Archive for October 6th, 2008
The End of a Disastrous September
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.
The Role for Survivalists and Depressives in Uncertainty Management
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.
Be Careful What You Wish For!
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.)
Planes, Trains, and Automobiles and Banks and Farms and States…
…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.
