Wednesday, March 6, 2019

Webb, The Big Nine

On February 11, President Donald Trump launched the American AI Initiative, directing federal agencies to focus on the technology. The United States was slow to take even this admittedly vague action. At least 18 other countries had already announced national AI strategies. Canada was the first off the blocks, in March 2017, and, most notably, China announced its next generation AI plan in July 2017 and its three-year action plan in December of that year.

The U.S. government may not have a national strategy, but that doesn’t mean that American companies are not shaping the future of artificial intelligence. Amy Webb, a futurist and professor of strategic foresight at the NYU Stern School of Business, claims in The Big Nine: How the Tech Titans and Their Thinking Machines Could Warp Humanity (PublicAffairs/Hachette, 2019) that nine companies now control the future of AI: the G-MAFIA (Google, Microsoft, Amazon, Facebook, IBM, and Apple) in the U.S. and the BAT (Baidu, Alibaba, and Tencent) in China.

Even though Webb does not want to preclude the G-MAFIA from earning revenue and growing, she thinks it is critically important to realize that AI has become a public good, just like our breathable air. “[W]e cannot continue to think of it as a platform built by the Big Nine for digital commerce, communications, and cool apps.”

As AI evolves, becoming an ever more dominant part of our lives, we have a responsibility to steer it in the right direction. Webb outlines three possible scenarios of our future with AI—the optimistic, the pragmatic, and the catastrophic. Only if countries across the globe collaborate on AI standards and best practices and if governments, companies, universities, and individuals change their current practices, she argues, can we avert a potential catastrophe.

The Big Nine is a thought-provoking book, well worth the read.

Tuesday, March 5, 2019

Stevenson & Tuckwell, The Ultimate ETF Guidebook

Trust me, there’s a lot about ETFs that you don’t know. David Stevenson, a columnist at the Financial Times, and David Tuckwell, editor of ETF Stream, set out to remedy that situation. The Ultimate ETF Guidebook (Harriman House, 2019), even though in some of its chapters it tilts toward the European and London markets, should be of value to everyone using, or thinking about using, ETFs in their portfolios.

For those who want a look under the hood, the book explains the different ways in which ETFs can be constructed (physically replicating, synthetically replicating, ETN or ETC), reasons for tracking errors, and how ETF issuers can make money even if their fees are close to zero (lending stock to short sellers).

The book takes aim at the argument that passive investing is taking over and that passive funds will destroy efficient markets. It analyzes the continuum of ETF investing strategies, maintaining that passive and active is not a binary choice. It introduces the reader to factor-based investing, ESG investing, and leveraged ETFs.

Following a detailed laundry list of global asset classes, the book turns to building ETF portfolios as constituents of diversified portfolios. The authors suggest that the ordinary (in reality, the more sophisticated) investor might think about copying some of the strategies of macro hedge funds using ETFs.

The authors then devote a chapter to five model portfolios: adventurous growth, balanced, opportunistic, contrarian, and cautious. And finally, they list what they consider to be the top 75 ETFs in the London market and 26 wild card ETFs.

All in all, The Ultimate ETF Guidebook would be a worthy addition to any investor’s library.

Sunday, March 3, 2019

Updegrove, The Blockchain Revolution

Those who have been following the exploits of cybersecurity expert Frank Adversego will welcome Andrew Updegrove’s fifth novel in the series, The Blockchain Revolution: A Tale of Insanity and Anarchy. This time, Frank is hired by First Manhattan Bank to be its chief risk officer for blockchain technologies. The bank is moving all its financial processes onto a global financial blockchain system, which it refers to as “BankCoin,” and it can’t afford to be hacked. Naturally, the hacker is lying in wait.

And it isn’t only the Western banking system that is in potential jeopardy. The Russian government’s cryptocurrency, designed to circumvent Western sanctions, is a second target of the hacker. And, of course, on the radar of the U.S. government. And in the portfolio of a not so upright hedge fund manager.

The Blockchain Revolution is not only a good read as a thriller. It’s also a thoroughly enjoyable way to learn more about blockchain systems and cryptocurrency. And, the kicker, the e-book is currently only $0.99 on Amazon.

Tuesday, February 26, 2019

Collins, Turning the Flywheel

Turning the Flywheel: Why Some Companies Build Momentum … and Others Don’t (HarperBusiness, 2019) is a short (40-page) monograph intended to accompany Jim Collins’s iconic bestseller Good to Great, published back in 2001. I never read Good to Great, so I can attest that Turning the Flywheel stands proudly on its own.

Underlying the success of the flywheel as a business principle are two concepts known to every investor: momentum and compounding. As Collins writes, “Never underestimate the power of a great flywheel, especially when it builds compounding momentum over a very long time.”

What exactly is a business flywheel? In the case of Amazon, it goes something like this (imagine these steps laid out in a circle): lower prices on more offerings, increase customer visits, attract third-party sellers, expand the store and extend distribution, grow revenues per fixed costs. “Push the flywheel; accelerate momentum. Then repeat.” Or, with Vanguard, offer lower-cost mutual funds, deliver superior long-term returns for clients, build strong client loyalty, grow assets under management, generate economies of scale—and repeat. Notice, Collins writes, “how each component in the Vanguard flywheel isn’t merely a ‘next action step on a list’ but almost an inevitable consequence of the step that came before.”

The flywheel isn’t just for CEOs. Anyone can use this model to propel a venture, for example, in education or medicine—or, for that matter, in trading. The point is that once you identify the right components of the flywheel, and once you have all these components performing at a high level, you must then keep cranking. “The big winners are those who take a flywheel from ten turns to a billion turns rather than crank through ten turns, start over with a new flywheel, push it to ten turns, only to divert energy into yet another flywheel, then another and another. When you reach a hundred turns on a flywheel, go for a thousand turns, then ten thousand, then a million, then ten million, and keep going until (and unless) you make a conscious decision to abandon that flywheel. Exit definitively or renew obsessively, but never—ever—neglect your flywheel.”

In 2017, Forbes selected Collins as one of the 100 Greatest Living Business Minds. Turning the Flywheel justifies that accolade.

Sunday, February 17, 2019

Gannon, Tailored Wealth Management

Niall J. Gannon, of the Gannon Group at Morgan Stanley, is a financial advisor for high net worth and ultra high net worth individuals and families. And yet Tailored Wealth Management: Exploring the Cause and Effect of Financial Success (Palgrave Macmillan) is applicable to all investors, at any stage of their lives. It addresses three pillars of wealth: identifying and building it, managing it, and deploying it. As such, the book can be read as a wealth life plan.

Among the most original parts of the book is an updated version of a paper Gannon co-authored with Scott Seibert in 2006. It has been re-titled “Forecasting Long-Term Portfolio Returns: The Efficient Valuation Hypothesis.” The paper’s hypothesis is that “much of the long-term (20-year rolling periods) variability in stocks can be explained by the beginning-of-period earnings yield (the inverse of the starting P/E ratio).” For the 42 rolling 20-year periods beginning on January 1, 1957, with the inception of the S&P 500, the paper shows that the earnings yield accurately predicted the minimum expected return 95% of the time. In the two instances in which the hypothesis failed (1958-1977 and 1989-2008), the disparity was less than 1%. It is noteworthy that the highest observed earnings yield of 13.7%, in 1975, produced a 14.33% annualized return and the lowest earnings yield of 4.54%, in 1998, produced a 7.1% annualized return. Gannon concludes that “the use of earnings yield as a minimum expected return produces a more informed comparison of the future return potential of equities versus fixed income than the application of the theory of mean reversion or the Efficient Market Hypothesis.”

Gannon looks at the effect of taxes on equity returns and tries to compare stock and bond returns on a net basis. He contends that “the notion that stocks outperform fixed income over time … is false when examining net returns over specific periods.”

Tailored Wealth Management is a valuable book both for financial advisors and DIY investors. Most of it is easy-to-read text, with the occasional case study thrown in to illustrate the pillars of wealth. But it includes just enough quantitative research to whet the appetite of anyone who is trying to plan his or her financial well-being for the long run.

Sunday, January 13, 2019

Zuboff, The Age of Surveillance Capitalism

Shoshana Zuboff, professor emerita at Harvard Business School, has the rare ability to take a subject that has been beaten to death and offer a fresh, provocative take on it. The Age of Surveillance Capitalism: The Fight for a Human Future at the New Frontier of Power (Public Affairs/Hachette, 2019) is such a work.

First, a brief description of surveillance capitalism. It “unilaterally claims human experience as free raw material for translation into behavioral data. Although some of these data are applied to product or service improvement, the rest are declared as a proprietary behavioral surplus, fed into advanced manufacturing processes known as ‘machine intelligence,’ and fabricated into prediction products that anticipate what you will do now, soon, and later. Finally, these prediction products are traded in a new kind of marketplace for behavioral predictions that I call behavioral futures markets.”

Even more dangerously, automated machine processes not only know our behavior but also shape our behavior. “With this reorientation from knowledge to power, it is no longer enough to automate information flows about us; the goal now is to automate us.”

In this nearly 700-page book Zuboff develops her thesis using Google, Facebook, and Microsoft as “the petri dishes in which the DNA of surveillance capitalism is best examined.” Her discussion is wide-ranging, from Giovanni Gentile to B. F. Skinner to Alex Pentland (the MIT applied utopianist).

Zuboff is especially concerned about the damaging social and political ramifications of surveillance capitalism. It is, she writes, a “profoundly antidemocratic social force.” It is a market-driven coup from above, a “form of tyranny that feeds on people but is not of the people. In a surreal paradox, this coup is celebrated as ‘personalization,’ although it defiles, ignores, overrides, and displaces everything about you and me that is personal.”

The Age of Surveillance Capitalism will undoubtedly be a deeply divisive book, somewhat along the lines of Thomas Piketty’s Capital in the Twenty-First Century, which Zuboff cites. But it is an important read, one that makes us rethink our all too easy acquiescence to the siren call of surveillance capitalism.

Wednesday, January 2, 2019

Mackay, Extraordinary Popular Delusions and the Madness of Crowds

When Harriman House announced the publication of the “definitive edition” of Charles Mackay’s Extraordinary Popular Delusions and the Madness of Crowds, I wondered what made it stand out from all the other editions of this classic work. I don’t have the definitive answer myself, but I can say that, unlike many other versions, this one is complete. It contains not just the first three chapters, the ones dealing most directly with markets, but the full 15 chapters. Thus you can learn not only about money mania, the South-Sea bubble, and tulipomania, but about, among other things, modern prophecies, the influence of politics and religion on the hair and beard, the witch mania, haunted houses, popular admiration of great thieves, and duels and ordeals.

When I first read the abbreviated version, I thought I had absorbed everything Mackay had written that was relevant to the phenomenon of manias today. But, as Russell Napier notes in his preface to this new edition, “Not only has the world shown no signs of being immune to the errors within this book almost 180 years on, there are a number of trends today that make it even more pressing. The theme that runs through Mackay’s catalogue of follies is a search by reasonable people for an answer to uncertainty—sometimes, if necessary, by disregarding reason.”

Some of the things Mackay wrote about no longer seem especially relevant, although Donald Trump’s preoccupation with the phrase “witch hunt” might belie this point. Still, even though the specific delusions may change, the phenomenon of the madness of crowds remains in full force. And with social media, it may be even greater than it was in Mackay’s time, which makes his classic a must-read book in 2019.