Links

Cicero used to be boring. With Trump around, he’s breathtaking. (LINK)

Related book: On Duties

It’s Time for Investor Fees to Go Even Lower - by Jason Zweig (LINK)

Oscar is Disrupting Health Care in a Hurricane - by Steven Levy (LINK)

Tren Griffin's Advice for Twitter (LINK)

16 Questions About Self Driving Cars (video) (LINK)

Vikram Mansharamani on the demand for avocados (LINK)

Thieves in Italy targeting precious Parmiggiano Reggiano [H/T Abnormal Returns] (LINK)

An Ingenious Experiment of Jungle Bats and Evolving Artificial Flowers - by Ed Yong (LINK)

Links

"The performance of public duty is not the whole of what makes a good life; there is also the pursuit of private excellence. For man, though partly social, is not wholly so." -Bertrand Russell

It appears that last June, The Reith Lectures series added some archived podcast episodes in case anyone is interested in downloading them to your favorite podcast-listening device, including one of the original ones from Bertrand Russell in 1948-1949 (you can find all of his lectures HERE.)

Farnam Street: 3 Famous Writers on the Relationship Between Reading and Writing (LINK)

Latticework of Mental Models: Liking Bias (LINK)

The 10 Biggest Retail Bankruptcies of the Last Decade [H/T Linc] (LINK)

Mutual Fund Observer, March 2016 (LINK)

Yale's Vikram Mansharamani sees bubbles bursting everywhere (video) (LINK)

Related book: Boombustology

The Voters Decide - by Ben Thompson (LINK)

Edge #450: AI & The Future Of Civilization - A Conversation With Stephen Wolfram (LINK)

Book of the day: Classics: An Investor's Anthology

TEDXYale - Vikram Mansharamani - The Power of Foxy Thinking

Link

All Hail the Generalist - By Vikram Mansharamani

Found via @farnamstreet.

We have become a society of specialists. Business thinkers point to "domain expertise" as an enduring source of advantage in today's competitive environment. The logic is straightforward: learn more about your function, acquire "expert" status, and you'll go further in your career.

But what if this approach is no longer valid? Corporations around the world have come to value expertise, and in so doing, have created a collection of individuals studying bark. There are many who have deeply studied its nooks, grooves, coloration, and texture. Few have developed the understanding that the bark is merely the outermost layer of a tree. Fewer still understand the tree is embedded in a forest.

Approximately 2,700 years ago, the Greek poet Archilochus wrote that "The fox knows many things, but the hedgehog knows one big thing." Isaiah Berlin's 1953 essay "The Fox and the Hedgehog" contrasts hedgehogs that "relate everything to a single, central vision" with foxes who "pursue many ends connected...if at all, only in some de facto way." It's really a story of specialists vs. generalists.

In the six decades since Berlin's essay was published, hedgehogs have come to dominate academia, medicine, finance, law, and many other professional domains. Specialists with deep expertise have ruled the roost, climbing to higher and higher positions. To advance in one's career, it was most efficient to specialize.

For various reasons, though, the specialist era is waning. The future may belong to the generalist. Why's that?

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Related previous posts:

Philip Tetlock: Why Foxes Are Better Forecasters Than Hedgehogs

Hedgehogs and Foxes

Related book: Boombustology

Is Education Overvalued? - by Vikram Mansharamani

College graduation is a time of great joy, of optimism, of forward-looking enthusiasm. Indeed, the very term “commencement” implies a positive new beginning. Unfortunately, this is not universally the case in America. Many students this year will graduate with questionable educations and mountains of debt; as more students go off to college and borrow money to do so, student loan debt in the United States is likely to top $1 trillion this year, exceeding credit card debt for the first time in history.

Might our strong belief in the value of an education be misguided? Is higher education in America a bubble about to burst? As a student of booms and busts, I have developed a framework for identifying unsustainable price dynamics, which are as applicable to higher education as they are to tulips, Japanese real estate, and Internet stocks.

Two primary dynamics seem to telegraph bubbly price action regularly through history’s great speculative eras. First, an unquestioning faith in the asset’s value leads to an ever-increasing universe of buyers, despite price increases. Second, the availability of “easy money” or “loose credit” is often driven by policies that generate significant moral hazard. Higher education in America today exhibits both of these warning signs.

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Related book: Boombustology

Is The Chinese Bubble Ready To Burst?

Thanks to Phil for passing this along.

The discussion of whether or not the Chinese economy is a bubble destined to collapse, or if the recent rash of media over empty cities and spiraling food costs are merely sensationalistic hype masking an unstoppable growth story, has become a favorite Wall Street parlor game over the past year.

May trade data from China released earlier this month registered stronger growth in imports than consensus forecasts, suggesting that demand in the Middle Kingdom is remaining resilient despite the steady rounds of tightening that the People’s Bank of China policy makers began in the fourth quarter of last year. With interest rate and reserve ratio increases still failing to tame rising prices completely, some economists anticipate that currency appreciation against the dollar peg is remains a possibility. Simply put, the longer view of the situation facing Beijing is still very much a matter of debate.

One strong voice in this debate is Vikram Mansharamani, a Managing Director at Boston-based SDK Capital and a lecturer at Yale where he teaches a seminar on economic boom and bust cycles that served as the basis for his book 'BOOMBUSTOLOGY: Spotting Financial Bubbles Before They Burst' that was published earlier this year.

Mansharamani, who holds a PhD and two master’s degrees from MIT, helps oversee a long/short global equity portfolio. "I skin the cat thematically – what I look for structural long term trends on which I can bank for longs, and on the short side I look for things that fit my framework of bubbly conditions."

One example Mansharamani gives as a potential developing bubble is base metals. "The steel industry in China boomed from 5 percent of global steel production in the late 70s to almost 50 percent today; on the back of that surge was a voracious appetite for iron ore" he says. "Anticipating that Chinese growth will continue and extrapolating on past trends, the iron ore industry is now planning expansions equating to over 100 percent capacity growth in the next ten years. Well, hold on a moment: if China continues to grow at past rates, China becomes more than 90 percent of the entire global steel market – which is unlikely, and so it seems likely that the iron ore capacity may be rising just as slowing capital investments in China cools demand."

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Book: Boombustology

Related previous post: Hedgehogs and Foxes

Hedgehogs and Foxes

“The fox knows many things, but the hedgehog knows one big thing.” -Archilochos

In the book Boombustology (which I’d put in my list of ‘Top 10 Most Important Books on Investing’), Vikram Mansharamani states that:

The basic underlying logic of Boombustology has been that when it comes to spotting financial bubbles before they burst, it is better to be a fox. Foxes are more suited to attack mysteries. Hedgehogs, with their depth of understanding, are more effective in solving puzzles.

He also mentions Phil Tetlock’s study which produced the book Expert Political Judgement, in which Tetlock also concluded that “foxes are better forecasters than hedgehogs.” This discussion reminded me of a couple of paragraphs we wrote in Chanticleer’s Q2 2010 Letter, which are below.

In the book Good to Great, Jim Collins writes about an idea he calls the Hedgehog Concept, in which he compares the fox to the hedgehog. Foxes, Collins writes, know many small things while hedgehogs know one big thing. Hedgehogs survive because the big thing they know is that when there is danger, they can roll into a ball of spikes and survive. Collins makes the case that companies that go from good to great are all hedgehogs. We disagree, and not just because 2 of the 11 companies the book sites as great are now basically or literally bankrupt; and another one might be if it weren’t for government support of the financial system.

When it comes to survival in business and investment management, we believe it is better to be the fox. It is better to view the current state of the world as a complex, interwoven, evolving system and to not take a static view of the world. There are different types of markets, cycles, and risks and it is important to constantly examine the rationale behind a business or investment decision to see if there are any dangers being missed. The hedgehog may survive an attack from a fox by rolling into a ball of spikes, but if the danger is a car driving toward it at 60 miles per hour, running might be a better defense. Warren Buffett is quick to remind people that the chains of habit are too light to be felt until they are too strong to be broken. Investors would be wise to keep this in mind. In our business, value still applies, but a world full of debt and interdependence is a fragile one, so building a portfolio that is resilient and takes this fragility into account is difficult, but essential.

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Related essay: The Hedgehog and the Fox - by Isaiah Berlin

Boombustology and Value Investing: Why Context Matters - By Vikram Mansharamani

Via Value Investing Letter.

As one who has fought with global equity markets during the past 20+ years, I remain confused by the typical value investor’s belief that “top-down” issues are not worth contemplating. Why is it that Graham and Dodd investing (as practiced by many value investors) downplays the role of context in the investment process? Wouldn’t the prudent investor want to understand risks and uncertainties relating to the environment in which he/she is investing?

Perhaps because I have spent a great deal of time investing outside of the United States, I have never had the luxury of dismissing macroeconomics, politics, or the actions of other investors. Consider Indonesia before and after the Asian Financial Crisis. Investing in the best companies at reasonable prices did not protect you. The utter bloodbath in the currency markets destroyed dollar returns. Likewise, many value investors faced steep losses during the second half of 2008 and the first quarter of 2009. Herd behavior and self-fulfilling dynamics unfortunately drive these dynamics.

Most of the time, Third Avenue’s Marty Whitman is correct that macro-factors are neither predictable nor important. However, this is not always the case, and just as extreme valuations merit attention, so too might macro extremes matter. How can we value investors effectively determine if we are at an extreme, and should therefore worry a bit more about the context? Surely it is worthwhile to know if a particular asset class is a bubble about to burst. Such an insight might allow us to tilt the balance of the errors we inevitably make towards errors of omission, rather than those of commission. While we may miss gains, we might avoid painful losses.

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I am not suggesting that we value investors abandon our focus upon the analysis of individual securities. We should not. Finding margins of safety from intrinsic values remains the most sensible method of investing. I am merely suggesting that when we do invest, we should be cognizant (rather than dismissive) of the environment and context in which we are operating. As eloquently summarized by Seth Klarman, we should all “invest bottom-up, but worry top-down.”

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Book: BOOMBUSTOLOGY: Spotting Financial Bubbles Before They Burst

Look Out Below: Why Skyscrapers are Classic Bubble Indicators

Thanks to Barry for passing this along.

In China, five of the world’s ten largest buildings are now under construction. Look out below!, says Vikram Mansharamani, a financial services veteran and part-time academic who has developed a multidisciplinary framework for sniffing out bubbles.

Mansharamani is author of a new book, BoomBustology: Spotting Financial Bubbles Before they Burst. The book is based in part on a course that Mansharamani, who has two master’s degrees and a Ph.D. from the Massachusetts Institute of Technology, has taught at Yale, his alma mater. While many analysts focus on a single causal factor (Fannie Mae caused the housing bubble! Snake-oil salesmen from Silicon Valley fomented the dotcom bubble!) Mansharamani takes a multidisciplinary approach. Borrowing from analysts in fields such as economics, psychology, and biology (bulls and bears, it turns out, act a lot like swarming ants), Mansharamani has developed a series of lenses through which to examine market behavior. Systematically examining outbursts of mania, from Dutch investors’ infatuation with Tulips in the 1630s to Florida real estate in the 1920, can help sniff out bubbles.

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Book: BOOMBUSTOLOGY: Spotting Financial Bubbles Before They Burst

Spotting Bubbles Before They Burst - by Vikram Mansharamani

Financial booms and busts are, particularly from an a priori perspective, probabilistic events for which multidisciplinary analysis is essential. Addressing financial booms and busts through a single lens may in fact have negative impacts and lead to gross misunderstandings.

Adopting a singular perspective will lead to an emphasis on depth of data versus breadth of information. It leads to deeper and more thorough understanding of particular information, but it misses the point that information is not the essential element.

There are plenty of “dots” but the connections between them are lacking.

Conceiving of financial booms and busts as uncertain ambiguities necessitates the application of different lenses to develop a probabilistic interpretation of scenarios to better understand how they may evolve. Economists, political scientists, psychologists, and even hard scientists have much to learn from each other. What we need today are analysts who employ a multidisciplinary perspective to connect the dots.

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Book: BOOMBUSTOLOGY: Spotting Financial Bubbles Before They Burst