Tuesday, November 29, 2011
It's funny, this blog is effectively a diary of one-off events in my life (on love, books, milestones, and experiences that opened my eyes), views of philosophy (human biases, dealing with loss, and appreciating success), and the occasional earthquake warning.
I guess that's me in a nutshell.
Saturday, November 19, 2011
Sunday, October 23, 2011
I recently read Tim O'Brien's The Things They Carried. It was a perfect gift as it provided a small break from my investing addiction.
There were so many complex themes about the human condition. While this short blog will not do the book justice, (which is sadly ironic given that a sub-theme was for memories that never received their due) below are some preliminary notes.
The book reinforced my belief in the need for a life philosophy that incorporates unfairness, cruelty and randomness. That's not to say we should all be bitter. Far from it. It’s just important to have a tool kit that can handle the whole picture.
The "do-onto-others" view is only part 1 of a broader philosophy. Reading Harold Kushner's "When Bad Things Happen to Good People" is in some ways an equally critical second chapter. In particular, I mean Kushner’s conclusion that there is no morality in the laws of nature. The holiness is found in that the laws of nature are upheld no matter whom you are – sinner or saint.
By no means am I criticizing these troops, but I think that these men largely adapted to the sudden death and inescapable tragedy of Vietnam through mind-tricks that remedied the immediate tension while leaving longer term scars. A solider dies after taking a piss and he's termed "zapped while zipping." A best friend dies, and a man shoots a baby buffalo in anger. These behaviors are not uncommon and rhyme with both prior and subsequent wars. I do not criticize these actions, after all I was not there and I have never experienced such horrific tragedy up close. But that’s why I enjoyed the book so much. It gave me a between the ears perspective of what they lived through. They used the coping mechanisms at hand to deal with the dark side of life. There it is.
Saturday, July 23, 2011
Its cracks me up that one of my first posts is about "Diana." I guess even the markets have a sense of irony.
A: You must solider through. Coping with adversity brings opportunity.
This is a brief interaction I had with Charlie Munger at his "Morning with Charlie" last month. I didn't realize how soon afterward I would rely on this advice and feel lucky to have gotten it.
As I've learned, the "opportunity" he spoke of, is in getting to know yourself and loved ones better, depth and limits. Proving our willpower and emotional fortitude.
In all honesty, it's tough for me to put to words everything felt and experienced over the last few weeks. Jess's stomach pains had been worsening for the last few months as she rotated through different medications from her Dr. Startlingly, her conditions started to spread beyond her stomach. Low grade fevers ever night. Strange bumps on her legs. Within a few days time she was re-diagnosed by a different Dr. and days later admitted to the ER and hospital.
Jess was diagnosed with Crohn's disease. From what I understand, it's an auto-immune disease where her body fights itself, creating ulcers in her intestine and colon. There are no cures for Crohn's, but medicine is available to keep it in remission for years. There were some other complications which needed a small surgery, but Jess has been back home since the previous Friday and has not been in pain since. While the initial diagnosis was upsetting, especially when I found out that she had been admitted to the ER while I was at work, as my Mom says, "thank God it's not cancer."
I'm relieved that Jess has made so much progress in less than two weeks. All that we can do now is to keep moving forward, step by step, one foot in front of the other. We still have a little ways to go, but she's making significant progress.
This morning I realized that the best summary for how I feel is a bizarre combination of two songs: Time in a Bottle, by Jim Croce and Amado Mio by Pink Martini. There's a melancholy appreciation for the finite duration of our lives while at the same time realizing that the sacred experiences we now share bring us closer than we have ever been.
It has been an opportunity to learn about love and how much I love Jess.
Saturday, June 18, 2011
This past month, I have gotten the opportunity to meet the top management of both Hulu & Netflix. A few months prior I met the CEO of Caterpillar and in a separate occasion had a conference call with Nat Rothschild of "Baron Rothschild" fame. It's all pretty cool stuff and it's fun to see how these Atlas's are moving the world. I'm sure I'm forgetting some other memorable characters, but this evening I'm drawing a blank.
On a separate note, sometimes people like to deride those employed in the financial industry. At one wedding recently (cousin's of my mother in-law) one of the best men said something like "the bride stopped working at Citigroup because she wanted to do something with her life." I don't blame him as it's easy to think it's one big casino where overpaid assholes move around stacks of paper with no value add to society, but I disagree with this perspective. Yet I also disagree with the idea that it's "God's work" as Llyod Blankfein described it. I think the answer is clearly somewhere in between. If pension funds didn't compound their money by investing in hedge funds and other investment products (including ETFs), there would be a lot of burnt out retirees eating dog food into their 70's.
Sometimes in a Mad Hatter sort of moment I try to force myself to imagine impossible scenarios. One of which is what if I didn't work in finance? If this was the case, and I had to restart my career with absolutely no venues for finance (aka I couldn't even be bank teller), I would like to think that I would strive to work at the cutting edge of some industry. Potentially media, energy or computer programming. There would also be the serious risk that I would consider the stable route which I knew would pay well at the expense of having some cool experiences (aka why the suicide rate in dentistry is so high). I would like to think the experience of riding the wave of some game-changing technology would be a lot of fun.
It's a strange moment trying to connect what seems like an infinite string of nearly-impossible events that got me where I am today. Yet somehow, I'm here. And it's not just me. We're all here due to one small miracle leading another.
There's a true story, or so I believe, about my grandfather. I only say "so I believe," because the story passed from word of mouth from my grandfather, to my Dad to me. I trust nearly everything my Dad has told me growing up, and for good reason, so I have no reason to believe that this story is untrue. That said, I have never asked to confirm the story with my grandfather as I sadly don't have the relationship with him where I would be comfortable asking him to relieve some of his most painful experiences.
That said, when he was around my age or younger my grandfather lived and worked and nearly died in a concentration camp. At one point during this nightmare, he was told to march along with hundreds of prisoners. These marches were notorious for their ability to sift through the Jews that still had their strength to work and the more sickly that would be executed as they stumbled and fell behind. Towards the end of one these marches, my grandfather fell. He was exhausted and had begun to accept what would likely be a swift termination. Instead a Nazi guard came to my grandfather and persuaded him to get up and keep going as there was only a short distance left. Now I don't know what it was that re-motivated my grandfather to get up, or even why the Nazi guard would persuade him to, but he did. And from those small miracles, my family is here today.
So on this Father's day, we should not only be appreciative for what our Father's have done, but what all the Father's (and Mother's) before us have done, whether or not we understand what it was or even know why it happened.
Saturday, March 26, 2011
I recently finished reading three books: Seeking Wisdom: From Darwin to Munger, Predictably Irrational and Moonwalking with Einstein. While each of these were dynamite as standalone reads, I think the value of combining the three creates a "lollapalooza" effect, similar to what Munger describes above.
As an illustration, Seeking Wisdom is an encyclopedia of valuable life lessons. My favorite chapter is about Munger's list of human biases. These biases are as follows:
1. Mere Association
3. Self Interest / Self Dealing
4. Self Deception / Denial
6. "Super-Deprival" Syndrome
7. Status Quo - Do Nothing Syndrome
9. Envy / Jealousy
10. Contrast Comparison
12. Vivid Imagery
13. Abstract Blindness
15. Bias from Liking
16. Social Proof
19. Reason Respecting
20. Believe First, Question Latter
21. Memory Limitations
22. Do-Something Syndrome
23. Say-Something Syndrome
24. Emotional Arousal
26. Chemical Influence
27. Lollapalooza Effects
While this list is not perfect, it's value lies in the fact that it provides a framework for understanding biases and predictable misjudgments. For example, as you read through Predictably Irrational, you start to realize that while the book is wonderful in its examples (which Seeking Wisdom draws from), Dan Ariely doesn't really take the next step in providing a conclusive map of biases.
To take it another step, once you memorize the biases from Seeking Wisdom, you also start to notice how some of the chapters in Predictably Irrational are in fact the result of multiple biases (lollapalooza) all running in the same direction (sometimes the same as in previous chapters but in a different form).
For example in Chapters 11 and 12, the student that takes an exam where each question answered correctly is rewarded with a token that is exchangeable for cash, may cheat because of incentives (#2), self-interest (#3) and abstract blindness (#13) (the tokens don't feel like your stealing cash but you still are). The student that doesn't cheat on the same test because they sign a document indicating they follow a fictitious moral code, has mere association (#1 ) and consistency (#5) biases working in their favor.
So where does Moonwalking fit in? The reason why I liked Moonwalking with Einstein, is because it provided a framework that makes it easier to memorize large (and small) chunks of data. In this case, I used the "method of loci" to memorize the list of Munger's biases a few weeks ago.
While I consider all three books "required" life reading, I would add the provision that Moonwalking should be required reading before starting high school. I wished I had known about these memory tools years ago.
Sunday, February 27, 2011
Saturday, February 26, 2011
- David Einhorn, founder of Greenlight Capital
I love investing because it requires an open mind and a constantly evolving lattice work of ideas. What's fun is that frequently the ideas overlap with major concepts in other fields (economics, psychology, statistics, physics, law, poker, etc.) so incorporating one new way of looking at something can literally change how you approach questions / problems the rest of your life.
For example, my history of trades reflects how my mental models have developed over the past decade. One baby step at a time it has evolved from gambling on chart price fluctuations, to using liquidation as a pricing backstop, to low free cash flow multiples, to investing by valuing the intangible aspects of a business that can add exponentially to the enterprise value over time. My most recent development is about searching for "clues."
While searching for "clues" is definitely not something most investors will ever admit they're doing as it can create the impression of trivializing "serious" work, but the concept is actually commonplace in another field: Poker. In poker, players are constantly listening for "tells" or signals that may give away an event or behavior before anyone else realizes it.
Let's start with a straight-forward, first example on Netflix (NFLX). Investors have lost millions (perhaps billions) trying to short Netflix. I could argue that it's been for good reason as NFLX stock is certainly not cheap.
The day before NFLX released its 4Q'10 earnings it traded at ~$180 per share. This would equate to a $9.4bn valuation. To put this figure in comparison, their free cash generation in 2010 was $25mn (of course I'm benefiting from information that wasn't available at the time, but it's still effective for making my example for reasons you'll see shortly). If I exclude the cash outlays they made to improve their DVD and streaming libraries their free cash generation was $242mn. So just based on the math you can see why the stock is not cheap ($240mn divided by $9.4bn valuation equates to a 2.5% yield). In order to justify paying $180 for NFLX stock, you'd have to believe NFLX will grow its business exponentially from current levels (currently has 20mn subscribers vs. ~100mn U.S. households). So on a high-level this covers the fundamentals. What about the clues?
Given this lofty valuation, one hedge fund investor even went so far as to published a letter titled "Why We're Short Netflix." Shortly afterward, Reed Hastings, the CEO of NFLX, published a response piece called "Cover Your Short Now." Now, this is a monster of a clue for several reasons. First, if the CEO is telling you to not bet against their stock weeks before they report 4Q'10 results, you may be right in the long-term, but in the short-term the CEO knows more than you do. Second, this means the CEO is watching the stock and any bad news associated with it, so he's going to do everything in his power to manipulate it higher. Whats this all mean? Walk away. The clue is that Mr. Hastings wouldn't put out a positive letter weeks before earnings if the results wouldn't be amazing and impress Wall Street.
Later in January NFLX ultimately did report knock-out 4Q'10 results and the stock quickly shot up to $240 (30%+ higher). While its now even more expensive, a lot of short-sellers could have avoided the near-term pain had they combined their fundamental analysis with interpreting a very obvious clue. Hindsight is 20/20.
If you keep an open mind, you start to realize that there are clues all over the place. As another example, look at Southwest Airlines (LUV). Now this is a much more subtle clue with a less significant price fluctuation (and less extreme valuation divergence) but it's still worth mentioning.
On 1/20/11, LUV reported 4Q'10 results. During the call management talked about their expectations for the month of January:
"Our January revenue and booking trends thus far suggest a year-over-year improvement in our January PRASM [a proxy for pricing] similar to or possibly slightly better than the 5% year-over-year improvement in December 2010 PRASM."
But then, only a few weeks later on 2/3/11 management provided the following comments at an investor conference:
"Our January 2011 revenue in Traffic will be reported early next week. But at this point in time, we are estimating that the year-over-year increase for January will exceed the 5% year-over-year increase that we reported in December."
Do you notice the difference? If not, I would suggest you reread each of the quotes.
What you should see is that the tone changed. January went from should "possibly" be "slightly better" than 5% PRASM growth to "will exceed the 5%." It's a subtle difference, but if you were a shrewd trader you would have bought the stock just by observing the difference. What's even more telling is how the stock dropped 12% from 1/5/11 to 2/3/11, the same day as the investor conference. In the week following the conference, LUV stock rallied 7% and on 2/7/11, management reported ~8-9% PRASM growth for January.
Learning this clue-based model has reinvigorated my joy of investing because I know the clues are out there, I just have to be receptive to them. That said, investing still requires a lattice work combining short-term data points with long-term valuation techniques. Just b/c you successfully interpret a clue (like that NFLX is going to report a good quarter or LUV is going to report a solid January figure) doesn't mean you should make the investment. The business can still be overvalued (ala NFLX) or susceptible to external shocks (LUV subsequently traded back down b/c of the current oil spike) so you must weigh the separate variables accordingly.
Thursday, February 10, 2011
A few questions:
1.) How can someone so stupid get elected (Rep. Christopher Lee)?
2.) Is our populace really so dumb that we elect someone so stupid?
3.) Who ran against Rep. Lee?
This sort of story is really just another incremental data point to the philosophy that our society only improves due the influence of a few exceptional people despite the overwhelming stupidity of the masses.
Saturday, January 08, 2011
A wife is waiting for her husband to return home and she turns on the television to pass the time. The news comes up that shows a man driving the wrong-way down the freeway. Startled that this is the same freeway her husband comes home on, she calls her husband to tell him:
"Husband, be careful - someone's on the freeway driving the wrong direction."
"One?" The husband responds, "there's hundreds of them."
Another from Dr. Marc Faber's January 2011 Gloom Doom and Boom reports:
The mating rites of mantises are well known: a chemical produced in the head of the male insect says, in effect, “No, don’t go near her, you fool, she’ll eat you alive.” At the same time a chemical in his abdomen says, “Yes, by all means, now and forever yes.”
While the male is making up what passes for his mind, the female tips the balance in her favor by eating his head. The male, absorbed in the performance of his vital functions, holds the female in a tight embrace. But the wretch has no head – he has hardly a body. And, all that time, that masculine stump, holding on firmly, goes on with the business! - Annie Dillard, Pilgrim at Tinker Creek (from Bill Gross's recent investment outlook from January 2011 comparing recent policy stimulus focused on maintaining consumption to the mantis matting rituals)
"One of the annoying things about believing in free will and individual responsibility is the difficulty of finding somebody to blame your problems on. And when you find somebody, it's remarkable how often his picture turns up on your driver's license." - PJ O'Rourke
Howard Marks, also wrote about his take on gold in a memo title "All that Glitters". He compares it to Noah S. “Soggy” Sweat, Jr., a member of the Texas House of Representatives in 1952, about his position on whiskey:
If you mean whiskey, the devil’s brew, the poison scourge, the bloody monster that defiles innocence, dethrones reason, destroys the home, creates misery and poverty, yea, literally takes the bread from the mouths of little children; if you mean that evil drink that topples Christian men and women from the pinnacles of righteous and gracious living into the bottomless pit of degradation, shame, despair, helplessness, and hopelessness, then, my friend, I am opposed to it with every fiber of my being.
However, if by whiskey you mean the oil of conversation, the philosophic wine, the elixir of life, the ale that is consumed when good fellows get together, that puts a song in their hearts and the warm glow of contentment in their eyes; if you mean Christmas cheer, the stimulating sip that puts a little spring in the step of an elderly gentleman on a frosty morning; if you mean that drink that enables man to magnify his joy, and to forget life’s great tragedies and heartbreaks and sorrow; if you mean that drink the sale of which pours into Texas treasuries untold millions of dollars each year, that provides tender care for our little crippled children, our blind, our deaf, our dumb, our pitifully aged and infirm, to build the finest highways, hospitals, universities, and community colleges in this nation, then my friend, I am absolutely, unequivocally in favor of it. This is my position, and as always, I refuse to compromise on matters of principle.
I recently watched an hour-long video of Hans Rosling a great Statistics teacher (non-finance), that was eye-opening. The beginning was kind of neat but got progressively more interesting throughout the hour. There was one quote from a Stanford professor tracking Tweets to measure emotions and some stuff which I can't remember, and I can't remember exactly what he said but it went something like this:
It's interesting how when you're younger happiness is frequently tied to something new and exciting, whereas when you're older happiness it's tied to peace. (I couldn't agree more.)
Link to the video below:
Recently I was talking with Steve, my psychologist /trader friend who had an epiphany when seeing one of his teenage clients. He wrote the following:
"I was working hard yesterday to solve a clinical puzzle...redoing the data, my conclusions and then, after much discussion and thought, I came to the conclusion that, differences aside, your whole generation is very vulnerable / at risk... [where we'll] probably get more leadership positions going to Indian's and Chinese (which I think is a good thing)....I realized that without an individual assessment, each child/teen I saw wasn't so much suffering from neurosis as needing to be rescued from going over the falls. And they don't know it. They think they're doing great, which makes treatment a tough sell, because the parents believe it too! Then I realized, "hey wait, didn't Charlie repeatedly tell me this is the 'loser generation.' Why keep doing psych analysis when I should just accept the sociological perception Charlie has already done and stop suffering over each situation. Also, as one of my patients hauls-ass, I realize that more than solving neurosis, she/he is being saved from the Loser Generation."
Of course, I was flattered, which is why I'm also sharing it. In response I opened up a little bit about myself:
"I think on a subconscious level it helps explain my general antisocial tendencies. Spend 3 years at my middle school, 4 years at my high school, spending most lunches trying to figure out why I prefer eating by myself and I've had enough of my generation (obviously with a few exceptions). After a few years you reach the conclusion either I'm the loser or everyone else is.
This also helps explain my attraction to value investing at an early age. As a kid I said, wow these Buffett and Munger guys sure don't seem like losers. Not only that, but I can get rich betting against the crowd!
It was a perfect fit for an insecure Jewish boy who didn't fit in and desperately didn't want to be a loser.
It's not that I've been living my life that much differently, but the reading material, ideas and conversations have been exceptional. Recently, for example, I finished reading How We Decide which was chalk-full of ideas. A few that spoke to me were:
- One of the worst possible ways to die is to get a brain tumor that fundamentally alters your personality. You effectively live in a shell where your behavior is driven by an overgrowth that's pushing on sensitive spots in your brain. The whole concept of Timshel is meaningless. Steve, my psychologist friend uses the term "psychic death" to describe it, however he uses it not just for tumors but when you stop the ability to learn, or improve your behavior.
- Humans have trouble processing multi-variable problems. Jonah Lehrer, the author, details several situations ranging from picking strawberry jams to choosing different cars, where an overload of data can skew our preferences resulting in illogical choices (I think this was Chapter 8). His end conclusion also seems to suggest that if you try to rationalize or explain your preferences you'll actually make worse decisions than if you trust your instincts. It's an interesting idea, and there are many problems where it is better to trust your instincts, or restrict your data, but I think there's a simple mental model he completely missed that's a better answer.
- I would suggest using a checklist. Everyone makes complex judgments and many aren't prepared or have the instincts to do the right thing. A checklist is an easy way to take a multi-variable problem and break it into bite size pieces. For example when I buy a stock, the first thing I look at is the valuation. If it's too expensive I don't bother to consider to consider all the other variables (if it trades at 100x FCF who cares where they're headquartered?). If the valuation checks off, however, I move to safety of the balance sheet, business sustainability and consistency and further down the list. Ultimately this yields a portfolio of companies that meets my value system that I can articulate.
- The obvious rebuttal to the checklist is that it assumes that you know yourself well-enough to figure out what you should prefer. This may have been the point after all that we don't consciously know ourselves. But I would argue that if we don't know ourselves, instead of trusting our instincts, we should first think and develop a value system. Then we should consider a checklist, and then trust your instincts. It's like a Jedi knight-thing, you can't do mind tricks until you can move rocks with the force, and you don't move rocks until you can hit the flying zapping ball with your visor down.
Another over-arching theme I've been thinking about the last few years is the current generation. I call it the "loser generation." I've noticed that the people I've mentioned this to can have a strong adverse reaction when I say it, but the funny thing is that they usually have kids themselves that have graduated college, are unemployed, directionless and living at home or are getting subsidies in one form or another. While its mostly an anecdote that lacks in data, the "loser generation" is the phrase I use to help explain the behaviors I've seen in my colleagues since middle school and it helps me understand what we're currently living through. This loser generation has been coddled and doesn't think 2-steps ahead, as it'll "somehow work out."
This loser generation is over-sexed, over-medicated, lacks in work ethic, thinks they're entitled and lost any desire to improve oneself. The American dream is no longer about buying a home from the money saved from a career in a job that you've done well, but about buying shit you can't afford with someone else's money. A friend of mine recently went to a restaurant who had a waiter in his mid-20's, who had graduated college and who was very grateful to have a job. He competed with 70 other candidates for the position. I respect this story as it's very telling for the trouble our generation is in. It's great that this kid is working as I respect industriousness over laziness and entitlement any day, but it reflects the declining value of our education and repercussions of a weak economy.
As long as the economy's chugging along, jobs are being created in innovative sectors such that the kids with no plans but college degrees can land into whatever happens to be growing. But when the economy shudders, the loser generation, who assumed it'll somehow work out, no longer as job offers from whatever's growing, because nothing is growing, and after spending 4.5 years draining their parents funds for college, end up back home . 1-step forward, 3-steps back. This also explains why unemployment for the young is something like ~20%+. I think this a good segway into why I turned to value investing in the next post.