Monday, February 16, 2009
Nationalization, Regulation...
Those have been the overwhelming fighting tool brandished by those in government and other mummies and zombies. And that's what scares me the most in this whole crisis. Those have always been the standard reflex in all crises I can remember. If it was the right answer, how come we still have crises coming? And have you noticed that for all the fuzz, alternative investment (hedge funds, private equities) is the only category that has NOT asked (or received) Government aid? On the other hand, banks, that are highly regulated and GSEs (which stands for GOVERNMENT SPONSORED ENTITIES, by the way) like Fannie Mae and Freddie Mac were the CAUSE of the whole imbroglio.
Wednesday, March 19, 2008
The age of the intangibles and venture capital
Most great business today don't require physical assets. Capital that investors put into companies typically are no longer used to finance plants and physical capital but rather to help them develop intellectual properties, systems and/or franchises that generate earnings streams. Each new individual business typically is much riskier but generates much higher returns on capital when successful. Venture capital has gone mainstream.
Saturday, March 15, 2008
Obituary - Haimchinkel Malintz Anaynikal
That was the name legendary Alan (Ace) Greenberg invented for the fictional "counselor" he referred to in his famous memos when he ran Bear Sterns. HMA's core business philosophy was "Make decisions based on common sense. Avoid herd mentality. Control expenses with unrelenting vigil. Execute the fundamentals. Free your motivated, intelligent people from the chains of command. Hire PSDs (Poor, Smart and with a deep Desire to become rich). And stay humble, humble, humble." It seems his successors adopted only the part on "freeing people from the chain of command" part and now, as they say, the rest is history. RIP, Haimchinkel Malintz Anaynikal.
Follows some scraps from recent cover pages on Bear Stearns demise and Greenberg's book that lead me to exciting reflections:
The context:
FT: "The credit crisis on Friday engulfed one of Wall Street’s most important investment banks as the Federal Reserve and JPMorgan Chase combined to provide emergency finance for 85-year-old Bear Stearns and prevent further upheaval in global markets.
The decision by the monetary authorities to throw a temporary lifeline to Bear followed a night of deliberations involving regulators, led by Timothy Geithner, president of the New York Fed, and came after Bear’s shares plunged and its access to overnight funding dramatically diminished. It is likely to pave the way for a sale or liquidation of the company in the coming weeks.
Fed officials told the Financial Times that it acted because of the systemic risks involved in the potential sudden failure of the fifth-biggest US investment bank at a moment of extreme fragility in the markets."
WSJ: "By 7:30 p.m. Thursday, when it became clear Bear had not managed to secure necessary financing or a strategic deal, Fed officials began to realize they might have to step in.
Yesterday's developments were the latest in a series of blows to the financial system that began in August. Then, banks became so wary of lending to each other that money markets seized up and the world's central banks had to intervene. The trigger was a surge in delinquencies on U.S. subprime mortgages and the end to a spectacular rise in home prices.
The pervasiveness of the financial problems and the risks to the economy became increasingly apparent at the beginning of the year. That led the Fed to cut short-term rates by 1.25 percentage points in 10 days, and the Bush White House and Democratic Congress -- usually unable to agree on anything -- to approve a large fiscal stimulus."
And The Economist: "The Fed’s concern is understandable. If it had failed to intervene on Friday, few doubt that Bear would have gone down the tubes. The timing of the move shows just how desperate the situation had become at Bear. If the bank could have held on until March 27th it would have been able to borrow directly from the central bank under a new facility announced earlier this week.
Bear’s fate now hangs in the balance... would-be buyers have reason to be wary. Bear’s books are stuffed with complex “structured” mortgage-related assets, the value of which is hard to calculate. As a result, so is the value of Bear’s equity. A full-blown collapse cannot be ruled out if the value of its collateral—to whose credit risk the Fed is now exposed—continues to fall"
Memo from ACE Greenberg to All General & Limited Partners, March 13, 1979.
"... The developments at Bear Stearns certainly seem to be positive and as a result we will, of course, intensify our surveillance of all positions and expenses. You know how I feel about the dangers of overconfidence.
It certainly looks like we have a dynamic future in store as long as we remember the words of the famous philosopher Haimchinkel Malintz Anaynikal:"thou will do well in commerce as long as thou does not believe thine own odor is perfume".
Memo from ACE Greenberg to Senior Managing Directors, Managing Directors & Associate Directors, April 12, 1988
"...always respect our in-house administrators and compliance people. It is impossible to make enough on a trade or a deal to justify subsequent litigation due to carelessness or greed".
And to finish on a funny note, the Economist remarks that "the intervention came a day after Standard & Poor’s, a rating agency, said that the worst of banks’ write-downs related to subprime mortgages—Bear’s biggest weakness—may soon be over" and I received an email from a friend that ran like that: "This is simply too funny"
"at 2:17 pm: Standard & Poor's cut some of its credit ratings on investment bank Bear Stearns Friday following news of the bank's cash crisis and emergency bailout.
S&P cut its long-term counterparty rating on Bear Stearns to "BBB" from "A" and its short-term rating to "A-3" from "A-1."
S&P said Bear Stearns' need for temporary financing to continue operating normally led to the downgrade. Earlier Friday, Bear Stearns said it is receiving a financing line from JPMorgan Chase that is secured by the Federal Reserve Bank of New York.
The agency also placed the bank's long- and short-term ratings on negative watch, meaning they could be downgraded in the next three months."
OMG! How can someone even dream about sailing those dangerous waters without having timely access to S&P's prescient views?
Follows some scraps from recent cover pages on Bear Stearns demise and Greenberg's book that lead me to exciting reflections:
The context:
FT: "The credit crisis on Friday engulfed one of Wall Street’s most important investment banks as the Federal Reserve and JPMorgan Chase combined to provide emergency finance for 85-year-old Bear Stearns and prevent further upheaval in global markets.
The decision by the monetary authorities to throw a temporary lifeline to Bear followed a night of deliberations involving regulators, led by Timothy Geithner, president of the New York Fed, and came after Bear’s shares plunged and its access to overnight funding dramatically diminished. It is likely to pave the way for a sale or liquidation of the company in the coming weeks.
Fed officials told the Financial Times that it acted because of the systemic risks involved in the potential sudden failure of the fifth-biggest US investment bank at a moment of extreme fragility in the markets."
WSJ: "By 7:30 p.m. Thursday, when it became clear Bear had not managed to secure necessary financing or a strategic deal, Fed officials began to realize they might have to step in.
Yesterday's developments were the latest in a series of blows to the financial system that began in August. Then, banks became so wary of lending to each other that money markets seized up and the world's central banks had to intervene. The trigger was a surge in delinquencies on U.S. subprime mortgages and the end to a spectacular rise in home prices.
The pervasiveness of the financial problems and the risks to the economy became increasingly apparent at the beginning of the year. That led the Fed to cut short-term rates by 1.25 percentage points in 10 days, and the Bush White House and Democratic Congress -- usually unable to agree on anything -- to approve a large fiscal stimulus."
And The Economist: "The Fed’s concern is understandable. If it had failed to intervene on Friday, few doubt that Bear would have gone down the tubes. The timing of the move shows just how desperate the situation had become at Bear. If the bank could have held on until March 27th it would have been able to borrow directly from the central bank under a new facility announced earlier this week.
Bear’s fate now hangs in the balance... would-be buyers have reason to be wary. Bear’s books are stuffed with complex “structured” mortgage-related assets, the value of which is hard to calculate. As a result, so is the value of Bear’s equity. A full-blown collapse cannot be ruled out if the value of its collateral—to whose credit risk the Fed is now exposed—continues to fall"
Memo from ACE Greenberg to All General & Limited Partners, March 13, 1979.
"... The developments at Bear Stearns certainly seem to be positive and as a result we will, of course, intensify our surveillance of all positions and expenses. You know how I feel about the dangers of overconfidence.
It certainly looks like we have a dynamic future in store as long as we remember the words of the famous philosopher Haimchinkel Malintz Anaynikal:"thou will do well in commerce as long as thou does not believe thine own odor is perfume".
Memo from ACE Greenberg to Senior Managing Directors, Managing Directors & Associate Directors, April 12, 1988
"...always respect our in-house administrators and compliance people. It is impossible to make enough on a trade or a deal to justify subsequent litigation due to carelessness or greed".
Memo from ACE Greenberg to Managing Directors & Associate Directors, May 2, 1987.
"... We are different from other corporations. Let us stay that way."
Memo from ACE Greenberg to Senior Managing Directors, Managing Directors & Associate Directors, October 28, 1994
"... I have just received an invitation from Corporate Decisions Inc. of Boston to attend a one-day Senior Executive Forum on November 29, 1994. The subject of the conference is Value Migration: A Strategic Framework for Succeeding in the late 1990s.
If any of our senior managing directors would like to participate, please let me know. They will not be allowed to attend, but I would like to discuss with the interested parties why they want to attend, their philosophy of managing and why are they at Bear Stearns.
It seems like we receive at least on invitation per week to attend a conference regarding the buzz words... I find it amazing that we never hear of a conference devoted to applying common sense to the securities industry. We can not miss."
Memo from ACE Greenberg to Senior Managing Directors, Managing Directors & Associate Directors, January 13, 1989.
"The only thing that can stop us from getting richer is stupidity"
And to finish on a funny note, the Economist remarks that "the intervention came a day after Standard & Poor’s, a rating agency, said that the worst of banks’ write-downs related to subprime mortgages—Bear’s biggest weakness—may soon be over" and I received an email from a friend that ran like that: "This is simply too funny"
"at 2:17 pm: Standard & Poor's cut some of its credit ratings on investment bank Bear Stearns Friday following news of the bank's cash crisis and emergency bailout.
S&P cut its long-term counterparty rating on Bear Stearns to "BBB" from "A" and its short-term rating to "A-3" from "A-1."
S&P said Bear Stearns' need for temporary financing to continue operating normally led to the downgrade. Earlier Friday, Bear Stearns said it is receiving a financing line from JPMorgan Chase that is secured by the Federal Reserve Bank of New York.
The agency also placed the bank's long- and short-term ratings on negative watch, meaning they could be downgraded in the next three months."
OMG! How can someone even dream about sailing those dangerous waters without having timely access to S&P's prescient views?
Thursday, January 10, 2008
Nothing is set in stone
The Lex column today reminds us that back in 2000, after many mega mergers, the "big ten" or "supermajors" oil companies represented 2/3 of world's oil companies market cap. In a sector where scale is so relevant, all other players were believed to be doomed, destined to eternal irrelevance.
Fast forward to January 2008. It turns out that once again the "game-over" was called too soon. The "big ten - supermajors" today account for only 23% of worlds oil companies market cap. The take-aways?
1- Too big is often bad. Even in big oil.
2- Labels are terribly dangerous. Triple A companies can go bust very quick as we've been given many examples recently, "genius fail", and five or more sigma events that were statistically supposed to occur once in a million years have been blamed for many of the crisis over the last decade.
3- You can never be sure of anything in the future. You must have values and should have some convictions but certainty will always elude us. Build your positions accordingly.
Fast forward to January 2008. It turns out that once again the "game-over" was called too soon. The "big ten - supermajors" today account for only 23% of worlds oil companies market cap. The take-aways?
1- Too big is often bad. Even in big oil.
2- Labels are terribly dangerous. Triple A companies can go bust very quick as we've been given many examples recently, "genius fail", and five or more sigma events that were statistically supposed to occur once in a million years have been blamed for many of the crisis over the last decade.
3- You can never be sure of anything in the future. You must have values and should have some convictions but certainty will always elude us. Build your positions accordingly.
Tuesday, January 08, 2008
When morons failed
After Citi's and Merril's CEOs, now it's Bear Stearn's CEO turn to be forced out. When you look at that, the size of the losses (even if you assume that they were "just" the tens on Billions already recognized), the disruption created and the fact that so many signals were highlighted and warnings given beforehand by many, from Buffett to the mass newspapers, if you're committed to make a living in the capital markets, it should be inevitable to ask: how can it be? How can all those highly educated, ultra-highly paid, brilliant guys make such a mess that seemed so obvious?
My answer is: hubris, greed and the wrong incentives systems. As they say: if you want to find the answer, follow the money. The guys that created the mess might have suffered at the end, but received tons of money in the process and thought they were not only smart, but smarter then the other guys. At the end, they ended up looking, and being, morons.
My answer is: hubris, greed and the wrong incentives systems. As they say: if you want to find the answer, follow the money. The guys that created the mess might have suffered at the end, but received tons of money in the process and thought they were not only smart, but smarter then the other guys. At the end, they ended up looking, and being, morons.
Sunday, December 23, 2007
Phillip Fischer - an underated investment genius
Phillip A. Fischer wrote one of the most relevant books on investment: "Common Stocks and Uncommon Profits". He was the guy that opened Warren Buffett's mind to the "growth" part of the value of a company. Follows some selected sentences from the book
"Absence of conflict may not mean a basically happy relationship so much as fear of the consequences of conflict"
"You must learn what is important and train yourself to ignore the rest"
"Proof of any pudding is in the eating"
"Stockbrokers: men who know the price of everything and the value of nothing"
"Finding the really outstanding companies and staying with them through all the fluctuations of a gyrating market proved far more profitable to far more people than did the more colorful practice of trying to buy them cheap and sell them dear"
"Absence of conflict may not mean a basically happy relationship so much as fear of the consequences of conflict"
"You must learn what is important and train yourself to ignore the rest"
"Proof of any pudding is in the eating"
"Stockbrokers: men who know the price of everything and the value of nothing"
"Finding the really outstanding companies and staying with them through all the fluctuations of a gyrating market proved far more profitable to far more people than did the more colorful practice of trying to buy them cheap and sell them dear"
Friday, December 21, 2007
How to get out of trouble
Munger's advice on the topic on BRK's 2007 general meeting: "The best legal experience I ever got when I was very young. I asked my father why he did so much work for a big blowhard, an overreaching jerk, rather than for his best friend Grant McFaden. He said, “That man you call a blowhard is a walking bonanza of legal troubles, whereas Grant McFaden, who fixes problems promptly and is nice, hardly generates any legal work at all.” My dad was teaching me a lesson and it worked.
Considering its size, Berkshire has supported fewer lawyers than any company I can think of. We’ve gone through the world like Grant McFaden, the pioneering Omaha Ford dealer.
Figure out what you don’t want and avoid it and you’ll get what you do want. Warren had the same instincts I had. We haven’t had our share of disappointed, angry people that ruin so many lives. It’s easy to get into that position. Ask the question: How can you best get what you want? The answer: Deserve what you want!"
Or how Buffett also said once: "The best way to get out of trouble is to stay out of trouble in the first place." - Priceless
Considering its size, Berkshire has supported fewer lawyers than any company I can think of. We’ve gone through the world like Grant McFaden, the pioneering Omaha Ford dealer.
Figure out what you don’t want and avoid it and you’ll get what you do want. Warren had the same instincts I had. We haven’t had our share of disappointed, angry people that ruin so many lives. It’s easy to get into that position. Ask the question: How can you best get what you want? The answer: Deserve what you want!"
Or how Buffett also said once: "The best way to get out of trouble is to stay out of trouble in the first place." - Priceless
Mind hack
Frequently I find it very useful reading something apparently unrelated to the problem I'm supposed to be looking into. Most of the time, the most important thing in reading is not what you're reading, but what it makes you think. When we're facing a challenge, our minds tend to have it running on a parallel process at the back of our minds. Sometimes when reading a completely unrelated subject, we help our brain to actually look at the problem from a different position/frame of mind that leads to great solutions.
The greatest competitive advantage of all
The greatest competitive advantage of all is to do certain things differently from what human nature would lead us to. Having the discipline to do our homework, build conviction, manage risks and focus on the long-term results instead of following the herd into a doomed search for instant gratification through frenzy trading and yearly bonus is what can put us ahead.
Tuesday, December 18, 2007
My idol, Jehane Noujaim
A presentation about a girl that dreams of world peace. And actually has a concrete idea of how to help it happen using film and photography. Her point: how can people understand each other if they don't know what the other side is being told? This is fantastic. Really!
Is a short in oil the best hedge?
Over the last few weeks I’ve been thinking about what could be the best hedge nowadays. It seems to me that a short/put in oil or oil related companies could be it. Why?
Because the current oil bull market has been based on expanded demand and geo-political risks, not on supply constrains. Geopolitical risks are hard to gauge, but since they’ve been high for a while, mean reversion, at least, should be on your side over the medium term.
As for the supply/demand balance, the idea is to hedge against lower global growth, a scenario where oil demand would certainly abate. On the other side, progress in new sources in Russia and Brazil will eventually hit the market, as well as an increase in Iraq production as soon the situation become more stable there.
And last but not least, alternative sources are finally coming through, motivated both by higher oil prices and environmental concerns.
Bottom line is that I’d bet a great amount that oil prices will be substantially lower over the next 5 years. Maybe “short oil” could be more than a hedge. It could be a theme. Next step would be to search for the best vehicle.
Because the current oil bull market has been based on expanded demand and geo-political risks, not on supply constrains. Geopolitical risks are hard to gauge, but since they’ve been high for a while, mean reversion, at least, should be on your side over the medium term.
As for the supply/demand balance, the idea is to hedge against lower global growth, a scenario where oil demand would certainly abate. On the other side, progress in new sources in Russia and Brazil will eventually hit the market, as well as an increase in Iraq production as soon the situation become more stable there.
And last but not least, alternative sources are finally coming through, motivated both by higher oil prices and environmental concerns.
Bottom line is that I’d bet a great amount that oil prices will be substantially lower over the next 5 years. Maybe “short oil” could be more than a hedge. It could be a theme. Next step would be to search for the best vehicle.
Best Business Model Ever
A joint venture between an acupuncturist and a voodoo priest. Total scalability with 0 marginal costs!
Reflections on some defining moments
As I was running in the park today I start thinking about some few situations that ended up being very relevant to who I am, what I do and the culture I inoculated in the business I founded 20 years ago.
The first one was in mid-school. I had a math teacher that whenever someone would go into dithering preambles he would interrupt and say: "Don't tell a story. Ask a question". That might not sound big if you're not from a latin background, but for those who are, it's a major breakthrough. It was a great lesson in terms of objectivity and I was reasonable enough to understand that that would be the best way to go most of the times, although some context sometimes is all-important.
The second I can vividly remember was also from a professor, this time of physics, in high school. When students complained that his tests were too long and there wasn't enough time to do them, he would answer: "You're leaving too much thinking to be done during the tests. The time to think is during studies." That thought me to try to explore to the max the potential consequences of every concept I got introduced to. Do tons of what-if analysis. Take them to extremes. The fact that was before PCs was even more helpful, for it forced me to really incorporate the concepts and models, have them "hardwired" in my brain to run the simulations. To this day, its rare for me to face a crisis that is unexpected, that I haven't already gone through in a mental simulation. The only collateral effect I should warn all that would consider follow this path is that it leads to many sleepless nights.
The third came when we were starting our business. We were having a meeting with the guy that was to be our first accountant. As we discussed the structure, he said "Ah! The privilege of starting with a white sheet of paper". His eyes gleamed with this look not even the best actor can simulate, emphasizing how much in meant. From that moment on we decided to keep our "sheet" spotless. To this day, our company might not be the most efficient structure tax-wise or the biggest in its pond. But it has a wonderfully simple and stable structure that allows us to keep doing what we love most of the time.
Then there was Warren Buffett. Nowadays Buffett seems to be everywhere and I really don't know if that means that everyone is benefiting from his extreme wisdom or if overexposure has banalized it actually reducing his effects. But for me in the early 90s, it was a revelation. It's not only that he says great things, it's the way he says it, his ability to synthesize. Like in "In order to finish first, first you have to finish".
And last but definitely not least there's the fact that I was born in Rio de Janeiro, Brazil in the early 60s, to a upper-middle class family of medical professionals, with a strong ethical view of the world. That meant that no security could be take for granted. From 64 to the late eighties, Brazil was a military dictatorship where people could disappear at night and be "suicided", businesses-owners were forced out businesses in favor of government cronies. Later, as democracy gradually returned, Rio was to always in the opposition to federal government, meaning economic degradation and ramping crime rates, frequent waves of riots and kidnappings. On the economic front, utterly incompetent and short-sighted Governments played havoc. Hyper-inflation was constant and heterodox economic plans - that never worked but always resulted in losses for savers - happened with unbelievable frequency. My take on all of that, probably my deepest ingrained acquired reflex, is: "as much as you take care and be conservative, you shouldn't rely on whatever material or financial riches you have. The only reliable value is in your knowledge and in your relationships. So be humble, be nice and never stop learning and making new friends."
The first one was in mid-school. I had a math teacher that whenever someone would go into dithering preambles he would interrupt and say: "Don't tell a story. Ask a question". That might not sound big if you're not from a latin background, but for those who are, it's a major breakthrough. It was a great lesson in terms of objectivity and I was reasonable enough to understand that that would be the best way to go most of the times, although some context sometimes is all-important.
The second I can vividly remember was also from a professor, this time of physics, in high school. When students complained that his tests were too long and there wasn't enough time to do them, he would answer: "You're leaving too much thinking to be done during the tests. The time to think is during studies." That thought me to try to explore to the max the potential consequences of every concept I got introduced to. Do tons of what-if analysis. Take them to extremes. The fact that was before PCs was even more helpful, for it forced me to really incorporate the concepts and models, have them "hardwired" in my brain to run the simulations. To this day, its rare for me to face a crisis that is unexpected, that I haven't already gone through in a mental simulation. The only collateral effect I should warn all that would consider follow this path is that it leads to many sleepless nights.
The third came when we were starting our business. We were having a meeting with the guy that was to be our first accountant. As we discussed the structure, he said "Ah! The privilege of starting with a white sheet of paper". His eyes gleamed with this look not even the best actor can simulate, emphasizing how much in meant. From that moment on we decided to keep our "sheet" spotless. To this day, our company might not be the most efficient structure tax-wise or the biggest in its pond. But it has a wonderfully simple and stable structure that allows us to keep doing what we love most of the time.
Then there was Warren Buffett. Nowadays Buffett seems to be everywhere and I really don't know if that means that everyone is benefiting from his extreme wisdom or if overexposure has banalized it actually reducing his effects. But for me in the early 90s, it was a revelation. It's not only that he says great things, it's the way he says it, his ability to synthesize. Like in "In order to finish first, first you have to finish".
And last but definitely not least there's the fact that I was born in Rio de Janeiro, Brazil in the early 60s, to a upper-middle class family of medical professionals, with a strong ethical view of the world. That meant that no security could be take for granted. From 64 to the late eighties, Brazil was a military dictatorship where people could disappear at night and be "suicided", businesses-owners were forced out businesses in favor of government cronies. Later, as democracy gradually returned, Rio was to always in the opposition to federal government, meaning economic degradation and ramping crime rates, frequent waves of riots and kidnappings. On the economic front, utterly incompetent and short-sighted Governments played havoc. Hyper-inflation was constant and heterodox economic plans - that never worked but always resulted in losses for savers - happened with unbelievable frequency. My take on all of that, probably my deepest ingrained acquired reflex, is: "as much as you take care and be conservative, you shouldn't rely on whatever material or financial riches you have. The only reliable value is in your knowledge and in your relationships. So be humble, be nice and never stop learning and making new friends."
Saturday, December 03, 2005
Pro-active risk-taking control
"Warren and I get nervous with vast amounts of leverage unless we're 100% confident that risk-taking won't creep into the culture."
"It reminds me of a guy running a company who fired his top producer. The guy asked him, 'Why are you firing me? I'm your top producer.' To which he responded, 'You make me nervous. I'm a rich old man. Why should I be nervous?" (Charlie Munger on Wesco's 2002 Annual Meeting)
"It reminds me of a guy running a company who fired his top producer. The guy asked him, 'Why are you firing me? I'm your top producer.' To which he responded, 'You make me nervous. I'm a rich old man. Why should I be nervous?" (Charlie Munger on Wesco's 2002 Annual Meeting)
Monday, June 27, 2005
Thoughts on investing
Bill Miller gave a recent interview to "Smart Money" where he was specially happy in summarizing some aspects I also believe are key to investing:
" ... the only sustainable [market] anomalies, I think, have to be behavioral, in that behavioral anomalies arise from the way that large groups of individuals function psychologically — the way they react to information, the way that they process it, the sorts of errors that are either cognitive or emotional. Those are the sorts of things that are really unlikely to be arbitraged away. That is, if we know, as all the data indicates, that people feel a loss twice as acutely as they feel a gain, then you know that until people stop doing that in the aggregate, that losses will be things people will shy away from, and that's a potential source of excess return, because you can predict how they're gonna behave in the aggregate."
" ...if you do what other people do, you get the results that other people get. So by diversifying your sources of information, you get insights, analogies and metaphors, and you see connections that other people might not see. That's a fruitful way to go about thinking about markets... "
" ... the only sustainable [market] anomalies, I think, have to be behavioral, in that behavioral anomalies arise from the way that large groups of individuals function psychologically — the way they react to information, the way that they process it, the sorts of errors that are either cognitive or emotional. Those are the sorts of things that are really unlikely to be arbitraged away. That is, if we know, as all the data indicates, that people feel a loss twice as acutely as they feel a gain, then you know that until people stop doing that in the aggregate, that losses will be things people will shy away from, and that's a potential source of excess return, because you can predict how they're gonna behave in the aggregate."
" ...if you do what other people do, you get the results that other people get. So by diversifying your sources of information, you get insights, analogies and metaphors, and you see connections that other people might not see. That's a fruitful way to go about thinking about markets... "
Democracy
Democracy is a system where 3 wolves and a sheep vote on what they're going to have for lunch...
Sunday, June 19, 2005
Options
Closing options are a very ambiguous thing. Sometimes it's one of the most aggravating events, like in the case of serious illnesses or death. But it can also be very liberating, as noted by Sean Scully, an abstract painter: "One advantage of getting older is that you can see what possibilities are not open to you, and where your gifts do not lie, and you are liberated because you can turn all your ambition onto what you do have". Indeed one of the greatest gifts one can give to some people is to decide for them, telling them what to do (or what not to do), elimitating there doubts over options.
Friday, June 17, 2005
Minimizing errors
Minimizing errors is one of the most underated strategies. From investment management to tennis, in most cases a technically inferior player who concentrates in not making mistakes will defeat an otherwise superior opponent that takes bigger risks.
Tuesday, June 14, 2005
The greatest problem of all
As put by the dying android in Blade Runner, "... those eyes have seen so many things... and all those memories will be lost in time, like tears in the rain." So bad...
Monday, June 13, 2005
Optimization x Satisfaction
Evolution is a process that seeks satisfactory, not optimized states. Allas, failure to understand the difference between that in some processes, as well as which one is more relevant in each case accounts for lots of big mistakes all around us.
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