Spero Consulting

Archive for October 6th, 2008

One of America’s largest com­pa­nies had a dis­as­trous Sep­tem­ber, and it was touch-​and-​go there for awhile. A com­pany that some thought too big to fail, failed miserably. 

As we have all seen, when a gigan­tic com­pany on the coast suf­fers, even from self-​inflicted wounds, it can neg­a­tively affect all of us in the fly-​over.

There were clear warn­ing signs in August. In fact, we wrote about them, but it was too lit­tle, too late, and the metaphor­i­cal train wreck occurred.

Despite our near-​Libertarian stance on eco­nomic issues, we were pre­pared to call for gov­ern­ment inter­ven­tion. For­tu­nately, it never came to that.

Microsoft seems to have ditched the Jerry Sein­feld adver­tis­ing campaign.

We ini­tially wrote about Microsoft’s deci­sion to use the for­mer come­dian in Sein­feld, a Youth­ful 54.

After the first ad, we wrote, Sein­feld + Gates = Mac Sales, Or Maybe Not, where we began to sus­pect that Bill Gates had an ulte­rior motive and was more clever than the hir­ing of Sein­feld would indicate.

Until now, we have never men­tioned the sec­ond ad; it was just too weird and way too creepy and we were try­ing to repress it. Had we seen it twice we might have had night­mares about those two doing their nails in the older princess’s room.

We’re glad to see the “I’m a PC” com­mer­cials, and much pre­fer the mus­cu­lar, “tyranny of the masses” approach – where almost every­one in every field uses PCs (hope­fully, peer pres­sure may be enough to get the other 300 peo­ple to switch) – to two old men act­ing like teenage girls. Err, let’s hope they were acting.

In con­clu­sion, we say, good job Mr. Gates! The next time we buy a PC, we promise to also pur­chase your Win­dows software.

We think that the cur­rent tur­moil in the mar­kets pro­vides an atmos­phere for inde­pen­dent thinkers and adviser such as our­selves to gain some atten­tion (and more clients) by com­ment­ing on cur­rent issues and by offer­ing free and use­ful advice, espe­cially if said advice is dif­fi­cult to imple­ment with­out us. For that rea­son, we’re in the mid­dle of writ­ing a few longer posts about a vari­ety of top­ics related to the ongo­ing finan­cial crisis.

One of those unfin­ished posts, “Hedging the Pen­ny­wise and Pound-​Foolish Way,” deals with myopia and tunnel-​vision, and it is the impe­tus for this post. 

Here, we con­tem­plate a few types of per­son­al­i­ties that would be ben­e­fi­cial hires for finan­cial firms, but read­ily admit that it is highly unlikely that most firms could or would ever know­ingly employ such folks. Their cor­po­rate cul­tures, par­tic­u­larly their empha­sis on hope and conformity, eliminate such indi­vid­u­als from employ­ment con­sid­er­a­tion. So much for diver­sity we guess!

Among the group of per­son­al­i­ties that we have in mind are the sur­vival­ist and the depressive.

First, as reg­u­lar (and by this time, possibly even occa­sional) read­ers may know, we pre­fer “uncer­tainty man­age­ment” to “risk man­age­ment,” because that is the true nature of the task. One needs pro­tec­tion from unknown and/​or immea­sur­able bad things, too. The task is about loss pre­ven­tion not just the nar­rower ex ante mea­sur­able loss prevention. 

Above we high­lighted our broader empha­sis on uncer­tainty, rather than merely risk, because such con­sid­er­a­tion of extremely bad events tends to be the nature of both sur­vival­ists and depressives.

Between the two groups – we’ll ignore the depressed sur­vival­ist inter­sec­tion for a few para­graphs – it seems that sur­vival­ists spend more time devel­op­ing strate­gies and tac­tics to cope with the bad out­comes than they do fix­at­ing on their causes (although we’re sure that many have their favorite con­spir­acy the­o­ries, too). 

Con­versely, depres­sives seem to spend much more time con­tem­plat­ing all of the bad things that could hap­pen and all the ways that those events could arise; many have suf­fi­cient imag­i­na­tions to con­struct the nec­es­sary chain of events to arrive at, say, Armaged­don – both lit­er­ally and fig­u­ra­tively. In fact, that’s what tends to make them so depress­ing to be around, and it is also what makes them unlikely to pass a day-​long sequence of inter­views at an invest­ment com­mer­cial bank.) 

Unfor­tu­nately, they often spend so much time wal­low­ing in the despair of such losses that they don’t pos­sess the nec­es­sary cop­ing skills or the determination/​drive to pro­vide use­ful solu­tions. That, of course, is what sur­vival­ists spe­cial­ize in: being pre­pared for the worst.

Now, we con­jec­ture that few sur­vival­ists would view most money cen­ter loca­tions as the opti­mal high ground on which to camp when West­ern Civ­i­liza­tion falls, espe­cially if said money cen­ter were, say, a small island of sev­eral mil­lion peo­ple with extremely-​limited, nat­ural, non-​cannibalistic food sources and very restric­tive gun con­trol to boot.

Of the cognoscenti, we’d view one of our favorites, Nas­sim Nicholas Taleb, the author of Fooled By Ran­dom­ness, as the per­son whose trad­ing strate­gies most closely embrace the the inter­sec­tion of the survivalist/​depressive men­tal­ity in markets. (He seems to have too much fun justly annoy­ing fools to be either depressed or overly-​fixated on survival.)

Based upon his reported trad­ing success, it would seem that at least on a small scale, analogs to our rec­om­men­da­tion can be prof­itable. As we under­stand it, Mr. Taleb would often buy deep-​out-​of-​the-​money puts fig­ur­ing that in the long run, he would gain out­sized returns because (1) oth­ers would under-​estimate the prob­a­bil­ity of bad out­comes, and (2) he had an exact strat­egy and tac­tics in place to ben­e­fit from such occurrences. Ergo, the suc­cess­ful, depressive-​survivalist trade.

However, as Mr. Taleb repeat­edly men­tions, such beliefs (and the strate­gies and actions that they induce) require a sub­stan­tial degree of dis­ci­pline to implement. Successful bets are few and far between, and it takes much sta­mina, patience, and deter­mi­na­tion to wait on the occa­sional win. Moreover, it is psy­cho­log­i­cally painful when friends, neigh­bors, and for­mer col­leagues are mak­ing imme­di­ate money on seem­ingly sense­less and ran­dom trades and you’re wait for that extreme event.) We’d imag­ine that the level of frus­tra­tion felt and the dis­ci­pline required to cope with it, aren’t much dif­fer­ent than what’s needed to seat next to a sur­vival­ist or depres­sive on the trad­ing floor.

Finally, we’d be remiss not to men­tion our other favorite author in the field, Richard Book­staber, author of A Demon of Our Own Design. In that excel­lent book, he admon­ishes traders and risk man­agers to keep their strate­gies sim­ple and robust. He points to the cock­roach as an exem­plary evo­lu­tion­ary sur­vivor with a very sim­ple phys­i­o­log­i­cal structure. 

We dis­agree with him slightly, because our tiny insec­toid brain is not con­cerned with the entire sur­vival of the species– but only with our own per­sonal via­bil­ity. So, Mr. Bookstaber’s long-​run is likely quite a bit longer than we (and most oth­ers) care about. How­ever, he does describe the prob­lems and costs of com­plex­ity; thus, the title of the book. We whole­heart­edly agree with him on those issues, e.g., no one under­stands the whole sys­tem; such things tend to be jerry-​rigged à la Rube Gold­berg; and the (initial) failure of a safety sys­tem can destroy the entire entity, etc. Some of those things are very scary when they hap­pen in air­planes and nuclear plants.

In that regard, our rec­om­men­da­tions to hire for per­son­al­ity might not seem that out­ra­geous: it is sim­ple and robust. Perhaps a few knowl­edge­able and imag­i­na­tive depres­sives and sur­vival­ists are worth an army of lemming-​like quants attempt­ing to “over-​calculate” the unknowable?

Look for our upcom­ing book series: Essen­tial Risk Man­age­ment I: Embrace Your Inner Sur­vival­ist and Essen­tial Risk Man­age­ment II: Embrace Your Inner Depres­sive. No, not really.

Wealth trans­fer or wealth destruction?

It’s Not Look­ing Good.

We’re try­ing to care­fully avoid our own Nar­ra­tive Fal­lacy, but it is very dif­fi­cult to avoid the temp­ta­tion. Instead, we’ll cop to the lesser plea: rebuk­ing con­ven­tional wisdom’s own fal­lacy that we heard for the past few weeks.

Last Mon­day evening, we heard from any num­ber of sources that stock prices fell because the U.S. House of Rep­re­sen­ta­tives failed to pass the first finan­cial bailout bill. The S&P 500 index dropped almost 9% that day.

Last Wednes­day the U.S. Sen­ate passed its ver­sion of the bailout, and on Thursday, it became exceed­ingly more likely that the House would con­sider and then pass the revised bill. Of course, that hap­pened on Fri­day afternoon.

As of mid-​day Mon­day, Octo­ber 6, the S&P 500 is down about 11% since Wednesday’s close, which was already down a few per­cent from last Monday’s close. The S&P has fallen more than 20% since the bailout was first pro­posed a few weeks ago. On an annu­al­ized basis, that would lead to large losses for many of us. Think how much the mar­ket would have lost if short-​selling were per­mit­ted (he writes sar­cas­ti­cally and mischieviously).

Despite the major­ity of our blog posts dur­ing the past two weeks, we do admit that there is more hap­pen­ing in the world than just the bailout; so, our forth­com­ing qual­i­fi­ca­tion is enor­mous, BUT, all else equal, other folks seem to be join­ing us in our con­vic­tion that the bailout will not work. (Or maybe they’re just real­iz­ing one of those two will be the next President.)

…are some of the dif­fer­ent indus­tries and enti­ties to request and receive large fed­eral sub­si­dies in recent times. Talk about cor­po­rate welfare!

Did the reader hap­pen to notice that when the government’s bailout of the finan­cial indus­try was (jus­ti­fi­ably) stalling early last week, its bailout of the auto indus­try was mov­ing ahead as effort­lessly as a lux­u­ri­ous Ger­man or Japan­ese car? As we recall, the auto pack­age included $25 bil­lion in guar­an­teed, low-​interest loans? 

The stated pur­pose of these loans is to pro­vide domes­tic firms with another oppor­tu­nity to retool to pro­duce more fuel effi­cient mod­els. Now, our mem­ory isn’t what it was, but isn’t that what GM and Ford and Chrysler were sup­posed to do since some­time before Jimmy Carter became Pres­i­dent in 1977?

Hey, Mr. Bush! We have a Sub­ur­ban. We’d like to get some­thing a lit­tle more fuel effi­cient. Where do we sign up? 

Oh! You say that we don’t? That we, and our chil­dren, and our children’s chil­dren get to pay for it, instead? Not very com­pas­sion­ate or con­ser­v­a­tive, sir.

So, $25 bil­lion for the automak­ers; depend­ing upon the accounting, possibly $700 bil­lion or more for the finan­cial firms; and now Cal­i­for­nia is request­ing a mere $7 bil­lion. What a bar­gain! But why does a state need the money?

There’s a chance, you see, that Cal­i­for­nia won’t be able to pay its bills some­time around elec­tion day. It claims that it has the assets but not the cash flow. Unfortunately, 30 other states may face sim­i­lar prob­lems? Hmm. Is it pos­si­ble that they overspent?

Dear reader, do you really believe that no one else will seek such bailouts? Did you hit your head over the weekend?

Heroin? crack? meth? No, the most addic­tive drug seems to be spend­ing other people’s money, espe­cially dur­ing elec­tion years, but that seems to be less about drugs and more about prostitution.