Investing Journal

Super Crunchers: Why Thinking-By-Numbers Is the New Way to be Smart by Ian Ayres

I recently finished the unabridged audio CD of this book.  Despite a few college courses, I know little about statistics, and this book helped me think about how I should apply it more in my career.  This book doesn't need to be this long, and it doesn't really have any deep discussions, or how-to ideas--it's more like a motivational book for using statistics to make decisions.  Personally, I think that's what a lot of managers need to read.

I enjoyed learning about how law experts and doctors should be able to use statistics more in their professions, and it made me think of a way I should use them in mine.  The book tells how regression models were set up to predict wine based on rain and temperature, and decisions of the Supreme Court by knowing only a few facts about the case.  The models do way better than the experts in the area.  I hope to be able to encourage my team to use a bug priority calculator rather than the current gut-based approach.

In general, I enjoyed it, but you may just get good value out of it by pondering the following summary from an Amazon reviewer.  It doesn’t do it justice, but it’s a basic outline of the book:

(1) Mathematical regression models generated from large datasets often generate better predictions than human experts, and they provide supporting information on the predictive weight and reliability of each explanatory variable.
(2) Well-crafted experiments using randomized trials and control groups provide good market research and behavioral analysis results.
(3) Technological advances - the Internet, massive data storage devices, rapid computation, broadband telecommunication - are making it possible to share more sources of information and create ever-larger databases for analysis.
(4) Today's companies engage in multiple forms of market research by creating and using large databases and large-scale randomized trials.
(5) Many phenomena conform to normal distributions in which 95% of the population will be found within two standard deviations of the mean, the 5% balance generally divided evenly in the two tails.

Notice that over the last year, MSFT and the S&P 500 have matched each other almost exactly.  There are few occasions where the two have been much out of sync.  Even backing out to look at a 4 year view, they stay remarkably in tandem.

Now there’s a 14% disconnect between the two.  I don’t know if it’s institutions thinking there’s going to be a Win 7 bounce or what.  But there’s no news.  Anyway, I encouraged some of my friends to sell.

The Return of Depression Era Economics and the Crisis of 2008 – Paul Krugman

I listened to the unabridged audio CD of this book.  It is very well written and gives the reader a good understanding of recent financial crises.  Japan, Thailand, and Russia are covered in here, with good explanations about what causes a financial crisis.  I think the historical background was the most interesting thing in this book.  It helped me put pieces together that made certain economic ideas make more sense.

One of the greatest parts of the book for me was his explanation of how a baby-sitting coop “economy” can have a recession.  If some of the coupons are lost of otherwise go out of circulation, it will encourage hoarding of the fewer remaining coupons.  There’s no fundamental problem with the people in the economy, it’s just a technical problem causing the recession.  Increasing the circulation of coupons is a simple, technical fix to solve the problem.  He seems to suggest that economists can frequently find the tools to make problems less severe.

He talked about how developing countries, during a financial crisis need to quickly devalue their currency, and make sure it gives the impression that it’s big enough so that there won’t be more inflation.  It should make their exports more attractive, thus improving their economy.

In a few places, I wasn’t sure what he was getting at, but it’s a pretty deep book, so I’d like to read it again to see what other insights I can gain.  I wish he covered recommendations and forecasts, but it was fairly light on the current crisis.  (Or maybe that’s because I’ve already done so much reading on the crisis that it offered nothing new).

The Snowball: Warren Buffett and the Business of Life by Alice Schroeder

I listened to the 29 CD-long unabridged version of this book, over the course of a couple months.  The book is very well written, and interesting all the way through.  Since it is verbose, and very clearly read, I found myself listening at 1.4X speed to get through it much faster.

I don’t have a lot of commentary on the book, but I appreciated learning about Buffett’s life, from how he put pinball machines in barber shops, to selling newspapers, to being with multiple women, and then giving all his money away.  It’s interesting to realize that he made so much money by simply being a hard-core saver, and by siphoning money off of his business partners, and by buying assets for ridiculously cheap.  He started investing reading the Moody’s manual, looking for OTC stocks that traded for less than book value.  He had to call up people to find shares in companies he liked, and then he would typically offer the value quoted in the manuals, even as he was trying to soak up all the shares he could find.  There was no real market, so it was hard to do.  He was the only investor who took interest in some companies, and they would tell him information, like “We’re going to issue a $50 dividend soon,” while the stock was trading at something like $35 a share.  The other way he got money was by taking a portion of the profits from people in his partnerships, just like hedge funds do today.  His streak was something like 35% a year for 15 years, without ever losing money.

It’s interesting to think about what type of value Buffett added to the world.  While an excellent teacher, I have to say, that his investing isn’t particularly the same as entrepreneurs like Ford, Walton, or Gates, who really innovated and improved the standard of living of the world.  From that perspective, his activities don’t particularly earn my respect, but I’m certainly happy to see him donating his wealth to charity rather than his children.

Stories like those of Rose Blumkin, who emigrated here and founded the Nebraska Furniture Mart really round out the book with amazing stories.

I’m certainly convinced of Buffett’s ability to manage money, and I think I’ll add to my BRK.B holding on any dips this summer.

Made To Stick: Why Some Ideas Survive, and Others Die – by Chip and Dan Heath

Made to Stick is a great book that explains what principles of stories and messages make them interesting and memorable.  The book is a great read, from beginning to end, certainly because it takes its own advice and keeps the reader engaged and interested throughout.  The online resources for the book are a great summary, but you should really take the time to read the whole thing.

There are six principles commonly found in sticky ideas:

• Simplicity – Don’t argue too many points.
• Unexpectedness – Generate curiosity and “gaps of knowledge.”
• Concreteness – Not “maximize shareholder value.”  Try Southwest’s “Low Cost Leader.”
• Credibility – The listener, experts, celebrities, and anti-experts (those hurt by something, like smokers).
• Emotions – People need to care.  Avoid statistics.
• Stories – People remember stories.

The book shares stories about Subway’s Jared ads, the “Don’t Mess with Texas” anti-littering campaign, and an effective teen-targeted anti-smoking campaign.  It sounds like a marking book, and in a sense it is.  We all need to market ourselves and our messages better, and this book will help you guide your messages in the right direction.  I’d write more about this great book, but just read the link above.

America’s Great Depression – Murray Rothbard

Note that you can get a pdf version of the book online at the mises website.

I finished the unabridged audio version of this book, and took notes so that I’d be able to do a better review.  A discussion on an internal (MS) mailing list introduced me to the book, and I disagreed with the person who recommended it, so I figured it’d teach me a thing or two.  The book has two parts.  The first several chapters teach about the way Austrian Economists view the business cycle, and the rest talks mostly about the measures Hoover took that worsened the depression.

Austrian Economists believe that recessions are created because governments allow too much credit expansion.  Rothbard believes that that’s what happened throughout the 1920s, and cites several government statistics proving this point.  It’s hard to digest statistics in an audio book, but it seemed credible.  What really confused me about this is that he suggested that if government weren’t expanding the credit available that there would be no boom and bust cycle.  He suggested that businessmen would be smart enough to weigh risks properly to identify the proper levels of investment required.  It’s pretty clear to me that periods of stability cause people to take excessive risks, and thus create cycles. 

I agree with Rothbard that the only way to prevent a recession is to slow down the boom, but Rothbard seems to think that we need to get rid of fractional reserve banking, and go back to the gold standard.  As an aside, what good is the gold standard if it didn’t stick the first time, why would it stick if we were to reinstate it again?  After all, the only reason to use the gold standard is for supposed safety from corruption.

The facts about what President Hoover did are a useful part of the book.  It’s often stated that FDR’s Keynesian policies took us out of the recession, and Hoover stood idly by.  Well Hoover was very active in various ways.  He encouraged companies to invest further, and instead of laying off, or decreasing wages, to sacrifice profit.  He enacted the Smoot-Hawley tariff, farm subsidies, and created agencies to maintain artificially high prices.  People lost confidence in the banking system, so they had banking holidays.  Actually, when FDR came into office, people were so worried about what he would do to the banks, the banking runs got worse.  People hoarded cash, and despite the efforts of the government, they couldn’t get people to spend.

For some reason Rothbard, and Austrian Economists, seem to think that credit should be deflated even after the depression started, since that’s what caused the depression to begin with.  Here’s a quote: “[FDR] should have deflated instead of inflated to increase confidence in gold, and also to speed the adjustments needed to end the depression.”  I can’t understand how any economist could think that in the middle of a recession, the country would need less credit, or would want a speeded up depression.  From what I can tell, Austrian Economists want the boom to be reverted immediately, with a sharp drop in investment and spending and credit.  They don’t seem to think this would have lasting negative effects.  Personally, I think they ignore psychology a little to much, and need to think about how important consumer confidence is in a developed society.

My 2009 commentary: The book is quite timely, as some people wonder if we’ll have another depression.  People who suggest that banks should fail, and only those strong enough to survive on their own should survive aren’t thinking this through.  Productivity creates wealth, and investment facilitates productivity.  That last thing the economy needs right now is for the financial system to go bankrupt just to prove a point and to have it rebuilt.  The struggle to rebuild it would certainly do much more damage than the minor troubles caused by propping it up.

I don’t know how much inflation it would take to have the government soak up all the bad debts banks have, but it seems like a small price to pay to keep the financial system from collapsing.  After all, it’s our money markets that got saved, not any CEOs...  Inflation is a tax on assets, and the newly printed money is going towards shoring up assets.  Seems like a fair trade off to me.  Besides, with so many deflationary pressures, this will just offset them.  But besides that, I think inflation would actually be beneficial for the housing market, and that’s our biggest concern right now.

My outlook?  Well, I have no insight into things like major banks failing, but Lehman failing was pretty catastrophic to credit markets, the LIBOR rate, etc.  I don’t think the government will let anything bigger than that fail, so I expect things to stabilize.  750 feels like a solid low for the S&P 500.

After hours of trying I finally got the Smile achievement in Geometry Wars 2.  There are 20 levels, and you have to run out of time on 2 and 4, and die on 11, 15, 17, 18, and 19.  That’s the easy part, living on all the others is the hard part.

I was surprised it took so long, but as I got thinking about it, since my chances of death on any given level are relatively high, the overall probability of getting the achievement is pretty low.  So I made a table out of it with some very vague probabilities of how likely it is to die on each level, and thus how likely it is to win.

This isn’t necessarily representative of my skill at the end, but it’s a decent average as I worked through it, and it’s mainly for illustrative purposes.  Despite the fact that you usually pass most of them, if you string enough maybes together, it becomes really hard.  It’d be kind of fun for the game to keep track of this for you.

Here’s a guide: