Tuesday, April 30, 2019

Pieri, How We Make Stuff Now

Jules Pieri, the cofounder and CEO of The Grommet, a product launch platform, has written an advice manual for Maker-entrepreneurs, How We Make Stuff Now: Turn Ideas into Products That Build Successful Businesses (McGraw-Hill, 2019). This book should be read by two sorts of people: those who want to become Maker-entrepreneurs and those who love gadgets. I most definitely do not fall into the first category, but I found the case studies in this book fascinating. It’s amazing how many “great idea” products exist. I have no idea whether most of the products profiled here actually work (I looked at Amazon reviews for a few of them and found a lot of dissatisfied customers), but they were intriguing nonetheless.

For those who have a product they’d like to bring to market, Pieri’s book seems incredibly useful. She covers everything from design to funding, manufacturing to packaging, logistics to inventory management. By the way, as far as retail distribution outlets go, Pieri warns Makers to “be very careful about Amazon.” Why? You may never see much volume (Amazon is a site for commodity shopping, serving up the products people are searching for—and, by definition, they are not searching for unknown products), you give it your data, you will expose yourself to counterfeiters and copycats (among whom might be Amazon itself, which uses its data to direct its private label business), you give Amazon control over your pricing, and you have to deal with Amazon chargebacks.

How We Make Stuff Now is both inspiring and daunting. I tip my hat to all those Makers who have gone from idea to successful business. It’s no mean feat.

Sunday, April 28, 2019

Griffiths, The Creative Thinking Handbook

The Creative Thinking Handbook: Your Step-by-Step Guide to Problem Solving in Business by Chris Griffiths with Melina Costi (Kogan Page, 2019) starts with the bold statement that knowledge is no longer power. So much for you, Francis Bacon (or perhaps Thomas Hobbes) and, much earlier, Imam Ali. Creativity is the new power. The author defines creativity as “the incubator and cultivator of new ideas, which are born from existing knowledge and combined to form a new neural pathway in the brain, leading to a personal original thought.”

Griffiths’ book is divided into three parts: common thinking errors, finding solutions, and “the end of the beginning.”

Common thinking errors are selective thinking, reactive thinking, and assumptive thinking. These are more or less self-explanatory.

The heart of the book is the second part, where the author introduces his Solution Finder. It is based on four simple steps: understanding (define the challenge), ideation (generate ideas), analysis (evaluate ideas), and direction (implement the solution).

Let’s look briefly at ways of generating ideas. (Griffiths focuses on group settings, but with some modifications these methods can be applied to individual idea generation as well.) First, we have the classic rules for brainstorming: go for quantity, welcome wild and unusual ideas, postpone judgment, and combine and build on ideas. Then there is the ideation toolkit, whose tools include the reverse brainstorm canvas, metaphoric thinking canvas, and combinational creativity canvas. With reverse brainstorming, you state the reverse of your problem or challenge, brainstorm ideas to solve the reversed problem, and flip your reversed solutions. In the metaphoric thinking model, you reframe the problem using a metaphor (e.g., “I want more customers” becomes “How to catch a fish”), solve the metaphor (e.g., use correct bait, watch fishing shows on TV), and then map each key idea that you generated to solve the metaphor back to the original problem. The last model, the combinational, starts with sensible ideas, moves on to non-sensible ideas, and then tries to mix and match the sensible and the non-sensible to produce “ideas that are new, functional and unexpected.”

Of course, creative problem-solving endeavors are useless or worse if there is no follow-through. “Persistence is the fuel needed to build upon your best ideas and navigate the highs and lows that accompany implementation. Welcome to the unglamorous side of the creative process!”

Thursday, April 25, 2019

Murphy, Way of the Trader

It’s been a while since a mainstream publisher released a book on trading, especially trading with a human face. Ian Murphy’s Way of the Trader: A Complete Guide to the Art of Financial Trading (Harriman House, 2019) is a welcome addition to the literature. Not only does it offer sound advice, but it does so in a way that does credit to the Irish tradition of great storytelling.

As an active member of SpikeTrade.com, a group of traders led by Alexander Elder and Kerry Lovvorn, Murphy reprises some of the themes in Elder’s works. One is the critical importance of keeping good records. For instance, in delineating some of the differences between traders and gamblers, Murphy writes: “Honest and accurate records are what separate trading from gambling. The floor of a bookmaker’s office is littered with crumpled papers, each one cast aside by an unlucky punter. Every piece of paper is a written record of a financial transaction. This carpet of losses is conveniently trampled underfoot, allowing the customers to ignore the reality of their situation. But the bookmaker doesn’t throw away his records. That in itself speaks volumes.”

The book’s chapter titles show its breadth of coverage: “Is Trading a Job or a Business?,” “A Trader and The Market,” “The Preservation of Capital,” “Keeping It Simple,” “Trend Following, Swing Trading and Day Trading,” “The Attributes Which Support a Successful Trader,” “The Path of a Successful Trader’s Career,” “The Psychological Tools of a Successful Trader,” “A Look at the Records a Trader Should Keep,” “A Comprehensive Pre-Trading Checklist,” “Selecting Which Stocks to Trade Using Filters,” “An Introduction to Technical Indicators and Orders,” and, finally, three trading strategies: “The Tidal Strategy,” “The Wilde Strategy,” and “The Help-Up Strategy.”

Among the book’s nuggets of wisdom, here are a random few.

“Some people believe 10,000 hours spent on a topic makes them an expert. That’s not the case in the market. Sooner or later, ‘trading experts’ become complacent and predictable, and that’s when the market snaps them back to reality. The renowned Japanese teacher Shunryu Suzuki-Roshi tells us: ‘In the beginner’s mind there are many possibilities. In the expert’s mind, there are few.’ Anything is possible in the market and every day is essentially the first day—therefore a true market expert always sees themselves as a beginner.” This advice is akin to Jeff Bezos’s passion that Amazon remain a “day one” company.

“Trying to trade someone else’s ideas is like trying to comb our hair while looking at their reflection. Ultimately, we are our own opponent when we trade, so mimicking the actions of others is pointless.”

“For many of us, our smartphone has become a digital pacifier which we instinctively reach for when an anxious thought arises. We don’t need to know every market event as it happens, just as we don’t need to constantly monitor our pulse to know we are still alive. If we’re continually checking the market it can feel like we’re truly on top of things, but we’re just subjecting ourselves to a deluge of distraction and frustration. Considering the temperament of the market, do we really want her whispering in our ear 24/7? Traders need to be smarter than their phone and put a limit on their market interaction.”

Murphy’s book has value both for the beginning trader and the more experienced trader with a day-one mindset. As a bonus, it’s fun to read.

Tuesday, April 23, 2019

Desai, How Finance Works

If you are a burgeoning equity analyst or a self-directed fundamental investor, you will be confronted with reams of corporate financial data, from EBITDA to net present value. Even if you know how to calculate financial formulas, do you know what they are telling you? Can you put them into an appropriate context? Can you use them to make informed decisions?

How Finance Works: The HBR Guide to Thinking Smart about the Numbers (Harvard Business Review Press, 2019) emerged from Mihir A. Desai’s efforts to teach finance to MBA students, law students, executives, and undergraduates at Harvard. It is itself a wonderfully smart introduction to finance, with the only two prerequisites to the book being curiosity and perseverance. It comes complete with tables, figures, and graphs. It also features boxed reflections and analyses from the author and real-world perspectives from two CFOs, two investors, and an equity research analyst. And, of course, there are lots of relevant case studies.

In six chapters Desai covers financial analysis, the finance perspective, the financial ecosystem, creating and measuring value, the art and science of valuation, and capital allocation. At the end of each chapter is a 10-question quiz, with answers at the back of the book.

Any active investor who wants to do more than throw darts at a list of stocks or look at squiggles on stock price charts should read Desai’s book. It’s a gem.

Tuesday, April 16, 2019

Karlgaard, Late Bloomers

In a world that fixates on the achievements of the young, we tend to push our kids too hard and to write off anyone who hasn’t hit his or her stride by some fixed age. To help counter this trend, Rich Karlgaard, the publisher of Forbes magazine who himself took quite a while to find his calling, has written Late Bloomers: The Power of Patience in a World Obsessed with Early Achievement (Currency/Penguin Random House).

The book is part critique, part inspiring stories. Karlgaard takes aim at the ubiquitous tests of intellectual potential, where “success today is represented by the high-IQ, high-SAT wunderkind test takers beloved of Bill Gates and other IQ farms like Goldman Sachs, Google, and Amazon.” Admittedly, high test scores often appear to be predictive of worldly success. After all, Bill Gates, Larry Page, Sergey Brin, Jeff Bezos, Mark Zuckerberg, and Steve Wozniak all scored 800 on the math SAT. But, Karlgaard argues, “this pressure for high test scores and early achievement has created its own perversities” and cites the case of Elizabeth Holmes of Theranos. Moreover, it tends to discard as less talented or lazy those young people who have abilities that can’t be measured by a standardized test.

Although Karlgaard focuses on late bloomers, much of his work has universal applicability. He describes the sometimes destructive power of social norms, the pitfalls of perseverance (sometimes quitting is the right decision), and the positive potential of self-doubt (turn it into information and motivation).

Karlgaard concludes that “blooming has no deadline. Our future story is written in pencil, not carved in stone. … Research supports the idea that as we lose some capabilities, we gain others that far outweigh what is lost. Therefore the question we should be asking ourselves is not, what can we accomplish in spite of our nature and life experiences? Instead it should be, what can we accomplish because of them?”

Wednesday, April 10, 2019

Stepek, The Sceptical Investor

John Stepek, executive editor of the UK’s best-selling financial magazine MoneyWeek, has written an astute book for retail investors. The Sceptical Investor: How Contrarians Bet Against the Market and Win—And You Can Too (Harriman House, 2019) suggests that the investor start with the admittedly incorrect premise that the financial markets are always wrong or, less baldly stated, that there are commonly pockets of inefficiency that can be exploited. It’s worth spotting and exploiting contrarian opportunities because, as George Soros wrote, “generally speaking, the more an investment thesis is at odds with the generally prevailing view, the greater the financial rewards one can reap if it turns out to be correct.”

Stepek does not recommend always doing the opposite of what the market is doing since the market often gets things right, which is why he prefers the term “skeptical” to “contrarian.” Skeptical investors consistently question assumptions, both the market’s and their own. They do the difficult work required to “identify when markets are overreacting to the point where the reward on offer for betting on the gap closing between market perception and reality more than justifies the risk of being wrong.”

Those who want to devote at least part of their portfolio to active, skeptical investing must not only resist the urge to run with the crowd but must also “avoid falling prey to the tripwires in [their] own mind[s].” Stepek summarizes some of the key findings of behavioral finance and suggests ways of keeping subversive emotions in check, such as thinking about the downside before committing to an investment, making as many decisions as possible in advance, and keeping a detailed investment journal.

The book has chapters on how to use the media (and not only the magazine cover indicator), the importance of intellectual humility, how to spot bubbles and what to do about them, and the dangerous temptation of making better forecasts. Re the last point, Stepek notes that you want to find situations where you don’t have to predict the future because the downside is pretty much already in the price.

The skeptical investor, Stepek warns, shouldn’t rush to catch falling knives. As he writes, “if you pride yourself on being a sceptical investor, then you should be extra sceptical of any company whose share price has just slid off the edge of a cliff.” He offers practical tips on how not to get suckered into buying stocks that will only continue to go down.

The book concludes with a way out for readers who decide that skeptical investing is more trouble than it’s worth: find a good contrarian fund manager.

Thursday, April 4, 2019

Bond, T. Rowe Price

Cornelius C. Bond spent many years at T. Rowe Price, first as a technology analyst and eventually as president of the T. Rowe Price Growth Stock Fund. For almost ten years he worked directly with T. Rowe Price himself. In writing T. Rowe Price: The Man, the Company, and the Investment Philosophy (Wiley, 2019) he brought to bear the experience of an insider.

I have no space here to summarize Price’s life or the trajectory of his firm. Instead, I will touch on the firm’s fragile beginnings and on Price’s investing philosophy.

In 1937 Price resigned from Mackubin, Legg & Co. (which later evolved into Legg Mason), where he had spent 12 years, because, he wrote, his goals were not in sync with those of the firm. The fact is that his investment management department was losing money. “Because of this (and perhaps Rowe’s personal ‘mannerisms’) he was not being given the financial and personnel support he had requested for his new department.” Moreover, his father-in-law had just died, leaving Price’s wife $130,000 ($2.22 million in 2018 dollars). “Here, suddenly, were the funds that could support the startup of his own company. His wife’s inheritance would allow him to go without a salary during the firm’s early years, as well as funding most of its early losses.” Indeed, the business was slow to take off. Revenues for 1938 were only $6,090, and by December 3, 1941, the firm had a mere $11.07 in the bank. It took a lot of fortitude to keep going.

In the early years of the firm, especially during the war, the market did not reward growth stocks. But Price remained convinced that growth stocks were the way to go. He defined a growth stock as “a share in a business enterprise which has demonstrated long-term growth of earnings, reaching a new high level per share at the peak of each succeeding business cycle, and which gives indications of reaching new high earnings at the peaks of future business cycles.”

Eventually Price’s growth strategy paid off handsomely. From its inauspicious beginning in 1934 to the end of 1972, when Price retired, assuming the reinvestment of all dividends, his model portfolio of growth stocks rose more than 2,600 percent in value. The Dow was up 600 percent over the same time frame.

Bond’s book helps flesh out our understanding of the investment management business in the twentieth century. It is a welcome addition to the literature.

Tuesday, April 2, 2019

Buckingham & Goodall, Nine Lies About Work

Okay, let’s cut to the chase. What are the nine lies about work that Marcus Buckingham and Ashley Goodall identify in their book, subtitled A Freethinking Leader’s Guide to the Real World (Harvard Business Review Press, 2019)? They are: (1) people care which company they work for, (2) the best plan wins, (3) the best companies cascade goals, (4) the best people are well-rounded, (5) people need feedback, (6) people can reliably rate other people, (7) people have potential, (8) work-life balance matters most, and (9) leadership is a thing.

On the surface, many of these lies seem like truths. In this brief post I can’t, of course, explain what’s wrong with these statements. That’s what the book is for. But let’s look at a single point and see how the authors expose some of the problems with it. I’ve opted to go with #5: people need feedback.

One of the most extreme examples of a company that seemingly lives and dies by feedback is Bridgewater Associates, the world’s largest hedge fund. At Bridgewater, “employees are expected to rate their peers after calls, meetings, and daily interactions, and all the resultant ratings are analyzed (by the team that created IBM’s Watson, no less), permanently stored, and then displayed on a card that each employee carries with him or her at all times. Bridgewater calls this your ‘baseball card,’ and its intent is to hold you accountable for knowing ‘who you really are,’ and to give everyone else a radically transparent view of what you truly bring to Bridgewater—one of the metrics it displays is your ‘believability score.’” But, despite the millions of data points collected, the authors maintain, “Bridgewater still has no reliable measure of each person’s performance.” Of course, the obvious retort is that Bridgewater has been inordinately successful and that, even though its early turnover rate is high (30% leave in the first 18 months), those who stay must be contributing to the hedge fund’s excellent returns. Still, Bridgewater’s radical transparency is not a model that many firms have rushed to emulate.

The truth, the authors argue, is that people need attention. Even negative feedback is 40 times more effective than ignoring people. “For those employees whose leaders’ attention was focused on fixing their shortcomings, the ratio of engaged to disengaged was two to one.” But “for those employees given mainly positive attention—that is, attention to what they did best, and what was working most powerfully for them—the ratio of engaged to disengaged rose to sixty to one.” Of course, team leaders can’t overlook things their employees do wrong and focus only on the positive, but research indicates a ratio of three to five moments of appreciative feedback to one piece of negative feedback is probably about the right balance.

Nine Lies About Work is a thought-provoking book, well written and well argued. It might just shake up how businesses operate in the future.