Book Review: Fooled By Randomness

My anti-library has grown (and is growing) at a substantial rate. I was fortunate to ignore my usual forced FIFO indexing system and pick up Taleb's first work as soon as it arrived on my doorstep. A few years ago I read  The Black Swan and related many of Taleb's thoughts. He is an individual and deeply reflective thinker. I finally got around to ordering Fooled By Randomness and was not disappointed. This truly is a seminal work. One, I believe, will lead to Taleb winning the Nobel Prize someday. It would be wise to review the notes from this work the next time hubris in thinking sets it. The highlights:

Nero's objective is not to maximize his profits, so much as it is to avoid having this entertaining machine called trading taken away from him. Blowing up would mean returning to the tedium of the university or the nontrading life. Every time his risks increase, he conjures up the tinge of the quiet hallway at the university, the long mornings at his desk spent in revising a paper, kept awake by bad coffee.

Trading forces someone to think hard. Those who merely work hard generally lose their focus and intellectual energy. In addition, they end up drowning in randomness; work ethics, Nero believes, draw people to focus on noise than the signal. 

"never ask a man if he is from Sparta: If he were, he would have let you know such an important fact - and if he were not, you could hurt his feelings"

One of the attractive aspects of my profession as a quantitative option trader is that I have close to 95% of my day free to think, read, and research (or "reflect" in the gym, on ski slopes, or, more effectively, on a park bench). I also had the privilege of frequently "working" from my well-equipped attic.

A mistake is not something to be determined after the fact, but in the light of the information until that point. A more vicious effect of such hindsight bias is that those who are very good at predicting the past will think of themselves good at predicting the future, and feel confident about their ability to do so. 

The argument in favor of "new things" and even more "new new things" goes as follows: Look at the dramatic changes that have been brought about by the arrival of new technologies, such as the automobile, the airplane, the telephone, and the PC. Middlebrow reference would lead one to believe that all new technologies and inventions would likewise revolutionize our lives. But the answer is not so obvious: Here we only see and count the winners, to the exclusion of the losers. 

Finally, I reckon that I am not immune to such an emotional defect. But I deal with it by having no access to information, except in rare circumstances. Again, I prefer to read poetry. If an event is important enough, it will find its way to my ears.

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the more information you have, the more you are confident about the outcome. Now the problem: By how much? 

So why do we consider the worst case that took place in our own past as the worst possible case? If the past, by bringing surprises, did not resemble the past previous to it, then why should our future resemble our current past? 

whenever I hear work ethics I interpret inefficient mediocrity 

The major problem with inference in general is that those whose profession is to derive conclusions from data often fall into the trap faster and more confidently than others. The more data we have, the more likely we are to drown in it.

As we are cut to live in very small communities, it is difficult to assess our situation outside of the narrowly defined geographic confines of our habitat - Here I will make note: I recently read an interview with Andreesen where he discussed the adaptability of ideas that are produced in silicon valley - tech entrepreneurs there are caught in a bubble where they have no idea what will work in the rest of the country. On the flip side of that, Schultz was enamored with Italian coffee shops and thought they could be very successful in his adopted hometown of Seattle (also FP) some place he knew very well. 

Aside from the misperception of one's performance, there is a social treadmill effect: You get rich, move to rich neighborhoods, then become poor again.

The mistake of ignoring survivorship bias is chronic, even among professionals. How? Because we are trained to take advantage of the information that is lying in front of our eyes, ignoring the information that we do not see.

Remember that nobody accepts randomness in his own success, only his failure

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The exact same task of looking for the survivor within the set of rules that can possibly work. I am fitting the rule on the data. This activity is called data snooping. The more I try, the more I am likely, by mere luck, to find a rule that worked on past data.

People overvalue their knowledge and underestimate the probability of their being wrong

A journalist is trained in methods to express himself rather than to plumb the depth of things - the selection process favors the most communicative, not necessarily the most knowledgeable.

The epiphany I had in my career in randomness came when I understood that I was not intelligent enough, nor strong enough, to even try to fight my emotions.

Dialectitian - someone who never committed himself to any of the premises from which he argued, or to any of the conclusions he drew from them.

There is no rational reason to keep a painting you would not buy at its current market rate - only an emotional investment. Many people get married to their ideas all the way to the grave. 

Certainly, the odds in games where the rules are clearly and explicitly defined are computable and the risks consequently measured. But not in the real world. For mother nature did not endow us with clear rules. The game is not a deck of card (we do not even know how many colors there are). But somehow people "measure" risks, particularly if they are paid for it. 

At the limit, you can decide whether to be (relatively) poor, but free of your time, or rich but as dependent as a slave.

Rereading those sections after a week away from them was incredibly enlightening (again). I just ordered Taleb's newest book and can't wait to jump my FIFO system again.

Book Review: The Most Important Thing

I've gotten away from a good habit recently: writing book reviews. I will try to go back and recap my

highlights from recent book readings starting with Howard Marks', "The Most Important Thing". I was initially rubbed the wrong way with Marks being a descendant of the University Of Chicago's oft incorrect EMH. I stuck with it and Marks does a good job explaining the baseline of semi-strong efficiency and then getting into personal interpretations of alpha. Overall, impressive work from a storied investor. While he doesn't ever come out and say it, his underlying investing rational is spot on: don't lose money. The thought-provoking highlights (all quotes):

Like opportunities to make money, the degree of risk present in a market derives from the behavior of the participants, not from securities, strategies, and institutions. Regardless of what's designed into market structures, risk will be low only if investors behave prudently.

When everyone believes something is risky, their unwillingness to buy usually reduces its price to the point where it's not risky at all. Broadly negative opinion can make it the least risky thing, since all optimism has been driven out of its price.

When everyone believes something embodies no risk, they usually bid it up to the point where it's enormously risky.

Whatever few awards are presented for risk control, they're never given it out in good times. The reason is that risk is covert, invisible. Risk - the possibility of loss - is not observable. What is observable is loss, and loss generally happens only when risk collides with negative events. 

The worst loans are made at the best of times. This leads to capital destruction - that is, to investment of capital in projects where the cost of capital exceeds the return on capital.

When buying something has become comfortable again, its price will no longer be so low that it's a great bargain. Thus, a hugely profitable investment that doesn't begin with discomfort is usually an oxymoron. 

You tend to get better buys if you select from the list of things sellers are motivated to sell rather than start with a fixed notion as to what you want to own. An opportunist buys things because they're offered at bargain prices. There's nothing special about buying when prices aren't low. 

Mujo means cycles will rise and fall, things will come and go, and our environment will change in ways beyond our control. Thus we must recognize, accept, cope and respond. Isn't that the essence of investing? (Potential fund name)

The critical observation is that the [investor] pursues high returns, even in a low-return environment, and bears the consequences - increased risk - although often unknowingly. 

Investors are right (and wrong) all the time for the "wrong reason." Someone buys a stock because he or she expects a certain development; it doesn't occur; the market takes the stock up anyway; the investor looks good

I don't think many money manager's careers end because they fail to hit home runs. Rather, they end up out of the game because they strike out too often - not because they don't have enough winners, but because they have too many losers. And yet, lots of managers keep swinging for the fences.

Investing defensively can cause you to miss out on things that are hot and get hotter, and it can leave you with your bat on your shoulder in trip after trip to the plate. You may hit fewer home runs than another investor...but you're also likely to have fewer strikeouts and fewer inning-ending double plays. 

In heady times, capital is devoted to innovative investments, many of which fail the test of time. Bullish investors focus on what might work, not what might go wrong. 

When investor psychology is at equilibrium and fear and greed are in balance, asset prices are likely to be fair relative to value. In that case there may be no compelling action, and its important to know that, too. When there's nothing particularly clever to do, the potential pitfall lies in insisting on being clever.

In good years in the market, it's good enough to be average. Everyone makes money in the good years, and I have yet to hear anyone explain convincingly why it's important to beat the market when the market does well. No, in the good years average is good enough. 


The Most Important Thing

Book Review: Where are the Customer's Yachts?

It's been quite a while since I've been moved by a book like I was by this one. I was unable to fall asleep last night because the thoughts were so vibrant and alive in my brain. For a book published 74 years ago, much of the wisdom is very consistent to this day and I will exact quote the important points:

"God forbid! ho home and relax. Like most other Wall Streeters, bankers suffer from the inability to do nothing. Your average Wall Streeter, faced with nothing profitable to do, does nothing for only a brief time. Then, suddenly and hysterically, he does something which turns out to be extremely unprofitable. He is not a lazy man."

"As the man said after he had had the subject of relativity explained to him in a few unsuccinct phrases: 'And from this Mr. Einstein makes a living?'"

"When there is a stock-market boom, and everyone is scrambling for common stocks, take all your common stocks and sell them. Take the proceeds and buy conservative bonds. No doubt the stocks you sold will go higher. Pay no attention to this - just wait for the depression which will come sooner or later. When this depression - or panic - becomes a national catastrophe, sell out the bonds and buy back the stock. No doubt the stocks will go still lower. Again pay no attention. Wait for the next boom. Continue to repeat this operation as long as you live, and you'll have the pleasure of dying rich."

Three of the most profound insights to investing summarized very neatly and succinctly. Stop overthinking.

Book Review: The Spirit to Serve

-MANAGING BY WALKING AROUND

-Figure out how to do something right, then write it down

-By nailing the basics into place, systems allow employees to provide more customized customer service

-Take care of your employees and they will take care of your customers

-Listen to the family problems of your associates

-One, most people will do anything to avoid being the bearer of bad news, and two, thank goodness there are a hardy few who won't

-To say the right thing at the right time, keep still most of the time.

-"What do you think?"

-No grunt work=no growth. No growth=no future.

-Change is to business what oxygen is to life - vital.

-Companies that don't risk anything will inevitably find themselves falling behind those that do. You can lead change or it can lead you.

-No tree grows to the sky

-There's a price to be paid for thinking too well of yourself

-Competitors are often your best motivators and, consequently, a key factor in your success

-Part of what gets us out of bed in the morning is the search for new ways to keep customers happy, earn their loyalty, and win more customers.

-The success of our service innovations grows out of two of our most fundamental corporate values: attention to detail and good listening skills.

-The first and most important rule is: Be willing to make a decision.

Book Review: The Little Big Things

Key Points

-It's all about the restroom.

-Boring is Beautiful

-Reward excellent failures. Punish Mediocre Successes.

-Kindness is Free

-Be kind, for everyone is fighting a great battle

-Commit acts of deliberate relationship enhancement

-Hire people who's "eyes sparkle"

-Pleasant. Caring. Engaged

-It's showtime all the time

-Make that Three Minute Call right now

-Make an insane public effort

-To Lead is to Measurably help others succeed

-Leaders exist to serve their people. Period.

-"What do you think?"

-"Thank You"

-"I'm Sorry"

-Just say Yes

-"Trying it out" is the most important attribute to winning

-"We have a 'strategic plan'. It's called doing things." - Herb Kelleher

-MANAGING BY WANDERING AROUND

-Cherish the Last Two-Percenters

-Always refer to the generic customer as "She"

-All innovation comes from fury

-He who tries the most stuff wins

-QUIT BLOODY INTERRUPTING

"It was much later that I realized Dad's secret. He gained respect by giving it. He talked and listened to the fourth grade kid in Spring Valley who shined shoes the same way he talked and listened to a bishop or college president. He was seriously interested in who you were and what you had to say."

-Everybody has a valuable story, desperate to escape. Extract a story, make a friend-devotee.

"The difference [between 'worthy' ambition and 'mere' ambition] is well illustrated in the contrast between the person who says he 'wishes to be a writer' and the person who says he 'wishes to write'. The former desires to be pointed out at cocktail parties, the latter is prepared for the long, solitary hours at a desk; the former desires status, the latter a process; the former desires to be, the latter to do."

-Ask

-"So what have you learned since I last saw you"

-If you are constantly on your blackberry, it is mostly because of an...arrogant, consuming sense of self importance totally divorced from reality.

-There's but one question to ask: If I were walking in here as a customer or prospect or new hire, what would I take in - in the first .4 seconds? Where would it score on the 1 to 10 "We care scale"?

-Ask your customers how you are doing

-Every person who makes it into the history books is by definition...insanely disobedient. He or she doesn't "buy the act." He or she has contempt for his-her "betters." And yet we tell our kids in school to "sit still, follow the rules, and behave." (And if they don't, we put them on a polyester or Ritalin or metaphorical leash)

-Incremental solutions in discontinuous times seldom, if ever, work

-Set aggressive targets - forget "incrementalism," go after a 95% reduction in the time it takes to do project X

-The ultimate aim of a business organization, an artist, an athlete, or a stockbroker may be to explode in a dramatic frenzy of value creation during a short space of time, rather than live forever.

-You have to treat your employees like customers