Friday, February 17, 2017

Peterson & Hoekstra, Crunch Time

Rick Peterson was, in his most chronicled job, pitching coach for the Oakland A’s during the Moneyball era. Most recently he was director of pitching development for the Baltimore Orioles. Judd Hoekstra is vice president of The Ken Blanchard Companies, which provides leadership training, and has co-authored two books. The two men pooled their skills, and their stories, to produce Crunch Time: How to Be Your Best When It Matters Most (Berrett-Koehler, 2017).

The common thread of this book is reframing: reframing from trying harder to trying easier, from tension to laughter, from anxiety to taking control, from doubt to confidence, from failure to learning moment, from prepared to overprepared. Through reframing, they maintain, a person can learn to thrive under pressure.

Reframing “is not about pretending everything is perfect and positive. It is about finding different ways of interpreting a less-than-ideal situation.” It is about overcoming the fight, flight, or freeze response to pressure, viewed as a threat, and instead activating what the authors call the “Conscious Thinker,” which understands pressure as an opportunity.

Naturally, many of the reframing techniques have been described elsewhere. There are, after all, only a limited number of ways people have come up with to deal with performance under pressure, given our state of knowledge about brain functions. But here are a couple of pointers that traders may find useful.

First, in evaluating your performance, however you define ‘performance’ (and in trading profit can be a self-sabotaging way to view it), set up a personal performance evaluation scale, where 0 is your worst performance and 10, your best. The most important number on this scale is 5, “where you consistently perform today.” You shouldn’t view any performance that doesn’t reach your personal best as a failure. Instead, you should view any performance above 5 as a success. This approach doesn’t encourage mediocrity because as your performance improves, your personal average shifts. The old 6 becomes the new 5. “And because your average is always a 5 on a scale of 0-10, it shows you still have more game in you.”

Second, “you don’t have to feel great to perform great.” Tom Glavine, a Hall of Fame starting pitcher, admitted that he was “in the zone” only one out of every five starts over the course of his career. “If the only time you can win is when you go out there and all the stars are aligned and everything is great, then you’re going to struggle because that’s just not reality.” You have to learn how to win that B+ game or that C+ game. Glavine’s preparation “helped him develop an arsenal of pitches he could throw with precision. When one of his pitches wasn’t working, he adjusted. In addition, when his physical talent was not at its peak, Glavine used his mind to outsmart hitters.”

And finally, a nudge in the right direction, “While the process of overpreparing may feel boring, the results are spectacular.”

Wednesday, February 8, 2017

Thompson, Hit Makers

A video goes viral—or does it? Why did a handful of girls’ first names remain popular across generations and then “cycle in and out of popularity faster than summer dress styles”? Why was the phenomenal success of “Rock Around the Clock” (by some counts second only to Bing Crosby’s “White Christmas”) such a fluke?

Derek Thompson, a senior editor at The Atlantic, tackles these and a host of other intriguing questions in Hit Makers: Why Things Become Popular (Penguin Press, 2017). His book has two core themes: the secret to making products that people like and the reasons that some products fail while similar ideas catch on and become massive hits. Addressing these themes, he tells refreshingly new stories. And he offers explanations, occasionally in the form of models but, especially in the case of the greatest hits, often closer to “magic sprinkle dust.”

I’m about to do a great disservice to Thompson’s book by focusing on two models. The first comes from a professor of marketing who describes the entertainment business as “a complex, adaptive, semi-chaotic industry with Bose-Einstein distribution dynamics and Pareto power law characteristics with dual-sided uncertainty.” Sounds pretty similar to the financial markets, doesn’t it?

For those not familiar with Bose-Einstein distribution dynamics, it essentially says that “gas molecules in sealed containers would aggressively cluster at a time and place that was impossible to predict with certainty.” As a metaphor for pop culture, it says that “at some point in time, [consumers] will cluster around an unforeseeable cultural product by buying the same book or attending the same movie.” As for dual-sided uncertainty, in this case applied to films, “Hollywood is in the business of predicting what audiences want many years in the future, even though most people couldn’t say for sure [what they want], even if you asked them.”

The second model is one Thompson sets out to destroy as myth: ideas going viral. In epidemiology a viral disease “has the potential to spread exponentially. One person infects two. Two infect four. Four infect eight. And before long, it’s a pandemic.” Ideas, by contrast, do not go viral. Ideas achieve massive popularity primarily through broadcast diffusion—“many people getting information from one source.” Essentially, “one Facebook post, one favorable spot on the Drudge Report, or one well-watched segment on Fox News reaches thousands and thousands of people instantaneously, and then a small fraction of that … group passes it along again.” The better model looks something like this:

I must admit that after I requested a digital copy of this book on NetGalley I had second thoughts. Did I really care what made a best seller or a #1 song? Thompson convinced me that, yes, I did. So, even though this blog doesn’t exactly have the impact of a major media outlet, I can perhaps play a role in broadcasting that Hit Makers is a great book.

Sunday, February 5, 2017

Kolhatkar, Black Edge

Every trader needs an edge, but not all edges are created equal. One of the most powerful edges is information. At SAC Capital Jason Karp color coded information to teach his analysts “what was safe and what might be illegal.” The white edge was “readily available information”-–completely safe but not worth much. The gray edge might be (and probably was) material, nonpublic information. At SAC the only way to be sure it wouldn’t get the firm into trouble was to talk to its legal counsel, something few traders were eager to do. So gray slid into white. Black edge information was obviously illegal. Karp warned his analysts: “If you do one thing wrong, you’re in jail and your life is ruined. There is no trade that’s ever worth it.”

And yet. As one trader, asked if he knew of any fund that didn’t traffic in inside information, answered: “No, they would never survive.” The author adds: “In this way, black edge is like doping in elite-level cycling or steroids in professional baseball. Once the top cyclists and home-run hitters started doing it, you either went along with them or you lost.”

Sheelah Kolhatkar’s Black Edge: Inside Information, Dirty Money, and the Quest to Bring Down the Most Wanted Man on Wall Street (Random House, 2017) chronicles the government’s ultimately disappointing effort to build a case of insider trading against the legendary Steven A. Cohen of SAC Capital. The story, extensively reported at the time, transfixed the hedge fund world and financial news junkies. A lot of people were cheering for the government.

Kolhatkar, a staff writer for The New Yorker and author of the widely discussed article "What If Women Ran Wall Street?", worked as a risk arbitrage analyst at two hedge funds before becoming a journalist. For this book she relied not only on published press sources but on “hundreds of interviews with more than two hundred people, as well as voluminous court transcripts, exhibits, deposition testimony, SEC interview notes, notes taken by FBI agents during witness interviews …, diary entries, written correspondence, and other documents.” Predictably, Cohen refused to be interviewed.

Black Edge doesn’t shed much new light on the SAC saga, but it’s still well worth the read. I couldn’t put it down.

Wednesday, February 1, 2017

Stone, The Upstarts

Brad Stone, author of The Everything Store: Jeff Bezos and the Age of Amazon, turns his attention in this book to the shared economy. The Upstarts: How Uber, Airbnb, and the Killer Companies of the New Silicon Valley Are Changing the World (Hachette, 2017) tells the stories not only of the companies that have become part of popular culture but, in passing, of those that fell along the way, the nonstarters.

Airbnb, now valued at $30 billion, more than any hotel chain in the world, and Uber, valued in late 2016 at $68 billion, more than any other private company in the world, both began as side projects, with modest business plans. Neither seemed especially promising. After all, who would want to sleep in some stranger’s house or have a stranger sleep in his? And who would think that making the San Francisco cab system more efficient was a revolutionary business idea?

Even as Uber modified its initial business model, most potential investors had serious reservations. Ron Conway, “famous for backing the holy trinity—Google, Facebook, and Twitter—passed on the deal. ‘This one looks like it will be a fight in every city,’ he sagely e-mailed a fellow investor.”

Funding was a major hurdle, but actually making the businesses work was much tougher. One crisis followed the next. A woman who had rented her apartment for a week via Airbnb returned to find it burglarized and trashed. She wrote about the incident on her blog. After Airbnb didn’t come through with the promised compensation or provide her with alternative accommodations but instead suggested that she “shut down her blog or update it with a ‘twist’ of good news,” she posted that she was “basically homeless, terrified, and ‘broken’ by the situation.” She told readers to “book yourself into a nice, safe hotel room the next time you travel.” A nonstop Twitter-fueled media storm followed.
Uber had its share of horror stories about drivers who assaulted passengers. And its surge pricing, which eventually became orthodoxy inside the company, was initially a public relations disaster. One New Yorker tweeted: “While I’m glad I’m home safely, the $107 charge for my @Uber to drive 1.5 miles last night seems insanely excessive.”

Both companies, of course, faced, and continue to face, major political pushback.

The stories of Uber and Airbnb are nowhere close to being finished. Airbnb is now providing unique experiences for travelers, using local entrepreneurs and celebrities. Uber is experimenting with driverless cars. They are evolving along with technology.

The Upstarts is a testament to grit—lots and lots of it—and, yes, luck. It’s quite a good read.

Wednesday, January 25, 2017

Balleisen, Fraud

Fraud is endemic to capitalism. But to what extent should commercial and financial transactions be regulated to minimize its damage to society? Should the government try to protect investors and consumers through antifraud regulation or should caveat emptor rule the day?

In Fraud: An American History from Barnum to Madoff (Princeton University Press, 2017) Edward J. Balleisen explores regulatory cycles in the United States and how they affected business culture and society at large. In the process, he recalls some of the country’s most notorious scams and scammers.

Balleisen recognizes the difficult balancing act required to get regulation “just right,” neither too heavy-handed nor too light-handed. Regulators must understand, for instance, “the trade-offs between facilitating innovation and curbing deceit.” In the end, however, he believes that “inventive governance can stay abreast of all the new twists on old games, shut down the worst frauds, fortify consumers and investors against imposition, and sustain, at reasonable cost, the social trust necessary for modern capitalism.”

Since we may well be shifting to a new cycle, characterized by a lighter government hand, Balleisen’s book is especially timely.

Sunday, January 22, 2017

Thorp, A Man for All Markets

Edward O. Thorp is a legend in both the gaming and the quant worlds. The author of Beat the Dealer and Beat the Market, he went from math professor and blackjack whiz to renowned hedge fund manager. In A Man for All Markets (Random House, 2017), he reflects on his life and the power of thinking differently—and deeply.

Thorp learned how to puzzle things out for himself as a largely self-taught child. He also devised methods for learning how to learn. For instance, when at the age of 12 he set out to master Morse Code, required to get his ham radio operator license, he invested almost three weeks’ income from delivering newspapers in a “tape machine” to practice transcribing code. The machine’s speed was adjustable. Young Thorp’s plan “was to understand every tape at a slow rate, then speed the tapes up slightly and master them again.” He measured his progress against that of World War II army trainees. He writes: “I drew a graph of the hours I spent versus my speed and found that using my method I learned four times as fast per hour spent as did the army trainees.” That Thorp was uncommonly bright might also have contributed just a tad to this carefully recorded outcome.

Fast forward to Thorp’s time at the blackjack table. He recalls playing at one casino where the rules were excellent: “players could insure, split any pair, and double down on any set of cards. Even so, the cards ran badly, I lost steadily, and after four hours I was behind $1,700 and discouraged. Of course, I knew that just as the house can lose in the short run even though it has the advantage in a game, so a card counter can fall behind and this can last for hours or, sometimes, even days. Persisting, I waited for the deck to become favorable just one more time.” Soon enough the deck produced a 5 percent advantage, so Thorp made the maximum bet of $300, all his remaining chips. Dealt a pair of 8s, he pulled out his wallet to bet another $300 on the split hands. And, getting a favorable second card on one of the 8s, he dropped another $300 on the hand. The dealer busted, so Thorp gained $900. The deck continued to be favorable, “calling for big bets,” and the next deck was good as well. In a few minutes he was ahead $255 and quit for the evening.

As Thorp reflects, “for the second time, the Ten-Count System had shown moderately heavy losses mixed with ‘lucky’ streaks of the most dazzling brilliance. I learned later that this was a characteristic of a random series of favorable bets. And I would see it again and again in real life in both the gambling and the investment worlds.”

Indeed, at Princeton Newport Partners, which restarted its statistical arbitrage operation in 1992, Thorp expected “the statistical behavior of a large number of favorable bets to deliver [their] profit.” By 2000 they were placing a million bets a year, at an average trade size of $54,000, or “one bet every six seconds when the market is open.”

A Man for All Markets is an inspiring memoir. Not surprisingly, Thorp, in his final chapter, writes: “Education has made all the difference for me. Mathematics taught me to reason logically and to understand numbers, tables, charts, and calculations as second nature. Physics, chemistry, astronomy, and biology revealed wonders of the world, and showed me how to build models and theories to describe and to predict. This paid off for me in both gambling and investing.” And, to come full circle, he notes: “Much of what I’ve learned came from schools and teachers. Even more valuable, I learned at an early age to teach myself. This paid off later because there weren’t any courses in how to beat blackjack, build a computer for roulette, or launch a market-neutral hedge fund.”

Wednesday, January 4, 2017

Clark, The Tao of Charlie Munger

David Clark, who has written eight books on Warren Buffett, has moved on to Charlie Munger. The Tao of Charlie Munger (Scribner) is, in the words of the subtitle, A Compilation of Quotes from Berkshire Hathaway’s Vice Chairman on Life, Business, and the Pursuit of Wealth. Clark provides commentary.

Clark divided the 138 quotations he selected for this book into four categories: Charlie’s thoughts on successful investing; Charlie on business, banking, and the economy; Charlie’s philosophy applied to business and investing; and Charlie’s advice on life, education, and the pursuit of happiness.

Here are a couple of my favorites:

“It’s been my experience in life, if you just keep thinking and reading, you don’t have to work.”

“Any year that passes in which you don’t destroy one of your best loved ideas is a wasted year.”

There’s already a substantial body of literature about the ideas of Charlie Munger. And, of course, we have Poor Charlie’s Almanack. Do we need yet another book? Probably not. But even when I’m reading a quotation for the umpteenth time—for instance, that his children think he’s “a book with a couple of legs sticking out”—I still smile. And, by the way, he really is a reader. “It’s said that Charlie reads up to six hundred pages a day—which includes three newspapers a day and a weekly diet of several books.”

If you want to up your own personal daily page count, you might consider adding this book to your list.