Sunday, August 19, 2018

Faber, The Best Investment Writing, vol. 2

If you didn’t read the first volume of Meb Faber’s The Best Investment Writing (and you should have and of course still can), you’re got another crack at learning from a lot of smart folks who collectively manage hundreds of billions of dollars. The second volume of The Best Investment Writing (Harriman House, 2018) includes more than 40 articles, and, since the book runs about 350 pages, the articles are bite-sized. Most of them originally appeared online and were geared to a semi-distracted readership, which increasingly describes all of us.

The articles are organized under four headings: market conditions, risk and returns; investment portfolios, strategies and edges; pricing and valuation; and personal finance, behavioral biases and beyond.

Here I’ll recap two articles that appealed to me and that lent themselves to summary. The second criterion ruled out many excellent contributions. For instance, trying to summarize Barry Ritholtz’s “An Expert’s Guide to Calling a Market Top: The landscape is filled with pundits predicting the demise of the bull market. Here’s how to get in on the action” would be like trying to summarize a Letterman top-10 list. The task would simply produce a pale imitation of the original.

And so, to the two articles I chose. First, “10,000 Hours or 10 Minutes: What Does It Take to Be a ‘World-Class’ Investor?” by Charlie Bilello, originally published on the website of Pension Partners. From the title you can surmise that Bilello will debunk the applicability of the 10,000-hours rule to trading/investing. He argues that luck trumps skill in investment outcomes and that, in looking at the successes of the market wizards of years past, we can’t determine with certainty whether their performance was the result of skill or luck. More important, “even if we concluded that there was some skill involved, doing x, y, and z because a ‘market wizard’ did x, y, and z in the past is a guarantee of nothing. …the environment they operated in no longer exists. … If the wizards themselves were faced with the task of repeating their prior successes, they too would fail—Warren Buffett would not be the next Warren Buffett if he had to start over again today. Paul Tudor Jones would not be the next Paul Tudor Jones. Stanley Druckenmiller would not be the next Stanley Druckenmiller.” The average investor should simply spend ten minutes learning about controlling costs, diversification, and asset allocation. “In a field where the outcome is driven more by luck than by skill, being a master of nothing (diversifying and protecting yourself from the unknowable future) yields the highest probability of success.”

Second, Samuel Lee’s “Waiting for the Market to Crash Is a Terrible Strategy.” We hear over and over that we should be fearful when others are greedy and greedy when others are fearful. But is this really so? Lee shows that putting cash to work in the market only after a crash has been “an abysmal strategy, far worse than buying and holding in both absolute and risk-adjusted terms.” Using monthly U.S. stock market total returns from mid-1926 to the end of 2016, he simulated variations of the “buy after a crash” strategy, “changing both the drawdown thresholds [from -10% to -50% in increments of 5%] before buying and the holding periods [from 12 to 60 months] after a buy.” In all cases the strategy failed. The reasons? “First, the historical equity risk premium was high and decades could pass before a big-enough crash, making it very costly to sit in cash. Second, the market tended to exhibit momentum more than mean reversion over years-long horizons. As strange as it sounds, you would have been better off buying when the market was going up and selling when it was going down, using a trend-following rule.”

Wednesday, August 15, 2018

Bova, Growth IQ

In Growth IQ: Get Smarter about the Choices That Will Make or Break Your Business (Portfolio/Penguin, 2018) Tiffani Bova regales the reader with stories about 30 companies to demonstrate what she considers to be the only 10 paths to growth. Although this book is written for entrepreneurs and managers, it’s a worthwhile read for investors who want to assess the growth strategies of companies on their radar screen.

Without the stories, the paths to growth—customer experience, customer base penetration, acceleration, product expansion, customer and product diversification, sales optimization, churn, partnerships, co-opetition, and unconventional strategies—would seem either abstract or, in many cases, obvious. Moreover, taken in isolation, they probably wouldn’t even work. As Bova writes, “It isn’t enough to have the ‘right’ new growth strategy. You must fully understand what the current market context is prior to making any moves.” And then you need to select key actions that can positively influence outcomes and establish a priority, order, and timing to those actions. In sum, “Growth IQ is a holistic approach to finding the right path, in the right market context, in the right combination and sequence—creating a multiplier effect that is far more powerful than just focusing on one or two efforts in isolation.”

Almost all of the companies Bova writes about are publicly traded, though not all of them are stock market darlings. Some companies, such as Sears, Blockbuster, Wells Fargo, and Blue Apron, are fodder for cautionary tales. Even those that Bova selected to illustrate a particular path to growth may not have executed especially well in another domain, at another time.

Growing a company is not a mechanical exercise, as Bova points out again and again in her examples. But intelligently pursuing multiple paths to growth will pay off. “Amazon has pursued all ten possible growth paths in little more than two decades.” It is “the very embodiment of Growth IQ.”

Wednesday, August 8, 2018

Effron, 8 Steps to High Performance

We all start our careers with attributes (e.g., intelligence, personality, physical attractiveness) and socioeconomic backgrounds that are “largely unchangeable once we become adults.” These combined items “predict up to 50 percent of anyone’s individual performance” and give some people a clear advantage over others. But that leaves the other 50+ percent that people can control and shape at will.

In 8 Steps to High Performance: Focus on What You Can Change (Ignore the Rest) (Harvard Business Review Press, 2018) Marc Effron shares “scientifically proven” things you can do to help yourself be a high performer. They are, in a nutshell: (1) set big goals, (2) behave to perform, (3) grow yourself faster, (4) connect, (5) maximize your fit, (6) fake it, (7) commit your body, and (8) avoid distractions.

These behaviors have been shown to work within a corporate environment. They are not necessarily behaviors that propel people to be successful entrepreneurs, not even behaviors that top CEOs exhibit. For instance, top performing CEOs seem to be high on general ability (fast, aggressive, persistent, efficient, proactive, high standards) and low on interpersonal skills (respectful, open to criticism, good listening skills, teamwork). But, writes Effron, “if you’re not already at the top, I’d suggest that both great results and great interpersonal behaviors are essential ingredients for high performance.”

“Grow yourself faster” is a step worth pausing at. “[R]oughly 70 percent of your professional growth will come from the work experiences you have, 20 percent will come from your interactions with others, and 10 percent will come from formal education.” Formal education “that may seem critical to success often isn’t. Only thirty-nine Fortune 100 CEOs have an MBA, and many of those leaders didn’t earn them at top-ranked schools.” (And, yes, this book was published by a wholly-owned subsidiary of Harvard University that reports to the Harvard Business School.)

Growth, Effron contends, is “a cycle—perform, get feedback, perform again better…. The faster and more often you move through that cycle, the faster you’ll develop and get the next opportunity to learn a new skill, test a new behavior, and get more helpful feedback. Each cycle you move through should make you more competent and more competitive.”

Effron’s chapter on how you can prime your body to perform better at work is something of a myth buster. “Surprisingly little science,” he writes, “makes a direct link between our bodies and individual high performance at work. The science that does exist says that sleep matters most, exercise has some minor and specific effects, and diet has no direct effect. That doesn’t mean that exercise and diet don’t matter in your life, but neither has much power to boost your performance at work.” As for sleep, quality impacts performance more than quantity.

The final step, avoid distractions, is not about smart phones and email. Instead, Effron tells the reader to “avoid the fads that distract you from what’s scientifically proven to improve your performance. Many of these fads present advice that would seem to make your life easier (focus on your strengths), quickly increase your performance (adopt a growth mindset), or give you instant self-confidence (strike a power pose).” But this advice is misguided. For instance, focusing on your strengths “will help you be better at the exact same things you’re good at today, but won’t help you to be good at anything else.”

“If you want to accomplish more than you thought you could or break through a performance barrier,” the author concludes, don’t follow fads but follow the eight steps given in this book.

Wednesday, July 18, 2018

Rees, Principles of Financial Modelling

In the old days banks wanted applicants to be comfortable with Excel. Now they’re upping the ante. Citi, for instance, wants its incoming investment bank analysts to know Python. But Excel hasn’t gone the way of the dodo. It’s still incredibly useful for a range of financial tasks. The problem is that most Excel users have no idea how to go beyond basic formulas and engage the program as a high-level tool. In Principles of Financial Modelling: Model Design and Best Practices using Excel and VBA (Wiley, 2018) Michael Rees sets out to fill this void.

Rees’s more than 500-page book is divided into six parts: (1) introduction to modeling, core themes and best practices, (2) model design and planning, (3) model building, testing and auditing, (4) sensitivity and scenario analysis, simulation and optimization, (5) Excel functions and functionality, and (6) foundations of VBA and macros. As these part titles indicate, Rees first addresses financial modeling, from design to optimization, and then explains how to use Excel and VBA to implement the models. Complementary to this book is a website, which contains 237 Excel files.

Here, to give a sense of the book, I will summarize Rees’s distinction between database and formula-driven approaches to modeling.

Traditional models, for instance those used for cash flow valuation, are formula-focused. They “often have a small set of numerical assumptions, from which large tables of calculations are performed. Certainly, where a single value is used for an assumption across multiple time periods (such as a single growth rate in revenues that applies to all future time periods), arbitrarily large tables of calculations may be generated simply by extending the time axis sufficiently, even as the number of inputs remains fixed.”

Where a large volume of data is required, however, the appropriate model will use “database concepts, functionality or data-oriented architectures and modular structures. These include the structuring of data sets into (perhaps several) contiguous ranges, using a column (field)-based approach for the model’s variables (with well-structured field identifiers, disciplined naming conventions, and so on).”

Even though in practice these two approaches to modeling can sometimes overlap, with the modeler confronted with both large data sets and potentially many formulas, Rees contends that “at the design stage, the reflection on the appropriate approach is fundamental: an inappropriate choice can lead to a model that is inflexible, cumbersome and not fit for the purpose.”

Before they set out to build models in Excel, analysts would do well to read Rees’s book. With its help, they will avoid many pitfalls.

Friday, July 13, 2018

Hall, A Carnival of Losses

I’m getting to the age that I read things about getting old. Not the advice that AARP sends out but essays by writers who are comfortably ahead of me on the march to 100. Donald Hall, the former poet laureate, delivered two such volumes of late, Essays After Eighty and A Carnival of Losses (Houghton Mifflin Harcourt, 2018), the latter written as he was nearing 90. (Hall died last month, on June 23.)

Essays After Eighty addressed old age more expansively, and humorously, than A Carnival of Losses. The new book has qualities of leftover stew: warmed-up reminiscences and bits and pieces that were probably in the literary root cellar, such as his recollections of poets. It’s still a delightful read, but if I were to recommend only a single title, it would be Essays After Eighty.

Wednesday, July 11, 2018

Govindarajan & Ramamurti, Reverse Innovation in Health Care

I got an advance reader’s copy of Reverse Innovation in Health Care: How to Make Value-Based Delivery Work (Harvard Business Review Press, 2018) by Vijay Govindarajan and Ravi Ramamurti. I put it aside, thinking that it was not within the scope of this blog. But then came the tornadoes that struck Connecticut, one of which touched down far too close for comfort, on May 15. My property (fortunately not the house) was devastated, with large uprooted trees all around the house and the edges of the property and the top of one mighty oak pinning, and miraculously only denting, the car sitting in the driveway. Naturally, I had no power for days, and no Internet access for days more. And so, with my usual routine upended as well, I turned to this book.

The book’s premise is that U.S. healthcare providers can learn from models that have been successful in India. The authors are not, of course, touting Indian healthcare as a whole, which is sorely wanting. But one hospital system in particular, Narayana Health, could serve as an exemplar.

Founded by Dr. Devi Shetty in 2001 with a vision to treat all patients regardless of their ability to pay, Narayana Health is now a profitable company that offers, most notably, open-heart surgery (which would normally cost between $100,000 and $150,000 in the U.S.) to paying patients for $2,100 and to subsidized patients for $1,307. The hospital’s cost for each surgery is $1,100 to $1,200. Narayana is now doing about 14,700 cardiac surgeries a year. On average, in 2016-17 Narayana’s cardiac surgeons performed two to three times as many open-heart surgeries as their U.S. counterparts. And their outcome metrics rival those of the best hospitals in the world.

Shetty is a ruthless cost-cutter, as long as cutting costs doesn’t negatively impact quality of care. To construct Narayana’s no-frills hospitals, for example, costs about half that of its competitors. And when Shetty wanted to buy disposable surgery gowns and drapes from multinational suppliers who refused to budge on price, he had them stitched locally. Within four years, this firm became the largest manufacturer of disposable surgical gowns in India. The multinationals, unable to compete on price, left the market.

Narayana has innovated through task-shifting, allowing surgeons to do three operations in the time it takes other hospitals to do one. “[E]very motion in the operating cycle is choreographed to reduce turnaround time and optimize pay grades.” Senior surgeons do little or nothing that can be done by lower-paid, less-skilled staff.

In perhaps the most striking instance of task-shifting, in Narayana’s multispecialty hospital in Mysore, family members provide much of the post-ICU care. Since, in India, the entire family comes to the hospital with the patient and typically spends three days there, Narayana upgraded them from “underfoot” to caregivers. They get instruction from a four-hour video curriculum. “The practice of training families for in-hospital postoperative care not only frees up the nursing staff for other work but also eases the transition to reliable, high-quality home care, reducing readmissions by 30 percent.”

Narayana uses a hub-and-spoke model and, through farming cooperatives in Shetty’s home state, instituted an insurance plan to reach out to underserved villages. By 2017 the insurer had four million members who, for 22 cents a month, could get free treatment at 800 network hospitals across the state for any procedure whose cost did not exceed $2,200.

Shetty is also starting to pursue opportunities in telemedicine.

The authors highlight four new models in or near the United States that use some of the Indian tactics: Health City Cayman Islands (founded by Narayana Health), University of Mississippi Medical Center, Ascension, and Iora Health. All of these are making strides in trying to change the American healthcare system from the bottom up.

Reverse Innovation in Health Care offers ways for U.S. healthcare to save billions without compromising (indeed, perhaps with improving) quality. And it’s not simply on the back of low wages. The authors address a series of questions that skeptics raise to show that aspects of the model would be viable in the United States. As such, it’s an essential read for anyone who is prepared to tackle the change-resistant healthcare establishment.

Wednesday, June 27, 2018

McNally, The Promise of Failure

Why write? Especially when, in most cases, the writer faces rejection of one sort or another. This is the question John McNally raises in The Promise of Failure: One Writer’s Perspective on Not Succeeding (University of Iowa Press, 2018). Although McNally is addressing writers and would-be writers (of whom I am decidedly not one), his thoughts on failure can sometimes be generalized.

So, again, why write? “If no one out there cares if you put down your pen right now and never pick it up again, why keep doing this thing that you’re doing?” One reason is that “it’s the only thing [you’re] even remotely good at.”

So you keep writing and “putting [your] work out there,” even though you “ultimately have no control over whether something gets published or doesn’t…. It’s like letting go of a helium-filled balloon and hoping it touches an airplane. Once you let go of the string, it’s no longer in your control.” What a wonderful image for the disjunction between process and outcome. Once you hit the buy or sell button…. No, I don’t want to mash McNally’s language by forcing an analogy.

When, in the face of failure, should you just pack it in and quit doing what you’re doing? McNally says that he has “always been of the belief that as long as you’re not hurting anyone, it’s foolish not to pursue the thing you want to pursue, even if you pursue it badly.” Here it’s more difficult to analogize to trading. The writer piles up rejection slips; the trader piles up losses. Losses may not be psychologically more difficult to handle than rejection slips, but they do have a way of eroding any semblance of well-being. The losing trader either has to find some way to be profitable (and many highly successful traders have clawed their way back from nothingness) or should find something else to pursue.

But if you’re going to pursue trading, here’s McNally’s advice (and in this case it’s easy to analogize): “I measure my goals not by a typed page, not by a paragraph, not by a sentence. But by a word. One word. Because I know well enough now that one word will lead me to the next word and that this is how you get to where you’re going.”

Sunday, June 24, 2018

Portnoy, The Geometry of Wealth

Brian Portnoy, director of investment education at Virtus Investment Partners, has written a personal finance book that goes beyond mere finance. The Geometry of Wealth: How to Shape a Life of Money and Meaning (Harriman House, 2018) approaches the subject by way of three shapes: the circle, purpose; the triangle, priorities; and the square, tactics. The circle exemplifies how we navigate life’s ups and downs, through the back-and-forth of defining and then adapting. Portnoy imagines two triangles. The first one has risk management at its base, spending and saving decisions in the middle, and big dreams at the top. The second triangle is intended to be a bridge between planning priorities and investment decisions. At its base is behavior, then comes portfolio management, and finally individual parts of portfolios at the apex. As for tactics, the four corners of the square represent the growth we hope to achieve, the emotional pain of achieving those gains, fit (“how additional decisions improve or undermine what you already own”), and flexibility.

Portnoy addresses the sources of a joyful life because, as he writes, “if wealth is defined as funded contentment, then we need to know what we’re supposed to be funding.” He suggests four such sources: the need to belong, the need to direct one’s own destiny, the need to be good at something worthwhile, and the need for a purpose outside of one’s self.

But can we afford a meaningful life? “Purpose and prosperity,” he acknowledges, “aren’t necessarily a match for each other.” We need the wherewithal to “underwrite meaning and become truly wealthy.” And so we have to set priorities—priorities such as being less wrong rather than being more right, immunizing our liabilities before maximizing our assets, and addressing psychological vagaries.

Tactics is “the part where we strive for decent outcomes.” And where Portnoy looks at how to be a successful investor, with particular reference to returns, volatility, correlation, and liquidity.

In his final chapter, “Shapeless,” Portnoy turns to the tug-and-pull between now and later, between enough and more. “At any moment in life we have to decide whether we want, as Hunter S. Thompson once framed it, ‘to float with the tide, or to swim for a goal.’ We harbor an urge to do both, to appreciate the moment, to cherish where we are, but then also to push out for that next thing, to get to that next Great Place.”

Wednesday, June 20, 2018

Gannett, The Creative Curve

The thesis of Allen Gannett’s The Creative Curve (Currency / Crown, 2018) isn’t revolutionary. But I guess that’s the point. If it were, the book wouldn’t sell well. It would defy the science of what becomes a hit.

More interesting, however, at least to me, than how to identify the next big thing, whether it’s a new Ben & Jerry’s ice cream flavor or a blockbuster movie, is how people prepare to be creative. Because aha moments don’t happen in a vacuum. In the shower, perhaps; in a vacuum, never.

Gannett postulates four laws of the creative curve: consumption, imitation, creative communities, and iterations. Here I’ll look only at the first law.

How can some people be such successful serial entrepreneurs? In part, it’s due to pattern recognition, the ability to develop an uncanny instinct for opportunity. “Research shows that when entrepreneurs have significant prior knowledge, they no longer need to engage in slow, deliberate searches for new ideas. On the contrary, their prior experience gives them a rich library of exemplars they can access automatically.”

To build this mental library, would-be creators voraciously consume highly relevant material. In fact, in the case of already successful creative artists, it seems to be part and parcel of their daily routine. They spend about 20 percent of their waking hours expanding their knowledge of their field. Writers read, artists go to art shows, songwriters listen to music, old and new.

The 20 percent principle, the author contends, provides the building blocks necessary for aha moments to flourish. “This accumulation of prior knowledge fills up the brain with examples and concepts that artists then use to uncover non-obvious insights. … You can’t have insights about things you don’t know anything about.”

In brief, if you want to be a creative whatever, and that includes being a creative investor or trader, you need to accumulate a large repertoire of relevant material—and keep adding to it. Aha moments come only to the well prepared.

Sunday, June 17, 2018

Carreyrou, Bad Blood

On Friday Elizabeth Holmes, the founder of Theranos, and its former president Ramesh “Sunny” Balwani were criminally charged with wire fraud. These charges came three months after the SEC sued Holmes and Theranos for a “massive fraud” at the company.

John Carreyrou, a lauded investigative reporter at the Wall Street Journal who covered Theranos extensively from 2015 on, has written a spine-chilling book, Bad Blood: Secrets and Lies in a Silicon Valley Startup (Alfred A. Knopf, 2018).

It’s hard to imagine, amid all the suspicions, firings, and general upheaval, that Theranos got away with its alleged fraud for as long as it did. It was the persona of Elizabeth Holmes (along later on with some heavy legal fire power) that kept it going, that attracted big dollars from normally savvy investors and big names to the company board, that convinced companies such as Safeway and Walgreens to offer Theranos’s flawed finger-stick blood tests (although they later pulled back). People were bewitched by her “mixture of charm, intelligence, and charisma.” They didn’t see her much less flattering side.

Put Bad Blood at the top of your summer reading list. You won’t regret it

Wednesday, June 13, 2018

Yu, Leap

Legally or illegally, companies have for centuries copied the intellectual property of their competitors and encroached on their market share. One has only to think back to the commercial espionage of Francis Cabot Lowell, who in 1810-11, while strolling through dozens of British cotton mills, memorized critical details of mechanized textile manufacturing. Using this information, his Boston Manufacturing Company and eventually mills throughout New England took the growing American mass market away from British textile exporters.

Leap: How to Thrive in a World Where Everything Can Be Copied (PublicAffairs/Hachette, 2018) by Howard Yu is, in the best sense of the word, a story book. It tells tales of woe as well as tales of resilience. These case studies all have a point, but, even if they didn’t, they would be fascinating in and of themselves.

Wu, a professor at the International Institute for Management Development (IMD) in Lausanne, Switzerland, believes that the key to outlasting copycat competition is to leap. “Pioneers must move across knowledge disciplines, to leverage or create new knowledge on how a product is made or a service is delivered. Absent such efforts, latecomers will always catch up.”

Wu articulates five principles necessary for making a successful leap: (1) understand your firm’s foundational knowledge and its trajectory, (2) acquire and cultivate new knowledge disciplines, (3) leverage seismic shifts, (4) experiment to gain evidence, and (5) dive deep into execution. These principles, as stated, are somewhat telegraphic, but Wu develops them through compelling case studies from companies spanning the globe: for instance, Steinway (an example of what not to do in the face of competition, in its case, from Yamaha), Procter & Gamble, Novartis, WeChat, Recruit Holdings, and John Deere.

Leap is the kind of book that everyone with an interest in business can profit from. And here’s a lesson that everybody, active investors/traders in particular, can profit from. “Successful executives often exhibit a bias for action. But it’s even more important to separate the noise from the signal that actually pinpoints the glacial movement around us. Listening carefully to the right signals requires patience and discipline. Seizing a window of opportunity, which means not necessarily being the first mover but the first to get it right, takes courage and determination. To leap successfully is to master these two seemingly contradictory abilities. The discipline to wait and the determination to drive, in balanced combination, often pay off handsomely.”

Monday, June 11, 2018

Batnick, Big Mistakes

Consistently beating the market is insanely difficult. Whether it’s because the market is for the most part efficient, whether it’s due to the paradox of skill, whether it’s the result of the behavioral bogeymen that prompt us to do the wrong things at the wrong time, whatever the reason, no investor, not even the most successful, remains unscathed. Michael Batnick, director of research at Ritholtz Wealth Management, who admits to having made thousands of unforced trading errors himself, delves into this phenomenon in Big Mistakes: The Best Investors and Their Worst Investments (Bloomberg/Wiley, 2018).

In 16 chapters he writes about the mistakes of Benjamin Graham, Jesse Livermore, Mark Twain, John Meriwether, Jack Bogle, Michael Steinhardt, Jerry Tsai, Warren Buffett, Bill Ackman, Stanley Druckenmiller, Sequoia, John Maynard Keynes, John Paulson, Charlie Munger, Chris Sacca, and himself. Even though most of these mistakes are well known to students of investing history, Batnick frames them in a new, for the most part behavioral, way.

He distinguishes between “a lousy investment” and an unforced error. “Your thesis was wrong, or what you thought was already in the price; things like this are all part of the game. But oftentimes, we’ll act impulsively, even when we ‘know’ what we’re doing is a mistake. Few people are spared from unforced errors, and the way they usually manifest themselves is because we can’t handle people making money while we aren’t.” Stanley Druckenmiller, for instance, “played the game at a level few ever have.” He was 130% net long going into Black Monday and still made money in October 1987. And yet even he made an unforced error when he “couldn’t bear to see Quantum grinding its gears as a bunch of small-potato upstarts were racking up huge returns” in the late 1990s and bought $6 billion worth of tech stocks. … [I]n six weeks I had lost $3 billion in that one play. You asked me what I learned. I didn’t learn anything. I already knew that I wasn’t supposed to do that. I was just an emotional basket case and couldn’t help myself.”

Elaborating on a quotation from Livermore and further fleshing out the distinction between a bad investment and an unforced error, Batnick acknowledges the limitations of learning from investing mistakes. “Investing is inherently an act of uncertainty, so we can never say to ourselves, ‘I’ll never let that happen again!’ Sure, there are very specific mistakes that you won’t repeat, like buying a triple-levered inverse ETF and holding it for three months. That’s something you do one time and never repeat. But like Livermore said, the mistake family is too large to avoid all of them. And no amount of market quotes will change the fact that losing money is a part of investing. Risk management is a part of investing. Repeating mistakes is part of investing. It’s all part of investing.” Even so, we can, and should, focus on avoiding unforced errors—errors such as straying outside our field of competence, confusing skill with luck or genius with a rising market, over-concentrating a portfolio (think Sequoia with Valeant or Charlie Munger with Blue Chip Stamps), buying at market tops and selling at market bottoms.

Big Mistakes is a humbling book. Sentences such as “Imagine that you were physically exchanging stock certificates with Jim Simons of Renaissance Technologies every time you went to buy or sell a stock” might be enough to send investors scurrying to buy an index fund. But the lure of joining the pantheon of great investors/traders remains powerful. Batnick may not provide the path to such success, but he demonstrates that perfection is not required. “Mistakes,” as Peter Bernstein once said, “are an inevitable part of the process.”

Wednesday, June 6, 2018

Pearson, How Hard Can It Be?

I read a lot of fiction, mostly mysteries/thrillers, for relaxation and/or escapism, the vast majority of which I never write about. After all, who cares about my reactions to the latest exploits of Armand Gamache or Jack Reacher or all those girls or women “on/with/in,” pick your preposition?

Perhaps no one cares about my reactions to Kate Reddy either, but since I requested a copy of Allison Pearson’s How Hard Can It Be? (St. Martin’s Press, 2018) from NetGalley, I feel a duty to write a few words about it. Moreover, the reason I requested it was that, in the novel, Kate returns to the hedge fund she started years earlier, even though, as it turned out, this was the least realistic thread of the storyline.

How Hard Can It Be? is a sequel to Pearson’s blockbuster (four million copies sold worldwide) debut novel, I Don’t Know How She Does It, described by Oprah Winfrey as “the national anthem for working mothers.” I didn’t read the original novel, but its sequel is both incisive and hilarious. It speaks, of course, more to women than to men.

Kate Reddy, now pushing 50 and impatient to relinquish her all-engulfing role as wife and mother, sets out to re-enter the workforce. Of course, the kids, now teenagers, don’t go away, nor does her increasingly distant husband. And the financial world isn’t exactly scrambling to hire a 50-year-old whose only “relevant” work experience in seven years was serving as treasurer of the village parochial church council and chairman of the governors at a community college.

How hard can it be? Very hard. But Kate didn’t compile an impressive track record in the City and survive years of motherhood to be daunted by little things like forgetfulness, a spreading middle, and the truth (does she really have to be nearly 50?).

This novel is a paean to grit, resourcefulness, humor, and new-found love. Women can rightfully be proud of Kate.

Sunday, June 3, 2018

Ball, The Fed and Lehman Brothers

Laurence M. Ball, a professor of economics at Johns Hopkins University, is convinced that (1) the Federal Reserve Bank had the authority to rescue Lehman in 2008 and that (2) in any event, the beliefs of Fed officials about their legal authority were not the real reason they chose not to rescue the firm. In The Fed and Lehman Brothers: Setting the Record Straight on a Financial Disaster (Cambridge University Press, 2018), based on publicly available sources, Ball makes his case.

After a deal to sell Lehman to Barclays fell apart on September 14, what could the Fed have done to avert Lehman’s bankruptcy the next day? Actually, as Ball points out, not all of the Lehman enterprise failed on the 15th. LBHI, the holding company, filed for bankruptcy, along with most of its subsidiaries. But one subsidiary did not: Lehman Brothers Inc., the company’s broker-dealer in New York. “The Fed kept LBI in business from September 15 to September 18 by lending it tens of billions of dollars. After that, Barclays purchased part of LBI and the rest was wound down by a court-appointed trustee.”

The usual explanation for the Fed’s refusal to lend to LBHI was that, under Section 13(3) of the Federal Reserve Act, the loan had to be “secured to the satisfaction of the Reserve Bank.” Fed officials took this to mean that the Fed cannot make a loan if there is a significant risk that it will lose money on the deal. This provision did not require that Lehman be solvent, but “examining Lehman’s solvency helps us to understand what assistance the firm needed to survive its liquidity crisis, and to assess its longer-term prospects.” Ball contends that, with mark-to-market valuation in the distressed markets of September 2008, Lehman was near the edge of solvency, so “it was probably solvent based on its assets’ fundamental values.” The problem, of course, was not solvency but liquidity. Lehman, Ball calculates, “would have needed about $84 billion of assistance to stay in operation for a period of weeks or months” while it looked for long-term solutions to its problems.

Ball argues that the real villain in Lehman’s bankruptcy was Hank Paulson, that he insisted on the bankruptcy and that Fed officials acquiesced. Moreover, he suggests, neither Paulson nor Fed officials fully appreciated the severe damage to the financial system that Lehman’s bankruptcy would cause.

Ball supports his hypothesis with ample documentation. Whether readers come away convinced that the Fed made a grievous error in not being the lender of last resort to Lehman will probably depend on their view of the Fed. And even if future Fed leaders “take the Lehman lesson to heart,” they may be hamstrung in their actions. The Dodd-Frank Act revised Section 13(3) to limit the Fed’s lending authority and to make all lending subject to the approval of the Secretary of the Treasury, a political appointee.

Wednesday, May 30, 2018

Edwards, American Default

No, this is not a dystopian account of the consequences of bad tax policy, wanton spending, and political gridlock. American Default (Princeton University Press, 2018), by Sebastian Edwards, is, in the words of the subtitle, The Untold Story of FDR, the Supreme Court, and the Battle over Gold. And a fascinating story it is. I couldn’t put this book down.

At its heart is “the great debt default of 1933-1935, … when the White House, Congress, and the Supreme Court agreed to wipe out more than 40 percent of public and private debts” by abandoning the gold standard, devaluing the dollar, and abrogating gold-denominated contracts retroactively.

Edwards takes the reader on the long, tortuous path to devaluation. FDR was largely ignorant of economics, not that economists of the day themselves understood the intricacies of the monetary system. He used commodity prices, especially the price of cotton, as the benchmark against which to measure the success of his economic policies. (In 1932 about half of the American population earned their living by farming.) During the first year of his administration he “obsessively” followed these prices, and “their movements often guided public policy. When commodity prices went up, the president felt confident; however, when prices faltered, the president would become very upset, and his tendency to experiment and try new policies would rise to the surface.”

The president was taken with agricultural economist George F. Warren’s “elegant charts drawn on onionskin paper.” The theory was that if the price of gold increased, higher prices for agricultural commodities would immediately follow. The New York Times reported that the administration’s goal was to adopt “a ‘commodity dollar’ which will fluctuate in line with general commodity movements instead of remaining as a constant factor through all periods of changing values.” Despite spurious theory and many stumbles, between March 1933, when Roosevelt was inaugurated, and December 1934, “the price of corn quadrupled, that of cotton almost doubled, the price of rye doubled, and that of wheat increased by 114 percent. During the same period, the Dow stock market index had increased by 67 percent.”

One of the most controversial policies, enacted at the behest of the Treasury Department, was the congressional joint resolution voiding the gold clause for both past and future contracts. If the White House’s policies rested on spurious economic theory, the legal basis for them seemed even dodgier. After all, the sanctity of contracts was part and parcel of accepted legal theory. The Supreme Court took up four cases challenging the joint resolution.

The Court, by a 5-4 vote, ruled that “the abrogation of the gold clauses for private contracts was constitutional, and debtors could discharge their debts using legal currency.” As applied to public debt, however, the Court ruled 8-1 that the abrogation of the gold clause was unconstitutional. But, again by a 5-4 vote, it “accepted the government’s secondary argument that the abrogation of the gold clause had not produced any damages to bond holders; in terms of purchasing power over goods and services, bondholders were at least as well off in 1933, as they had been at the time the Liberty Bonds were issued.” So bondholders could not sue for damages, and “there was no practical economic consequence for having passed an unconstitutional law.”

Contrary to the dire predictions of the Court minority, there was no major fallout from the rulings. The government had no difficulty rolling over its debt or issuing new securities. The U.S. abrogation was an “excusable default.”

Could an American default happen again? Yes, but, Edwards maintains, it would not be related to deflation, exchange rates, or the monetary system. The debt crisis that looms on the horizon “has a completely different genesis: it is rooted in unsustainable promises made in the present for future delivery of services.” And, presumably, this time around a default would not be excusable.

Sunday, May 27, 2018

Hall, Ideas, Influence, and Income

I’m not sure what prompted me to read Tanya Hall’s Ideas, Influence, and Income: Write a Book, Build Your Brand, and Lead Your Industry (Greenleaf, 2018). I have a hard enough time writing a few paragraphs about books for this blog. I have absolutely no desire to write a book myself.

But I thought that some of my readers, especially those who want to promote their brand or company, might be more ambitious. If you are, Hall’s book is a remarkably useful guide. Yes, this book promotes her own company, Greenleaf Book Group, a hybrid publisher and distributor that offers the benefits of both traditional and self-publishing. But in the process it explains a great deal about the new realities of publishing and marketing. Start with the sobering fact that more than 800 books are published in the U.S. every day.

If you’re contemplating writing a financial book, be forewarned that publishers are cutting back dramatically on titles in this area. (You may have noticed that the number of reviews I write has shrunk over the years. This, I assure you, is not from sloth.) So you’ll probably have to do all of the work yourself, not just write the book but see it through publication and market it. And expect to come out on the short end of the stick financially.

Hall cites a survey of book-buying behavior that says that author reputation is the most important factor in a book purchase decision. So, she recommends, build your platform early through tweets, social media platforms, newsletters, blogging, videos, presentations, webinars, and articles. Become known to a wide audience as an “expert” in the field you eventually plan to write about. Connect with your potential readers. Only then do you stand a chance of having your book end up on some kind of bestsellers list.

Let’s put it this way, Hall’s marketing suggestions only reinforced my decision never to write a book. But for those who are not deterred, Ideas, Influence, and Income is an informative read.

Sunday, May 20, 2018

Koesterich, Portfolio Construction for Today’s Markets

Russ Koesterich, who is currently responsible for asset allocation and risk management for BlackRock’s largest investment team (managing about $80 billion), has written a book for financial advisors. Portfolio Construction for Today’s Markets: A Practitioner’s Guide to the Essentials of Asset Allocation (Harriman House, 2018) explains, in general terms, how to combine assets in a risk-controlled manner.

Portfolio construction is especially daunting in a low interest rate environment. Low rates have not only reduced income from bonds in a portfolio. Many bond funds, searching for yield, have gone out in duration, increasing their riskiness. “They will experience larger than typical losses when rates rise.” In brief, bonds are not playing their traditional role: they are providing less income, and they are becoming a less reliable way to manage volatility.

In separate chapters Koesterich discusses portfolio constraints (the most important of which is risk), diversification, factors, and how to make a stab at forecasting returns using, among other inputs, historical returns and expected risk (as “the second sanity check”). Only then is it time to build the portfolio, described in a chapter titled “Some Assembly Required.”

Koesterich considers several approaches to constructing a workable portfolio, in increasing degrees of viability: minimum risk, maximum return, maximum Sharpe ratio, targeted return while minimizing risk, and maximum return within a particular risk budget. The last two approaches result in strategic portfolios. “Think of the strategic portfolio as the portfolio best suited to the investor’s needs over the long term. It provides a baseline allocation consistent with investment goals. This is the portfolio the investor is trying to beat when they decide to get fancy and time the market [tactical asset allocation]. If the investor finds that they can’t really time the various asset classes to produce better results, these strategic portfolios are the default to revert to.” If, however, the investor wants to make tactical adjustments, thereby tilting his portfolio away from its long-term, strategic allocation, he might consider changing his risk budget, “raising it when expecting particularly high returns and lowering it when concerned about a bear market.”

Five rules can guide the process of building a portfolio: (1) start with a goal, (2) be both explicit and parsimonious when it comes to constraints, (3) be honest about risk, (4) diversify, and (5) remember the denominator: always think in terms of risk-adjusted returns.

Wednesday, May 16, 2018

Kobrak and Martin, From Wall Street to Bay Street

If your first reaction upon seeing the title of this post was “from Wall Street to where?” you personify one reason that Christopher Kobrak and Joe Martin felt it necessary to write From Wall Street to Bay Street: The Origins and Evolution of American and Canadian Finance (University of Toronto Press, 2018). The book traces the intertwined yet uniquely defined paths of financial development in the U.S. and Canada from colonial times to the 2008 financial collapse.

It’s of course impossible in a few paragraphs to do justice to the authors’ thorough history, so I decided to confine myself to a single event and to the authors’ conclusion about the relative success of the Canadian financial system.

The event, which resonates today, was the passage of the infamous Smoot Hawley Tariff, signed into law by Herbert Hoover in 1930. According to many economists, it was one of the reasons a stock market correction turned into a worldwide depression. The tariff “increased the rate on dutiable-good imports from 39 to 53 per cent, the highest in history. Canada’s exports to the United States plummeted by 70 per cent. … The full force of the Great Depression fell upon Canada’s staple exports—hardest hit were the markets for cattle, dried codfish, copper, and wheat…. Average incomes declined by 48 per cent, but in the Prairie province of Saskatchewan they declined by 72 per cent.”

Smoot Hawley, which exacerbated an already weak grain market for Canada, was introduced in the midst of a Canadian election campaign. The U.S. tariff became a major campaign issue, especially among farmers, and “the result was a resounding defeat of the Liberal government of William Lyon Mackenzie King and the election of a Conservative government led by R. B. Bennett, a former bank director and the richest man to ever hold the office of prime minister of Canada.” In the wake of the Depression, the three largest provinces elected populist governments.

Over the years the Canadian financial system has exhibited more self-restraint than has the American. “It has avoided the corporate governance scandals that nearly destroyed investor faith in American equities in the nineteenth century, in the 1920s, and most recently during the first few years of the twenty-first. Its legal system has avoided the excesses of the American tort system, making insurance cheaper and easier to acquire. Its corporate governance system remained more elitist and is still more activist than the American, whose New Deal legislation in the 1930s increased the obstacles and decreased the incentives for active shareholder governance, a shift that has only recently begun to be reversed. Perhaps most importantly, Canada’s more concentrated, domestic banks have given it a large measure of financial independence from America and the rest of the world.”

The American and Canadian financial systems reflect their national cultures and national priorities. But perhaps a sober reflection on how each country got to where it is today could prompt some tweaks to the systems to make them both more vibrant and more stable. From Wall Street to Bay Street is a good place to gain material for such reflection.

Sunday, May 13, 2018

Doig, High-Speed Empire

A couple of weeks ago 27 EU ambassadors to Beijing (with the exception of the ambassador from Hungary) signed an internal report criticizing China’s belt and road program, saying it creates an unfair global trade environment. China is trying to expand its freight railway services in Europe, normally providing countries with both the contractor and the money, in the form of a long-term loan, to build the tracks. And then there’s the Maritime Silk Road, which represents 10% of China’s GDP. In 2016 maritime shipping carried 94% of trade between China and Europe by weight and 64% by value. A more profitable part of the Maritime Silk Road, and potentially even more worrisome for Europe, is port management. China now controls about one-tenth of all European port capacity.

I have been following some of these infrastructure developments in Europe, so I was delighted to come across Will Doig’s High-Speed Empire: Chinese Expansion and the Future of Southeast Asia (Columbia Global Reports, 2018). It’s a short book, about 100 pages, that reads more like a series of long magazine articles. And I mean this as a compliment. It gives color to what could otherwise have been a dry politico-economic analysis.

I have never understood China’s “One Belt One Road” name for its massive infrastructure initiative and am forever slipping up. Why the “belt” refers to the overland infrastructure network and the “road” describes its web of shipping lanes is beyond me. But, however it got its name, it has, in the five years since it was officially launched, come to encompass more than 60 countries in Asia, Africa, and Europe and over a trillion dollars in spending.

Doig writes about a single project, “more an idea than a cohesive plan”: China’s desire to create a Pan-Asia Railway running from Kunming, the capital of Yunnan, through Laos, Thailand, and Malaysia, and terminating in Singapore.

He begins his account in the tiny city of Boten, Laos, just over the Chinese border. It was meant to be China’s gateway into Southeast Asia, with plans including a trading center, manufacturing complex, and storage facilities. But instead, for some years, it was simply a “gaudy little kingdom of clubs, drugs, casinos, hookers, and crime both petty and organized” that serviced, and was serviced by, mostly Chinese nationals. In time it became not only unsavory but dangerous, with gunshot-riddled corpses turning up in alleys. Eventually, in 2011, China shut it down, cutting the city’s power and cell phone signal.

China was, however, undeterred in its dream to build a railroad through Laos. Despite many political setbacks, work has finally begun on the $6+ billion project. The initial investment will be just over $2 billion, “of which China will contribute about $1.6 billion. Laos will cover the rest.” But since Laos doesn’t have that kind of money, it will borrow most of its share from China.

And what is happening in Boten today? It is “reincarnating, bit by bit, as a commercial hub…. You can see offshoots of the city’s new relevance in the wilderness just beyond its borders, where flashes of alien modernity have materialized: PetroLao gas stations, stucco guesthouses, and the weirdest: a palatial furniture showroom fully stocked with flashy bedroom sets.” Nearly everyone working in Boten is on the payroll of the Boten Economic Zone Development and Construction Group, a Chinese company. The company runs all of the city’s services.

In his book Doig traverses the railroad’s proposed route, writing about China’s relations with Thailand and Malaysia as well as Laos. And he issues some warnings, based on China’s earlier infrastructure deals. For instance, China lent the Sri Lankan government money for a seaport and built a new airport nearby. “The deal and others like it left Sri Lanka owing China $8 billion it couldn’t repay.” Sri Lanka ended up giving Beijing control of “one of the most strategically placed deep-sea ports in the world.” The airport, it seems, was not such a great deal. It is “so underutilized that guards were reportedly hired to prevent local wildlife from turning the empty concourse into an indoor habitat.”

China is using its financial muscle to reap economic and geostrategic benefits from its “partnerships” with other countries. High-Speed Empire illustrates some of the challenges it faces and how it ultimately manages to overcome them.

Wednesday, May 9, 2018

Carey et al., Go Long

Go Long: Why Long-term Thinking Is Your Best Short-term Strategy (Wharton Digital Press, 2018) by Dennis Carey, Brian Dumaine, Michael Useem, and Rodney Zemmel is a short book packed with managerial, and investing, insight. In the first part it profiles leaders who went long: Alan Mulally at Ford, Larry Merlo at CVS, Paul Polman at Unilever, Ivan Seidenberg at Verizon, Sir George Buckley at 3M, and Hewlett Packard Enterprise and Costco director Maggie Wilderotter. Part two offers principles for leaders who want to start thinking long term.

Some CEOs use long-term metrics as organizing principles. Alan Mulally invoked PGA (profitable growth for all), which is revenue times margins. His goal at Ford, even as he faced a $17 billion shortfall in a single year when he joined the company, was to use that measure to achieve a 10% to 15% compounded annual growth rate. How would Ford achieve this kind of growth? “The only way to raise revenue is to make products and provide services people want and value, and good companies improve their margins every year by improving quality and productivity. Mulally says the trick is to work both of those levers.” At each of his business review meetings, Mulally asked his 16 top executives to apply PGA to a five-year horizon: “imagine five bars representing profits going out five years, and each one going up 15%. That simple exercise got the executives to look five years out every week, every quarter, every year—even while they were dealing with short-term crises.”

The title of the chapter dealing with Sir George Buckley is “R&D Is the Last Place to Cut.” In the four years before Buckley became chairman and CEO of 3M in 2005,capital spending had been slashed by 65% and R&D by 25%. Buckley believed that the company’s sluggish growth was the result of shortchanging innovation. He “reached back into 3M’s history and reinstated a key metric known as the New Product Vitality Index.” He calculated that to grow at a 4% compounded annual growth rate above market growth would require that more than 30% of the company’s revenues come from products introduced in the last five years. “By the time he took mandatory retirement at age 65 in 2012, Buckley had grown the share of new products launched over the previous five years from 8% of sales to 34% of sales.”

Traditionally Wall Street hasn’t rewarded companies that plow earnings back into R&D and other capital expenditures. Goldman Sachs found that between 1991 and 2016 the stock returns of companies offering the highest combined dividend and share-buyback yields outpaced those of companies that spent more on R&D. Is the trend starting to shift? It’s too early to say, but last year “those companies in the Goldman study that spent more on capital expenditures and R&D outperformed those offering high dividends and buybacks by 11 percentage points.”

Go Long is a wonderful mini-manual for corporate executives and members of boards of public companies. But it is also meant to educate investors, to get them to think beyond the next quarter and to reward companies that focus on longer-term goals.

Sunday, May 6, 2018

Tuff & Goldbach, Detonate

In Detonate (Wiley, 2018) Geoff Tuff and Steven Goldbach, both principals at Deloitte, explore “why—and how—corporations must blow up best practices (and bring a beginner’s mind) to survive.” The general thesis may not be original, but the book brings together so many insights that it’s a decidedly worthwhile read.

Here I’ll summarize three points the authors make.

First, force your opponents to make a choice. “[A] truism in poker is that you can’t learn anything about your opponents if you don’t bet. … If you want to get information about your opponent, you need to force them to make a decision.” Businesses, they contend, should “stop asking, and start observing, simulating, and inferring.” A very funny cartoon illustrates their point.

Second, don’t try to design a whole system at the outset. The “mother of all snow forts” is a case in point. A snowstorm that leveled Boston in 2006 prompted one of the authors and his sons to design an elaborate snow fort, with an access point where they could drop into the fort from a second-floor bedroom window and “an offshoot tunnel that went right up to the kitchen window from which they could supply the fort with hot chocolate and something slightly stronger for the adults…. After a morning’s worth of design and a table full of drawings, they truly had something magnificent. Then they did nothing.” The task was too daunting. The authors ask what would have happened had they just started digging instead of spending all their time planning. They might have created something magnificent, or perhaps not much more than an igloo. But it would at least have been something rather than nothing. The point of the story: “focus on a minimally viable move to get going, trusting that something good will come of it even though you may not have the end game in mind.” Another cartoon illustrates the futility of over-systematizing in the planning stage.

Third, focus on the core rather than the periphery. Although there is a rationale for tinkering around the edges, the authors want to shift “the core from the inside.” They “don’t think you can blow up playbooks effectively and permanently from the periphery.”

Detonate challenges assumptions, tradition, and apathy. It is a business book, yes, but some of its principles reach far beyond the corporate world. I thoroughly enjoyed it.

Thursday, May 3, 2018

Arthur, Cyber Wars

Charles Arthur’s Cyber Wars: Hacks That Shocked the Business World (Kogan Page, 2018) takes the reader through some well-known and not so well-known hacks: Sony Pictures, HBGary, John Podesta’s inbox, TJX, ransomware, TalkTalk, and Mirai. Each chapter concludes with some lessons and suggestions, but the reality is that we will never make every system secure. We can simply make it a tad harder for the hackers to penetrate “our space” and either gain access to our data or lock us out from it.

The tales of woe told here explore the range of tools hackers have used. For those of us with zero hacking skills it’s an enlightening, if depressing, read.

Sunday, April 29, 2018

Cunningham & Cuba, The Warren Buffett Shareholder

I have often marveled at the number of books written about all things Buffett and Berkshire. Reading The Warren Buffett Shareholder: Stories from inside the Berkshire Hathaway Annual Meeting (Harriman House, 2018), I learned one reason for this profusion: they sell. In 2005 The Bookworm, an Omaha bookstore that is the only non-Berkshire affiliated booth at the annual meetings, sold 3,500 copies, or 8.5 tons!, of Poor Charlie’s Almanack. The bookstore at Omaha’s Eppley Airfield, which offers books that Buffett and Munger recommend at each annual meeting, on at least one occasion needed the police to control the crowd. And book signings regularly take place during these meetings in an Omaha Dairy Queen. This is, I guess, what happens when Warren Buffett says, in response to a question about what a young person should do to become a great investor, “Read everything you can.” And when he claims to have read every book in the Omaha Public Library with the word finance in the title by the age of ten, some twice.

The latest addition to the Buffett/Berkshire corpus is a collection of 40 reminiscences about Berkshire annual meetings. One theme running throughout is the people who attend, the relationships that are formed and cemented, the “faith” that is deepened. Yes, attendees hear Warren Buffett and Charlie Munger answer questions, but many of the shareholders are familiar with what they’re likely to say. After all, Berkshire has made only small tweaks to its investing principles over the years. Moreover, they could sit at home and watch streaming video of the meeting. The draw is not so much the words as the ethos and the people. Attendees describe the experience in religious terms as a pilgrimage or a revival meeting, in mundane terms as an oil change (admittedly, for the soul).

Berkshire has a relationship with its shareholders that no other company does. And thus its shareholder meetings are unique. The Warren Buffett Shareholder demonstrates just why that is and why people keep going back, year after year. It’s hard not to feel better having read it.

Wednesday, April 25, 2018

Sachs, Unsafe Thinking

Following the safe path, sticking with the tried-and-true, leads to mediocrity. To thrive, especially in conditions of rapid change, you must be willing to embrace the unconventional. This is the basic thesis of Jonah Sachs’s Unsafe Thinking: How to Be Nimble and Bold When You Need It Most (Da Capo Press/Hachette, 2018).

Sachs talked with more than 100 innovators to learn how they had succeeded in taking bold, intelligent risks. The insights he gained from them, coupled with the findings of academic research, provide the backbone of his book.

The six key components of unsafe thinking (and the six parts of the book) are courage, motivation, learning, flexibility, morality, and leadership. Here I’ll share a couple of the points Sachs makes on learning and flexibility.

Being, and (worse) acting like, an expert can “lead us, unwittingly, down the path to entrenchment. … The endpoint of this path is close-mindedness and over-confidence.” It’s far better to act like an explorer, “to openly ask questions, gain knowledge in new fields, and constantly expand [one’s] expertise.” One should “spend time doing things that make you a beginner again.” Sachs explains that “engaging in just about anything that is both challenging and unfamiliar creates more cognitive flexibility. Being a rank beginner breaks down overactive pattern recognition, giving you a boost of creativity, even when you return to your area of expertise.”

Flexibility is an essential ingredient of unsafe thinking. Sachs suggests that tapping into intuition is a way of becoming flexible. Let’s say a person has a counterintuitive idea. Should he move forward with it? “Because analysis alone can’t prove the unusual idea is right, proceeding demands a heavy dose of intuition.” As Jack Welch said, good decisions come “straight from the gut.”

But intuition can be “fickle and unreliable.” It can be used as “a cover to go into biased thinking.” Intuitions aren’t truths but hypotheses that need to be tested, to be checked with feedback and data.

Unsafe Thinking is an illustrated (with stories) roadmap for navigating those situations, increasingly frequent in our fast-paced world, where more-of-the-same or incremental change just won’t do.

Tuesday, April 24, 2018

Davenport, The Space Barons

I have my feet firmly planted on the earth’s surface, with no desire to travel into space. But that doesn’t undermine the pull of Christian Davenport’s The Space Barons: Elon Musk, Jeff Bezos, and the Quest to Colonize the Cosmos (Public Affairs / Hachette, 2018). It’s a tale of intense competition, dueling styles, and cosmic dreams.

The book focuses on SpaceX and Blue Origin, although it also touches on the endeavors of Richard Branson and Paul Allen and other pioneers whose names are not so well known.

Elon Musk’s SpaceX is normally center stage in any discussion of private, entrepreneurial space exploration. Musk is, as Davenport describes him, “the brash hare” with a knack for grabbing the limelight. (Who else would, in “pure Silicon Valley swagger,” park a shiny, white rocket that stretched seven stories long outside the headquarters of the FAA?) SpaceX’s mantra is “Head down. Plow through the line.” Jeff Bezos, by contrast, has been “the secretive and slow tortoise.” In fact, the turtle is Blue Origin’s mascot, the embodiment of one of Bezos’s favorite Navy SEAL sayings: “Slow is smooth and smooth is fast.” And the company’s only partially turtle-like motto is “Gradatim Ferociter” (step by step, ferociously).

In prose more than worthy of a staff writer at the Washington Post, Davenport glides effortlessly between biographical vignettes, engineering and financial challenges in building spacecraft, government obstacles to private space exploration, project failures and triumphs, and rivalry as “the best rocket fuel.”

Musk and Bezos have different goals, goals that neither of them is likely to see achieved in his lifetime. Musk wants to colonize Mars, a “fixer-upper of a planet.” Mars could be a plan B habitat in case something horrific happens to Earth, such as an asteroid strike that threatens to wipe out humanity. Bezos wants to preserve Earth by zoning it “residential and light industrial” and moving all heavy industry into space. “The thing that’s going to move the needle for humanity the most,” he said, “is mining near-Earth objects and building manufacturing infrastructure in place.” Both goals seem—well—just plain weird. But then so was transforming a tiny online bookstore into a retail juggernaut and cloud computing service company. The sky is no longer the limit.