

I should have mentioned before, that, in the autumn of the preceding year, [1727] I had form'd most of my ingenious acquaintance into a club of mutual improvement, which we called the Junto; we met on Friday evenings. The rules that I drew up required that every member, in his turn, should produce one or more queries on any point of Morals, Politics, or Natural Philosophy, to be discuss'd by the company; and once in three months produce and read an essay of his own writing, on any subject he pleased. Our debates were to be under the direction of a president, and to be conducted in the sincere spirit of inquiry after truth, without fondness for dispute or desire of victory; and to prevent warmth, all expressions of positiveness in opinions, or direct contradiction, were after some time made contraband, and prohibited under small pecuniary penalties.

The Junto's Friday evening meetings were organized around a series of questions that Ben devised, covering a range of intellectual, personal, business, and community topics. These questions were used as a springboard for discussion and community action. In fact, through the Junto, Franklin promoted such concepts as volunteer fire-fighting clubs, improved security (night watchmen), and a public hospital.

American Philosophical Society
One outgrowth of the Junto was the American Philosophical Society, created in 1743 to "promote useful knowledge in the colonies." Franklin proposed that the group be comprised of "ingenious men"—a physician, a mathematician, a geographer, a natural philosopher, a botanist, a chemist, and a "mechanician" (engineer)—who lived throughout the colonies. The purpose of the group was to facilitate the sharing of information about discoveries being made in the various fields.

A respected intellectual institution, the American Philosophical Society still exists more than 200 years later.

This is the list of questions Franklin devised to guide the discussions at Junto meetings.

1. Have you met with any thing in the author you last read, remarkable, or suitable to be communicated to the Junto? particularly in history, morality, poetry, physics, travels, mechanic arts, or other parts of knowledge?

2. What new story have you lately heard agreeable for telling in conversation?

3. Hath any citizen in your knowledge failed in his business lately, and what have you heard of the cause?

4. Have you lately heard of any citizen’s thriving well, and by what means?

5. Have you lately heard how any present rich man, here or elsewhere, got his estate?

6. Do you know of any fellow citizen, who has lately done a worthy action, deserving praise and imitation? or who has committed an error proper for us to be warned against and avoid?

7. What unhappy effects of intemperance have you lately observed or heard? of imprudence? of passion? or of any other vice or folly?

8. What happy effects of temperance? of prudence? of moderation? or of any other virtue?

9. Have you or any of your acquaintance been lately sick or wounded? If so, what remedies were used, and what were their effects?

10. Who do you know that are shortly going [on] voyages or journies, if one should have occasion to send by them?

11. Do you think of any thing at present, in which the Junto may be serviceable to mankind? to their country, to their friends, or to themselves?

12. Hath any deserving stranger arrived in town since last meeting, that you heard of? and what have you heard or observed of his character or merits? and whether think you, it lies in the power of the Junto to oblige him, or encourage him as he deserves?

13. Do you know of any deserving young beginner lately set up, whom it lies in the power of the Junto any way to encourage?

14. Have you lately observed any defect in the laws of your country, of which it would be proper to move the legislature an amendment? Or do you know of any beneficial law that is wanting?

15. Have you lately observed any encroachment on the just liberties of the people?

16. Hath any body attacked your reputation lately? and what can the Junto do towards securing it?

17. Is there any man whose friendship you want, and which the Junto, or any of them, can procure for you?

18. Have you lately heard any member’s character attacked, and how have you defended it?

19. Hath any man injured you, from whom it is in the power of the Junto to procure redress?

20. In what manner can the Junto, or any of them, assist you in any of your honourable designs?

21. Have you any weighty affair in hand, in which you think the advice of the Junto may be of service?

22. What benefits have you lately received from any man not present?

23. Is there any difficulty in matters of opinion, of justice, and injustice, which you would gladly have discussed at this time?

24. Do you see any thing amiss in the present customs or proceedings of the Junto, which might be amended?