Wednesday, October 31, 2018

Berger, The Book of Beautiful Questions

In 2014 Warren Berger wrote A More Beautiful Question: The Power of Inquiry to Spark Breakthrough Ideas. He has now followed that up with The Book of Beautiful Questions: The Powerful Questions That Will Help You Decide, Create, Connect, and Lead (Bloomsbury Publishing, 2018).

Let’s look briefly at some of the questions we might ask regarding a creative endeavor. First, to find “our big idea” we could ask: What stirs me? What bugs me? What’s missing? What do I keep coming back to? What is ripe for reinvention?

In order to see potential creative opportunities that “are all around,” we have to see the world differently. Here we can ask: What might I notice if I were encountering this for the first time? What is in the background? What here would fascinate a five-year-old? What would Seinfeld be amused by? What would Steve Jobs be frustrated by?

If you’re having trouble getting started on a creative project, Berger suggests that you ask six questions: Am I chasing butterflies? (“Meaning you keep thinking of new ideas instead of moving forward with an existing project.”) Who will hold me accountable? Am I rearranging the bookshelves? (“This refers to the act of ‘preparing to create.’ It may involve setting up a workspace, taking lessons, or doing research—each of which is fine until the point it becomes a stall tactic.”) How can I lower the bar? What if I begin anywhere? Can I make a prototype?

Berger’s book is not, of course, merely a list of questions. The questions serve to distill the points Berger makes in the text, where, understandably, he relies heavily on the work of others. He chooses his sources wisely, based on their own creativity and insights.

For instance, Ann Patchett’s description of the painful transition from a beautiful idea to the “stark disappointment” of the written word: “I reach up and pluck the butterfly from the air. I take it from the region in my head and I press it down against my desk, and there, with my own hand, I kill it. Everything that was beautiful about this living thing—all the color, the light and movement—is gone.” In its place is a creation that “rarely measures up to the vision.”

Or Adam Grant’s five stages of the creative process “that tend to trigger different emotional responses in the creator. The energized, optimistic feeling at stage 1 (‘This is awesome!’) is followed by a more realistic stage 2 (‘This is tricky’). Then comes the dreaded stage 3 (‘This is crap’), followed immediately by stage 4 (‘I’m crap’). If the creator somehow crawls out of that pit, they work their way to stage 5 (‘This might be okay’), and finally arrive at completion, stage 6 (‘This is awesome!’).”

I’ll end this post with another quotation, which makes an important, well-documented point. According to Dean Keith Simonton, “Creativity is a consequence of sheer productivity. If a creator wants to increase the production of hits, he or she must do so by risking a parallel increase in the production of misses…. The most successful creators tend to be those with the most failures.”

I suspect that Berger’s book will be a hit.

Sunday, October 28, 2018

Volcker, Keeping At It

The 91-year-old Paul A. Volcker has had a long, distinguished career, highlights of which he recalls in Keeping At It: The Quest for Sound Money and Good Government (Public Affairs / Hachette, 2018). For those with a financial memory, he is best known for his role as the Federal Reserve chairman who shepherded the economy through a period of high inflation (14.8%) in the early 1980s, raising the federal funds rate to a peak of 20% in 1981, even as the nation was in a recession (1980-1982). By 1983 inflation had been tamed. For those whose memory is not so long, his name is associated with bank regulations adopted during the Obama administration, the Volcker Rule.

Volcker’s memoirs, written with the help of Christine Harper, combine personal reminiscences with reflections on economic policy decisions in which he played a role, such as abandoning the gold standard. Among the personal reminiscences, the one that stood out for me was his cut in salary when he left his job as president of the New York Fed, which paid $110,000, and accepted the job as chairman of the Federal Reserve, which paid just $57,000. His wife, who had serious medical problems, remained in New York, and Volcker rented a one-bedroom apartment in a building full of George Washington students for $400 a month. The family’s financial squeeze led Volcker’s wife to take on a part-time accounting job and rent out their back room.

Presaging events in the financial crisis, Volcker describes the quick fix for Continental Illinois, which was suffering in the wake of the 1982 bankruptcy of a small Oklahoma bank, Penn Square, which “had originated more than $2 billion of loans to speculative oil developers” and sold them on to several large banks around the country, including Continental Illinois. The chairman of Continental said that the Penn Square loan portfolio could sink his bank. The Fed and the FDIC initially decided to follow the model they had applied successfully to the bailout of First Pennsylvania Corporation. There, “encouraged by the Fed, which was providing emergency lending, the FDIC and a group of a couple dozen banks provided a $1.5 billion rescue made up of loans and a line of credit. They also received twenty million warrants to purchase common stock—enough to provide a controlling majority.” But, in the case of Continental, the bankers were wary, and the FDIC ended up offering them its de facto guarantee to increase their line of credit. Continental survived for a while, but shareholders never recovered their losses. “This episode,” Volcker writes, “has often been credited with popularizing the phrase ‘too big to fail.’ Any ambiguity about the willingness of the government to bail out the big banks seemed to be lost when the comptroller of the currency, the supervisor of most of the big banks, went beyond his authority, seeming to commit to such support for the eleven largest in his later congressional testimony.”

Volcker’s memoirs are rich in detail about events that shaped the American economy and its financial institutions in the second half of the twentieth century. As for the future, although he has deep concerns, he quotes his mother, who said to him on an earlier occasion: “The United States is the oldest and strongest democracy in the history of the world. In two hundred years it has survived a lot. Get back to work.”

Sunday, October 21, 2018

D’Aveni, The Pan-Industrial Revolution

Richard D’Aveni, a professor at Dartmouth’s Tuck School of Business, has set forth a bold hypothesis. As 3-D printing or, more generally, additive manufacturing (AM) becomes increasingly sophisticated, manufacturing will be transformed and pan-industrial companies will come to dominate the world economy. At the moment, although investors certainly haven’t bought into this story, among the leading contenders for dominance are Jabil, GE, Siemens, and United Technologies.

In The Pan-Industrial Revolution: How New Manufacturing Titans Will Transform the World (Houghton Mifflin Harcourt, 2018) D’Aveni argues that, contrary to the popular myth, “the future of additive manufacturing does not lie in a world of ‘makers’—hobbylike small-scale craftspeople producing a few items at a time in little workshops scattered all over the world.” Instead, “the logic of the pan-industrial revolution—and the power of the virtuous cycle of growth that it will set in motion—will make the drive toward bigness practically irresistible.”

Pan-industrial firms are distinguished by their ability to “use industrial platforms to build flexible supply chains and powerful business ecosystems, enabling greater product diversification than practiced by any corporation of today.” In contrast to traditional manufacturing, which puts efficiency first, platform-managed AM puts agility first. Among the characteristics of platform-managed AM are: (1) products are built all at once, eliminating assembly and permitting internal complexity, (2) flexible equipment and workers are used to make a broad range of products at an affordable cost, (3)shallow learning curves facilitated by software, AI, and machine learning make innovation and entry to new markets relatively easy, and (4) short supply chains move production close to customers and minimize costs of transportation, warehousing, and inventory control.

AM has already made great strides in industries as diverse as medical devices, fashion, construction, and food. For instance, Dubai has partnered with the Chinese company Winsun to 3D print offices and homes, with a goal of having 30 percent of the city 3D printed by 2030.

Even though the future is unlikely to play out exactly as D’Aveni foresees it, he makes a strong case for an exciting new industrial revolution, the initial stages of which we are already beginning to see.

Wednesday, October 17, 2018

Siilasmaa, Transforming Nokia

Risto Siilasmaa, the chairman of Nokia, has written a real-life business thriller, one that he lived through and, along with Nokia, survived. Transforming Nokia: The Power of Paranoid Optimism to Lead Through Colossal Change (McGraw-Hill, 2018) takes the reader from the height of Nokia’s success in the global smartphone market in 2008, when it had a more than 50 percent share, to the company’s near bankruptcy in 2012, to the sale of its iconic smartphone business to Microsoft, up to today, where it is a top player in wireless infrastructure.

Siilasmaa had founded and served as CEO of F-Secure for 18 years before, at the age of 42, he was tapped to join the Nokia board of directors in 2008, a year after Apple introduced the iPhone. The timing couldn’t have been worse. Although Nokia tried to respond to the onslaught of competition in the smartphone market, it was plagued by technological, leadership, and cultural issues. It brought on a new CEO, an American from Microsoft, in the fall of 2010, who launched Project Sea Eagle, “a sweeping internal review of Nokia’s capabilities and competitiveness.” As a result of this review, Nokia decided to partner with Microsoft on the Windows Phone. In response to this decision, a Google senior vice president tweeted, “Two turkeys do not make an eagle.” Unfortunately for Nokia, he was right.

It was under this grim set of circumstances that, in May of 2012, Siilasmaa became chairman of Nokia. In the second part of his book he describes how he transformed the company. He attributes this in large measure to being a paranoid optimist, one who combines “vigilance and a healthy dose of realistic fear with a positive, forward-looking outlook.” In practice, he writes, “paranoid optimism calls upon leaders to explore a full spectrum of scenarios: the best case, the worst case, and the options in between. By imagining the unthinkable, you won’t be surprised and can generate strategies that will help you avoid it. As a result, you can radiate an unwavering certainty of eventual victory because you have already imagined the worst that could happen and have constructed a response.”

And many unthinkables did happen along the way. The negotiations with Microsoft to sell Nokia’s “crown jewels” were fraught with unexpected hurdles. Siemens wanted to get rid of its share of Nokia Siemens Networks, which over the course of six years had posted a cumulative operating loss in the billions. Could Nokia buy Siemens out even though it didn’t have the funds? Was it wise to do so? What should the company do with its digital map business, HERE, and its patent portfolio? Should NSN merge with Alcatel-Lucent—and in three weeks, as the executive chairman of NSN suggested? (The unrealistic time frame was scrapped.) “Merging with Alcatel-Lucent would increase NSN’s market share in the global wireless infrastructure market from 18 percent to more than 30 percent, leapfrogging over Huawei and closing in on market leader Ericsson.”

Nokia today is indeed “a company reborn.” “Out of some 100,000 employees, fewer than 1 percent held a Nokia badge in 2012.” The route to its rebirth makes for fascinating reading.

Sunday, October 14, 2018

Iqbal, Volatility

Adam S. Iqbal is the global head of FX Exotics and Correlation at Goldman Sachs and was formerly an FX options trader and portfolio manager at Barclays and Pimco. He holds a Ph.D. in financial mathematics and financial economics.

In Volatility: Practical Options Theory (Wiley, 2018) Iqbal sets himself the goal of providing “an intuitive, as well as technical, understanding of both the basic and advanced ideas in options theory, with the aim of encouraging translational work from theory into practical application by market makers, portfolio managers, investment managers, risk managers, traders, and other market practitioners.” Only peripherally is he writing for the retail options trader with a mathematical bent. He draws his examples from the FX market.

The ability to delta hedge, Iqbal explains, means that “options are fundamentally not bets on direction, but are bets on volatility.” Moreover, the spot FX rate is a martingale, so it exhibits no mean reversion or autocorrelation. Price-based predictability therefore has no place in probability distributions used to model FX rates for the purpose of option pricing.

What matters, and what professionals who use and price options should understand before they embark on building models or, under time constraints, in lieu of relying on models, are the major principles underlying options—first- and second-order greeks as well as implied volatility and term structure (along with smile and skewness). Only after all of these concepts are described in detail does Iqbal introduce the Black-Scholes-Merton model.

Iqbal provides examples of how the trader might make decisions without invoking a full-fledged mathematical model. In the case of a risk reversal, for instance, “one way that traders use to circumvent disagreements over volatility references is to trade a contract known as a risk reversal by smile vega. The idea here is that, since the seller of the risk reversal believes in lower volatility references, if she agrees to trade at the higher volatility references, she can sell a higher notional of the put than she purchases of the call.”

Or take the case in which a normal distribution is priced into options but market participants begin to realize that the actual distribution is leptokurtic, with a higher peak and fatter tales. The peak “means that spot is more likely to remain in the center of the distribution than is currently priced. This means that they sell ATM straddles to profit from the additional probability that we observe only very small moves. Second, they realize that spot is also more likely to exhibit a very large positive or negative return than is priced. They therefore look to purchase OTM strangles. That is, market participants buy the butterfly. … [T]he more kurtosis there is in the spot PDF, the higher the fair price should be for the butterfly.”

Wednesday, October 10, 2018

Hoffman & Yeh, Blitzscaling

In my wildest fantasies I never envisage creating the next Amazon or Facebook. But I’m intrigued by the people who set out to do just that, who they are and how they do it. Blitzscaling: The Lightning-Fast Path to Building Multibillion-Dollar Scaleups by Reid Hoffman and Chris Yeh (Currency / Crown, 2018) addresses the second question. And the answer is not for the faint of heart.

Blitzscaling is “prioritizing speed over efficiency in the face of uncertainty.” It can be compared to three other forms of rapid growth: classic start-up growth, classic scale-up growth, and fastscaling. Start-up growth prioritizes efficiency in the face of uncertainty (e.g., does your product satisfy a strong market demand?). Scale-up growth focuses on growing efficiently once the company has some certainty about the environment. Fastscaling, where you sacrifice efficiency for the sake of increasing growth, takes place in an environment of certainty and “is a good strategy for gaining market share or trying to achieve revenue milestones.”

And then there’s blitzscaling, which “combines the gut-wrenching uncertainty of start-up growth with the potential for a much bigger, more embarrassing, more consequential failure.” It’s hard to raise capital to blitzscale and, “to make matters worse, you usually need more money to blitzscale than to fastscale, because you have to keep enough capital in reserve to recover from the many mistakes you’re likely to make along the way.”

Blitzscaling is most applicable to high tech, but its techniques can benefit a range of industries. Two examples are the Spanish clothing retailer Zara and the shale oil company Chesapeake Energy.

This book grew out of a course that authors Reid Hoffman, the founder of LinkedIn and currently a partner at the venture capital firm Greylock Partners, and Chris Yeh, a writer and entrepreneur, co-taught at Stanford in the fall of 2015. Perhaps because of this, the authors not only explain the many intricacies and manifestations of blitzscaling but also address how to blitzscale responsibly and build companies that improve society.

Blitzscaling is about as fast-paced a book as its subject matter. It is packed with sophisticated business advice and useful examples of success and failure. Entrepreneurs and would-be entrepreneurs as well as investors in break-through companies will learn a tremendous amount from reading it. They may even decide to take up the book’s final challenge: “Race you to the future.”

Sunday, October 7, 2018

Tulchinsky, The UnRules

In some ways Igor Tulchinsky has written an “un-book,” and it’s undoubtedly the better for it. The UnRules: Man, Machines and the Quest to Master Markets (Wiley, 2018) is a short book, coming in at about 150 pages. As Tulchinsky explains in the preface, he is a man of few words. As it is, even to get to 150 pages, he blends memoir, the history of finance and mathematics, sometimes arcane examples, and quantitative analysis. But the result is a captivating personal account of what it takes for an immigrant to succeed in the world of quantitative finance and how data analytics are changing our future, and not only our financial future.

Tulchinsky is the founder, chairman, and CEO of WorldQuant, a global quantitative investment management firm. He is also the founder of WorldQuant Foundation and WorldQuant University, which offers a tuition-free two-year online master’s degree program in financial engineering and a free eight-week module on data science.

The UnRule, which Tulchinsky admits is loosely related to the liar’s paradox (loosely because it is an empirical rule), is that “All theories and all methods have flaws. Nothing can be proved with absolute certainty, but anything may be disproved, and nothing that can be articulated can be perfect.”

This UnRule informs his investing philosophy: create many competing points of view or, more precisely formulated in the case of his investment firm, alphas. In ten years WorldQuant went from 19 alphas to 10 million! “Today a typical portfolio may contain tens of thousands of alphas; the largest may contain 100,000. To our portfolio strategists, individual alphas, which may have vectors of hundreds or thousands of securities, remain black boxes. The algorithms, logic, and intellectual property remain with the researchers; the strategists know individual alphas only as mathematical expressions of a market signal. … [A] portfolio is all math.”

Readers who are looking for the mathematical secret sauce will be disappointed. But those in search of the qualities necessary for a person to thrive in today’s financial markets will be richly rewarded.

Wednesday, October 3, 2018

Belsky, The Messy Middle

We’ve all been there. We start a project with great enthusiasm. Then, as we proceed, the goal seems farther and farther away. We have self-doubts, we are mired in the mundane, we are on a roller coaster of successes and failures. The journey to make something great is definitely not linear.

In The Messy Middle: Finding your way through the hardest and most crucial part of any bold venture (Portfolio/Penguin, 2018) Scott Belsky, an entrepreneur and venture investor who is now chief product officer at Adobe, explores the ups and downs between a project launch and its (sometimes) successful conclusion.

“The middle,” he writes, “makes and breaks you, and ending up on the right side of this line depends on how you manage everything in between. It requires immense perseverance, self-awareness, craftsmanship, and strategy. It also requires luck, harvested whenever you encounter it.”

Belsky draws on his experience with Behance, his first company, which he founded in 2006 and sold to Adobe in 2012. He gives advice in two- or three-page bites. Among his words of wisdom: attempt a new perspective of it before you quit it; just stay alive long enough to become an expert; moving fast is great, so long as you slow down at every turn; too much scrutiny creates flaws; data is only as good as its source, and doesn’t replace intuition; the science of business is scaling, the art of business is the things that don’t.

There’s a lot of sound advice in this book. And since it’s laid out like a huge smorgasbord, you can read it that way as well, picking and choosing your way through it. And you can go back for seconds when you’re at a different stage of your endeavor.