Like most Singaporeans, I was saddened to learn of the death of our country's founding father, Lee Kuan Yew (LKY). There is little left to be said about his achievements in shaping the history of a small island nation. While LKY's actions have benefited generations of Singaporeans directly, it may well be that his greatest contribution to global welfare will be the creation of an Asian model of political and economic development. Having visited in November 1978, Deng Xiaoping was reportedly heavily influenced by Singapore's success in undertaking economic reform in China. India's Prime Minister, Narendra Modi, has in turn praised the Singapore model and identified it as an exemplar. On a personal level, much of my interest in macroeconomics stemmed from the simple observation growing up that Singapore seemed so much richer than many of its neighbouring countries. This brings to mind Robert Lucas who, speaking about development economics, said, "The consequences for human welfare involved in questions like these are simply staggering: once one starts to think about them, it is hard to think about anything else." LKY's ability to influence economic and social growth in the two Asian giants will ensure that he has a far greater effect globally than on Singapore alone.
The public outpouring of grief and emotion at LKY's passing has certainly taken me by surprise. Obviously, for many people it is an occasion to reflect on the opportunities they have had in life - education, political stability, economic growth, and meritocracy, just to name a few. Far from being complacent and apathetic, Singaporeans have shown a deep sense of gratitude for the strides the country has made, and a profound desire to build on LKY's legacy. I share those sentiments wholeheartedly. It is also a moment to reflect on our mortality, seeing a true giant pass from this world. For those of us with elderly relatives, it is particularly poignant.
Still, the contrarian in me is forced to make several points where I think public perception risks being skewed. First, Singaporeans should not fall for the Great Man Fallacy, and end up believing a monocausal narrative of our country's success. LKY's book, "From Third World To First" is a masterful telling of the complexity behind the nation's growth. (Aside: Blattman and Pepinsky argue that Singapore wasn't a Third World country even at independence. I agree that the narrative might be overstated, but the sustained levels of growth are still impressive). Developing countries don't need One Great Leader; they need strong institutions and a deep bench of competent public servants with integrity. Numerous leaders contributed to Singapore's growth, and I think particularly of Goh Keng Swee, who is generally acknowledged as the real architect of Singapore's economic success. A lovely book on this is "Lee's Lieutenants", edited by Lam and Tan. (Aside #2: Goh's own words on the philosophy behind Singapore's growth are stunningly "Washington Consensus". No doubt my bias towards such a framework in development economics emerges from having enjoyed the fruits of such policies first-hand.) The book rightly presents LKY's greatness as being the superb captain of a team, rather than someone governing in isolation. And of course, economies are complex systems. In addition to the nation's leaders, it is important to pay tribute to millions of anonymous Singaporeans who have contributed to the thriving economy through hard work and a powerful desire to improve themselves.
Secondly, we should be careful not to whitewash LKY's legacy. He was relentlessly clear-eyed as a leader and it would be odd if we didn't subject his legacy to the same level of scrutiny. LKY wasn't a cuddly old man. He was a political force to be reckoned with, and a ruthless opponent when crossed. There is a natural impulse to forgive the ethical trade-offs he and the ruling elite made in governing the country. (See Glenn Greenwald here on a similar approach to Reagan, and Alexander Pantsov here on Deng Xiaoping). If anything, LKY's passing should fill Singaporeans with a resolve to be politically engaged. That doesn't mean engaging in the petty partisan politics that seem to afflict much of the West. It means thinking critically about where we want our society to go, and challenging our political leaders to be outstanding community servants.
None of the points above should diminish the magnitude of LKY's legacy, or the gratitude that Singaporeans feel. He was singularly successful in navigating the pitfalls that corrupt other men of similar intellect and ambition, and had the foresight to create institutions that will outlive him. Hopefully, he will inspire generations of Singaporeans to contribute to the country through a variety of ways - serving in government, developing private enterprise, and building a dynamic and inclusive civil society. Non-Singaporeans often say to me, "I hear Singapore is very clean and efficient." These days, I often respond, "Yes, but it's so much more than that." Mostly I'm referring to the glittering skyline, vibrant multi-cultural society and burgeoning appreciation of our history. But it truly is more than that - it is, and always will be, our home. We owe it to LKY, and to ourselves, to make it the best home it can be.
Sunday, March 29, 2015
Saturday, February 28, 2015
Is the Fed Targeting Bond Yields? Mr. Dudley's Conundrum
In the history of ideas, it is always fascinating to observe how certain notions gain traction and overcome opposition. Max Planck famously wrote, "A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and a new generation grows up that is familiar with it." I've always found it a touch optimistic to assume that some form of objective truth always emerges victorious in the marketplace of ideas. We know that isn't the case, with discredited opinions often showing surprising and alarming resilience. Finance and economics are no exceptions to this phenomenon. For example, German hyperinflation is often cited as having led to Hitler's ascent to power, when in reality, it was deflation that brought the Nazis to power, as Matt O' Brien and Lars Christensen point out.
Sometimes marketing is important. Certain phrases seem to capture the public imagination, helping ideas spread, for better or worse. I'm often irked by the phrase "Lehman moment", which people often use casually to mean a tipping point in a crisis. Lehman, of course, filed for bankruptcy on Sep 15, 2008. While a massive event, it was just one of many in a significant chain of financial panic. I remember sitting with a fellow junior analyst on Sep 10 or so discussing the momentousness of Fannie and Freddie being put into conservatorship. The failure of the first TARP bill on Sep 29, 2008 also seems to be relatively forgotten in public memory, although that event coincides more closely with the real panic phase of the crisis (The S&P 500 was down about 3% in the 10 trading days between Lehman and the bill failure; it was down about 26% in the 10 trading days after the TARP bill failure). (See chart and data here - hardly conclusive, but worth noting).
But I suspect the real reason I find the phrase "Lehman moment" so chafing is because people often conflate the financial panic with the economic plunge, and ignore a slow Fed response to the crisis. It is surely too much to expect any institution to react perfectly to a crisis given the "fog of war", but I think it's still important to highlight the Fed's missteps. I've done so in a previous post, highlighting how Rick Mishkin's concerns were ignored by his FOMC colleagues.
Funnily, most criticism of Fed seems to be encapsulated in another popular phrase, "too low for too long" (TLFTL). TLFTL is of course is the notion that the Fed contributed to financial instability by pursuing an overly accommodating monetary policy prior to the crisis. I don't have a strong view on the matter, seeing arguments in both directions, but it's clear that current Fed policy-makers harbour worries about TLFTL. The Fed has made hawkish noises well in advance of any rate rises, leading to the infamous Taper Tantrum. And more recently, New York Fed President Bill Dudley made the following remarks in a speech:
"One significant conundrum in financial markets currently is the recent decline of forward short-term rates at long time horizons to extremely low levels - for example, the 1-year nominal rate, 9 years forward is about 3 percent currently...If such compression in expected forward short-term rates were to persist even after the FOMC begins to raise short-term interest rates, then, all else equal, it would be appropriate to choose a more aggressive path of monetary policy normalization as compared to a scenario in which forward short-term rates rose significantly, pushing bond yields significantly higher."
Let me note that (a) the context of this speech was a generally nuanced discussion of the real interest rate; (b) the speech is generally quite dovish in not wanting to adhere to a strict Taylor rule that would demand a higher Fed funds rate, and (c) Dudley's views do not, of course, represent the FOMC. But I found myself confused: Is the Fed now targeting long-term bond yields? The use of the word "conundrum" seems deliberate. Naturally, this brought to mind Greenspan's use of the word in testimony to Congress describing falling long-term rates despite an increase in the Fed funds rate. Greenspan and Bernanke seemed content before the crisis to explain away the conundrum with the "global savings glut" hypothesis. Post-crisis, however, Dudley, seems much less eager to use that argument. Dudley seems to be saying "The conundrum is back, but this time we'll act differently. TLFTL won't happen again."
Oddly, research by Daniel Thornton of the St. Louis Fed suggests that the relationship between Fed Funds and long-term yields had broken down by the 1980s. I must confess I don't have the econometric chops to evaluate this research fully. And even more importantly, perhaps I'm over-analyzing this. After all, policy-makers aren't known for inventive language, so Dudley might just be reverting to a familiar phrase. But if Thornton is right, it's disturbing for Dudley to focus on long-term bond yields. If the Fed is swayed by the price action of long-term bonds, combined with a lingering institutional sense of TLFTL guilt, I would be deeply concerned for the global economy and financial markets. I would also expect such a course of action to backfire spectacularly since long-term bond yields would probably decline if the Fed was too hasty in raising rates. But some bad ideas never seem to die - and as we've seen, some of those bad ideas can have painful repercussions for a very long time.
Sometimes marketing is important. Certain phrases seem to capture the public imagination, helping ideas spread, for better or worse. I'm often irked by the phrase "Lehman moment", which people often use casually to mean a tipping point in a crisis. Lehman, of course, filed for bankruptcy on Sep 15, 2008. While a massive event, it was just one of many in a significant chain of financial panic. I remember sitting with a fellow junior analyst on Sep 10 or so discussing the momentousness of Fannie and Freddie being put into conservatorship. The failure of the first TARP bill on Sep 29, 2008 also seems to be relatively forgotten in public memory, although that event coincides more closely with the real panic phase of the crisis (The S&P 500 was down about 3% in the 10 trading days between Lehman and the bill failure; it was down about 26% in the 10 trading days after the TARP bill failure). (See chart and data here - hardly conclusive, but worth noting).
But I suspect the real reason I find the phrase "Lehman moment" so chafing is because people often conflate the financial panic with the economic plunge, and ignore a slow Fed response to the crisis. It is surely too much to expect any institution to react perfectly to a crisis given the "fog of war", but I think it's still important to highlight the Fed's missteps. I've done so in a previous post, highlighting how Rick Mishkin's concerns were ignored by his FOMC colleagues.
Funnily, most criticism of Fed seems to be encapsulated in another popular phrase, "too low for too long" (TLFTL). TLFTL is of course is the notion that the Fed contributed to financial instability by pursuing an overly accommodating monetary policy prior to the crisis. I don't have a strong view on the matter, seeing arguments in both directions, but it's clear that current Fed policy-makers harbour worries about TLFTL. The Fed has made hawkish noises well in advance of any rate rises, leading to the infamous Taper Tantrum. And more recently, New York Fed President Bill Dudley made the following remarks in a speech:
"One significant conundrum in financial markets currently is the recent decline of forward short-term rates at long time horizons to extremely low levels - for example, the 1-year nominal rate, 9 years forward is about 3 percent currently...If such compression in expected forward short-term rates were to persist even after the FOMC begins to raise short-term interest rates, then, all else equal, it would be appropriate to choose a more aggressive path of monetary policy normalization as compared to a scenario in which forward short-term rates rose significantly, pushing bond yields significantly higher."
Let me note that (a) the context of this speech was a generally nuanced discussion of the real interest rate; (b) the speech is generally quite dovish in not wanting to adhere to a strict Taylor rule that would demand a higher Fed funds rate, and (c) Dudley's views do not, of course, represent the FOMC. But I found myself confused: Is the Fed now targeting long-term bond yields? The use of the word "conundrum" seems deliberate. Naturally, this brought to mind Greenspan's use of the word in testimony to Congress describing falling long-term rates despite an increase in the Fed funds rate. Greenspan and Bernanke seemed content before the crisis to explain away the conundrum with the "global savings glut" hypothesis. Post-crisis, however, Dudley, seems much less eager to use that argument. Dudley seems to be saying "The conundrum is back, but this time we'll act differently. TLFTL won't happen again."
Oddly, research by Daniel Thornton of the St. Louis Fed suggests that the relationship between Fed Funds and long-term yields had broken down by the 1980s. I must confess I don't have the econometric chops to evaluate this research fully. And even more importantly, perhaps I'm over-analyzing this. After all, policy-makers aren't known for inventive language, so Dudley might just be reverting to a familiar phrase. But if Thornton is right, it's disturbing for Dudley to focus on long-term bond yields. If the Fed is swayed by the price action of long-term bonds, combined with a lingering institutional sense of TLFTL guilt, I would be deeply concerned for the global economy and financial markets. I would also expect such a course of action to backfire spectacularly since long-term bond yields would probably decline if the Fed was too hasty in raising rates. But some bad ideas never seem to die - and as we've seen, some of those bad ideas can have painful repercussions for a very long time.
Monday, February 23, 2015
Index Funds: A False God?
The case against active asset management, particularly of equity investments, has many prominent expositors. Warren Buffett, perhaps the greatest known exponent of active management, made the startling remark in 2014 that he wanted his 90% of his estate to be put into a low-cost S&P 500 index fund. A more comprehensive argument is proffered in Swedroe and Berkin's excellent "The Incredible Shrinking Alpha", which is a highly readable summary of the case against active management. Swedroe and Berkin (henceforth S&B) lay out a variety of arguments against active management, which I summarize as follows:
1) Many alpha-generating factors (such as value, small size, momentum and quality) have been identified, so they can now be harnessed more cheaply, and are effectively beta.
2) In a competitive financial environment, successful trading strategies self-destruct. If a clear anomaly is discovered, investors will seek to exploit it, eventually leading to its disappearance. Or to put it more poetically, Lee and Verbrugge write, "The efficient market theory is practically alone among theories in that it becomes more powerful when people discover serious inconsistencies between it and the real world."
3) Alpha is a zero-sum game, meaning some investors must exploit the mistakes of others. This is becoming harder as (a) the growth of index funds drives down their costs, increasing their advantage over active funds, and creating a virtuous circle of size, lower fees and better performance; (b) the number of funds has grown, creating far more competition for alpha; (c) the "paradox of skill" means that today's active investors are better trained and have greater resources, making it harder to achieve outlier results; and (d) successful active management creates large inflows, making it difficult to replicate success.
Before proceeding, I must draw a distinction (as S&B do) between passive index funds and passive funds with systematic rules. To simplify matters, I'll refer to these as index funds and systematic funds respectively.
I'm extremely sympathetic to argument (1). Despite my background as an active investor, I'm quite willing to accept that passive funds with systematic rules can help investors in their search process and mitigate cognitive biases. But I'm far more cautious about index funds, which ironically are seen as simpler for the average investor to understand.
S&B themselves acknowledge the debt index funds owe to active managers: "Active managers play an important societal role - their actions determine security prices, which in turn determine how capital is allocated. And it is the competition for information that keeps markets highly efficient both in terms of information and capital allocation. Passive investors are "free riders." They receive all the benefits from the role that active managers play in making the financial markets efficient without having to pay their costs. In other words, while the prudent strategy is to be a passive investor, we don't want everyone to draw that conclusion." Essentially, index funds are derivatives of the skill of active managers and steadfastness of systematic funds. But derivatives, the ever quotable Buffett reminded us, are "financial weapons of mass destruction". The history of financial innovation seems to be strewn with examples of legitimate new tools taken to excessive lengths. We may one day think of the well-intentioned index fund in a similar fashion.
To explain this, I turn to Argument (2), which is broadly true, but occasionally wildly wrong. While markets are generally efficient in the medium term, it doesn't take much financial history to know that sharp periods of deviation from efficiency can occur. S&B appeal to the idea that markets are better information processors than individuals due to the aggregation of collective wisdom. Likening a skilled individual investor to tennis great Roger Federer, they write, "While the competition for Federer is other individual players, the competition for investment managers is the entire market. It would be as if each time Federer stepped on the court, he faced an opponent with Roddick's serve, Murray's backhand, Gonzalez's forehand, Nadal's baseline game, Stepanek's net game and Ferrer's speed." This is a good analogy with one problem: for all its supposed skill, we know that the market occasionally has the temperament of John McEnroe or Marat Safin. While we can agree on general market efficiency, we should not over-sell the principle. Indeed, we need active and systematic funds to act as "stabilizing speculators", to quote Milton Friedman.
This can be seen simply as a rebuttal of the neoclassical EMH model. A timely new paper by the IMF's Brad Jones summarizes current arguments for deviations from the EMH:
In similar fashion, we can raise some criticisms of index funds.
- Limits to learning: "Markets are particularly vulnerable to bubbles where there is a low level of financial literacy among participants, and common knowledge over the existence of a bubble is absent." (Jones) If investors are plowing money unthinkingly into index funds, they will have no anchor against market turbulence. This is a version of the Standing Ovation Problem, where agents act due to their own beliefs, but also out of mimicry and conformity. S&B make the following argument about active strategies: "When a strategy becomes popular, not only will it have low expected returns due to crowding, but the assets in it are now "weak hands" - the investors who tend to panic at the first sign of trouble. That leads to the worst returns occurring at the worst times, when the correlations of all risky assets move toward one." There is no reason this would not apply to index funds.
- Frictional limits to arbitrage: "Another source of friction capable of amplifying bubbles stems from the 'captive buying' of securities in momentum-biased market capitalization-weighted financial benchmarks...Importantly, the captive buying phenomena [sic] is unlikely to abate given the (passive) benchmark-tracking exchange traded product industry has expanded at a decade-long annual growth rate of more than 20 percent (to US$2.5 trillion), a much faster rate than for other relatively non-benchmark constrained investors."
- Institutional limits to arbitrage: As index funds become ever more entrenched in the financial mainstream, it may become increasingly difficult for managers to veer from benchmarks despite valuation concerns.
To be clear, I'm not saying that index funds are unambiguously bad or dangerous. Index funds allow investors to gain exposure to equity risk at a low cost. Like any other tool, however, they should be used with care, with a clear understanding of what they represent - an investor's claims on cash flows to an underlying equity piece. S&B have done a wonderful job in bringing together various strands of the case against active management. But investors should be wary of substituting one false god for another.
1) Many alpha-generating factors (such as value, small size, momentum and quality) have been identified, so they can now be harnessed more cheaply, and are effectively beta.
2) In a competitive financial environment, successful trading strategies self-destruct. If a clear anomaly is discovered, investors will seek to exploit it, eventually leading to its disappearance. Or to put it more poetically, Lee and Verbrugge write, "The efficient market theory is practically alone among theories in that it becomes more powerful when people discover serious inconsistencies between it and the real world."
3) Alpha is a zero-sum game, meaning some investors must exploit the mistakes of others. This is becoming harder as (a) the growth of index funds drives down their costs, increasing their advantage over active funds, and creating a virtuous circle of size, lower fees and better performance; (b) the number of funds has grown, creating far more competition for alpha; (c) the "paradox of skill" means that today's active investors are better trained and have greater resources, making it harder to achieve outlier results; and (d) successful active management creates large inflows, making it difficult to replicate success.
Before proceeding, I must draw a distinction (as S&B do) between passive index funds and passive funds with systematic rules. To simplify matters, I'll refer to these as index funds and systematic funds respectively.
I'm extremely sympathetic to argument (1). Despite my background as an active investor, I'm quite willing to accept that passive funds with systematic rules can help investors in their search process and mitigate cognitive biases. But I'm far more cautious about index funds, which ironically are seen as simpler for the average investor to understand.
S&B themselves acknowledge the debt index funds owe to active managers: "Active managers play an important societal role - their actions determine security prices, which in turn determine how capital is allocated. And it is the competition for information that keeps markets highly efficient both in terms of information and capital allocation. Passive investors are "free riders." They receive all the benefits from the role that active managers play in making the financial markets efficient without having to pay their costs. In other words, while the prudent strategy is to be a passive investor, we don't want everyone to draw that conclusion." Essentially, index funds are derivatives of the skill of active managers and steadfastness of systematic funds. But derivatives, the ever quotable Buffett reminded us, are "financial weapons of mass destruction". The history of financial innovation seems to be strewn with examples of legitimate new tools taken to excessive lengths. We may one day think of the well-intentioned index fund in a similar fashion.
To explain this, I turn to Argument (2), which is broadly true, but occasionally wildly wrong. While markets are generally efficient in the medium term, it doesn't take much financial history to know that sharp periods of deviation from efficiency can occur. S&B appeal to the idea that markets are better information processors than individuals due to the aggregation of collective wisdom. Likening a skilled individual investor to tennis great Roger Federer, they write, "While the competition for Federer is other individual players, the competition for investment managers is the entire market. It would be as if each time Federer stepped on the court, he faced an opponent with Roddick's serve, Murray's backhand, Gonzalez's forehand, Nadal's baseline game, Stepanek's net game and Ferrer's speed." This is a good analogy with one problem: for all its supposed skill, we know that the market occasionally has the temperament of John McEnroe or Marat Safin. While we can agree on general market efficiency, we should not over-sell the principle. Indeed, we need active and systematic funds to act as "stabilizing speculators", to quote Milton Friedman.
This can be seen simply as a rebuttal of the neoclassical EMH model. A timely new paper by the IMF's Brad Jones summarizes current arguments for deviations from the EMH:
In similar fashion, we can raise some criticisms of index funds.
- Limits to learning: "Markets are particularly vulnerable to bubbles where there is a low level of financial literacy among participants, and common knowledge over the existence of a bubble is absent." (Jones) If investors are plowing money unthinkingly into index funds, they will have no anchor against market turbulence. This is a version of the Standing Ovation Problem, where agents act due to their own beliefs, but also out of mimicry and conformity. S&B make the following argument about active strategies: "When a strategy becomes popular, not only will it have low expected returns due to crowding, but the assets in it are now "weak hands" - the investors who tend to panic at the first sign of trouble. That leads to the worst returns occurring at the worst times, when the correlations of all risky assets move toward one." There is no reason this would not apply to index funds.
- Frictional limits to arbitrage: "Another source of friction capable of amplifying bubbles stems from the 'captive buying' of securities in momentum-biased market capitalization-weighted financial benchmarks...Importantly, the captive buying phenomena [sic] is unlikely to abate given the (passive) benchmark-tracking exchange traded product industry has expanded at a decade-long annual growth rate of more than 20 percent (to US$2.5 trillion), a much faster rate than for other relatively non-benchmark constrained investors."
- Institutional limits to arbitrage: As index funds become ever more entrenched in the financial mainstream, it may become increasingly difficult for managers to veer from benchmarks despite valuation concerns.
To be clear, I'm not saying that index funds are unambiguously bad or dangerous. Index funds allow investors to gain exposure to equity risk at a low cost. Like any other tool, however, they should be used with care, with a clear understanding of what they represent - an investor's claims on cash flows to an underlying equity piece. S&B have done a wonderful job in bringing together various strands of the case against active management. But investors should be wary of substituting one false god for another.
Thursday, February 5, 2015
Monetary Orbit: Do We Have A Kepler?
David Beckworth has consistently argued that the US is a monetary superpower. He writes, "The Fed has this power because it manages the world's main reserve currency and many emerging markets are formally or informally pegged to the dollar. As a result, its monetary policy gets exported to much of the emerging world. The ECB and Bank of Japan are also influenced by the Fed's decisions because they are careful not to let their currencies become too expensive relative to these dollar-pegged currencies and the dollar itself. U.S. monetary policy, consequently, gets exported to the Eurozone and Japan as well."
This is hardly a recent phenomenon. I've been reading Barry Eichengreen's "Exorbitant Privilege", and it describes (among other things) the international conditions that led to the creation of a European single currency. The Nixon administration is probably most famous in popular consciousness for Watergate and foreign policy actions in Vietnam and China, but its inflationary policies were the the architect of serious change in international monetary arrangements. The threat of dollar devaluation led to capital flows to Germany, upsetting the European balance of competitiveness. "The report of the Werner Committee, issued in October 1970, saw irrevocably locking exchange rates as essential for preservation of the Common Market and as insulating Europe from destabilizing monetary impulses from the United States." The breaking of the dollar's peg to gold proved even more momentous. As Eichengreen notes, "Not for the first time, erratic U.S. policies pushed Europe into monetary cooperation."
The dollar's power worked in Europe's favour (well, in the short-term, at least) after 1992. "Just as a weak dollar had contributed to Europe's earlier financial difficulties, a strong dollar now relieved them", setting the stage for miffed European partners to make nice and resume the path to monetary union. Eichengreen observes, "There is no little irony in the fact that a strong dollar helped make possible the transition to the euro, given that a weak dollar had regularly provided impetus for Europe to move in this direction."
Even so, US monetary policy cannot act in isolation. Bernard Connolly's "Rotten Heart of Europe" posits that the Wall Street crash of 1987 was sparked by the Bundesbank raising its official rates in October 1987 for the first time since 1981. Connolly writes "The impact on the other side of the Atlantic was immediate. James Baker denounced [Bundesbank President] Schlesinger for, in his view, jeopardizing the world recovery. Schlesinger replied that German price stability could not be put at risk. US financial markets feared that American interest rates might rise, or at least be prevented from falling. The stock market had been booming while long-term interest rates had been rising, a vulnerable combination. Now, the open conflict between Baker and Schlesinger and the prospect of a long period of high long rates shattered the fragile, misplaced confidence on which the stock-market boom had reposed."
These episodes perfectly capture the nature of the economy as a multi-agent system. This doesn't really simplify matters - see, for example, the difficulty of formulating the current ECB-Greece standoff in game theory terms. In fact, the economy is probably even more complicated than that, better represented as a complex adaptive system, since economic actors are responding to and shaping central bank actions in unpredictable ways. It's a theme I cover a lot, but this view of the economy seems to present a problem for those who deny the importance of a macro framework for their investment processes. Macro changes spread through the economy, without respecting the supposed imperviousness of security selection and fundamental investing.
But there's an opposite problem, which I cover here a lot as well. Our ability to perceive and foresee change is flawed. But more importantly, the effects of some of these changes are essentially unknowable - that, after all, is one of the challenges of observing a complex adaptive system. In assessing monetary orbit, we may be hard pressed to find a Kepler, much less an Einstein. So what should we do then? One strategy proposed above is to ignore macro change. I don't think that works. Driving without a map seems a silly proposition. But so does building a system that purports to capture the complexity of the real world.
This sets up a paradox:
(1) Investors (and policy makers) have to accept they operate in a complex adaptive system, where they will be buffeted by the occasional, unexpected gust of wind. They need to create a framework that incorporates data without fetishizing the veneer of precision. File this along with other paradoxes such as:
(2) Asset markets are occasionally inefficient, allowing nimble investors to scoop up bargains (or harvest risk premia). But investors rely equally on efficient markets: if they were always inefficient, the savvy investor could never (a) determine fair value or (b) recognize a profit by selling at fair value.
(3) Tied to (2), from a behavioural standpoint, this demands that the investor be arrogant enough to believe she has identified a mispricing but humble enough to realize she could be wrong.
This might be enough to make you tear your hair out in frustration, but I plan to cover in a future post some strategies for dealing with these issues, inspired by a surprising array of sources.
This is hardly a recent phenomenon. I've been reading Barry Eichengreen's "Exorbitant Privilege", and it describes (among other things) the international conditions that led to the creation of a European single currency. The Nixon administration is probably most famous in popular consciousness for Watergate and foreign policy actions in Vietnam and China, but its inflationary policies were the the architect of serious change in international monetary arrangements. The threat of dollar devaluation led to capital flows to Germany, upsetting the European balance of competitiveness. "The report of the Werner Committee, issued in October 1970, saw irrevocably locking exchange rates as essential for preservation of the Common Market and as insulating Europe from destabilizing monetary impulses from the United States." The breaking of the dollar's peg to gold proved even more momentous. As Eichengreen notes, "Not for the first time, erratic U.S. policies pushed Europe into monetary cooperation."
The dollar's power worked in Europe's favour (well, in the short-term, at least) after 1992. "Just as a weak dollar had contributed to Europe's earlier financial difficulties, a strong dollar now relieved them", setting the stage for miffed European partners to make nice and resume the path to monetary union. Eichengreen observes, "There is no little irony in the fact that a strong dollar helped make possible the transition to the euro, given that a weak dollar had regularly provided impetus for Europe to move in this direction."
Even so, US monetary policy cannot act in isolation. Bernard Connolly's "Rotten Heart of Europe" posits that the Wall Street crash of 1987 was sparked by the Bundesbank raising its official rates in October 1987 for the first time since 1981. Connolly writes "The impact on the other side of the Atlantic was immediate. James Baker denounced [Bundesbank President] Schlesinger for, in his view, jeopardizing the world recovery. Schlesinger replied that German price stability could not be put at risk. US financial markets feared that American interest rates might rise, or at least be prevented from falling. The stock market had been booming while long-term interest rates had been rising, a vulnerable combination. Now, the open conflict between Baker and Schlesinger and the prospect of a long period of high long rates shattered the fragile, misplaced confidence on which the stock-market boom had reposed."
These episodes perfectly capture the nature of the economy as a multi-agent system. This doesn't really simplify matters - see, for example, the difficulty of formulating the current ECB-Greece standoff in game theory terms. In fact, the economy is probably even more complicated than that, better represented as a complex adaptive system, since economic actors are responding to and shaping central bank actions in unpredictable ways. It's a theme I cover a lot, but this view of the economy seems to present a problem for those who deny the importance of a macro framework for their investment processes. Macro changes spread through the economy, without respecting the supposed imperviousness of security selection and fundamental investing.
But there's an opposite problem, which I cover here a lot as well. Our ability to perceive and foresee change is flawed. But more importantly, the effects of some of these changes are essentially unknowable - that, after all, is one of the challenges of observing a complex adaptive system. In assessing monetary orbit, we may be hard pressed to find a Kepler, much less an Einstein. So what should we do then? One strategy proposed above is to ignore macro change. I don't think that works. Driving without a map seems a silly proposition. But so does building a system that purports to capture the complexity of the real world.
This sets up a paradox:
(1) Investors (and policy makers) have to accept they operate in a complex adaptive system, where they will be buffeted by the occasional, unexpected gust of wind. They need to create a framework that incorporates data without fetishizing the veneer of precision. File this along with other paradoxes such as:
(2) Asset markets are occasionally inefficient, allowing nimble investors to scoop up bargains (or harvest risk premia). But investors rely equally on efficient markets: if they were always inefficient, the savvy investor could never (a) determine fair value or (b) recognize a profit by selling at fair value.
(3) Tied to (2), from a behavioural standpoint, this demands that the investor be arrogant enough to believe she has identified a mispricing but humble enough to realize she could be wrong.
This might be enough to make you tear your hair out in frustration, but I plan to cover in a future post some strategies for dealing with these issues, inspired by a surprising array of sources.
Sunday, January 25, 2015
Our World Of Risk
The 9/11 Memorial Museum in New York City is a moving tribute to a tragic episode in the city's history. It's also incredibly extensive. I planned to spend two hours there, and ended up spending four. Part of that was my own interest in the event, having lived in New York for many years (albeit well after 9/11). But another reason for the length of my visit was the surprising nuance and richness of the exhibits. I was pleased to see that the museum didn't shy away from presenting uncomfortable issue that resulted from 9/11, such as a series of expensive wars of debatable efficacy, the rise of anti-Muslim sentiment globally and in the US, as well as threats posed to individual civil liberties. It was also another reminder of the concepts of reflexivity and the risk society. I refer here not to the concept popularized by George Soros, but rather its use by sociologists Ulrich Beck and Anthony Giddens. To simplify greatly, Beck and Giddens described our modern world as being a risk society, in which (a) we devise methods of dealing with the hazards and insecurities created by modernization itself, and (b) respond in turn to risks created by those supposed safeguards. The idea of a feedback loop has obvious parallels to the Soros concept, since both iterations are founded on ideas developed by William Thomas, Robert K. Merton and Karl Popper.
9/11 clearly demonstrates the risk society at work. 19 men were able to turn the fruits of modernization (airplanes and skyscrapers) into weapons of mass murder and terror. In response, the US and its allies launched a global "war on terror" that at the least inconveniences us as air travellers, and in its worst form seems to have resulted in the torture of suspected terrorists, giving fuel to anti-Western sentiment.
This certainly poses problems for those attempting to be thoughtful citizens. While we may hope to be rational and well-informed about political issues, it is incredibly difficult to do an informal mental cost-benefit analysis. Indeed, one of the best guides to public policy is still Bastiat's urging to consider "that which is seen, and that which is not seen". Take national security for example. Its very nature prevents citizens from ever learning the full extent of threats or the cost of steps taken to deal with those threats. So how can citizens assess whether increased safety has merited the extraordinary costs (as the Cato Institute asks here)? These costs refer not only to the financial outlay combating terrorism since 9/11, but also the possibility that terrorism is better allayed by supporting poverty and disenfranchisement across the globe.
Climate change offers another example of the challenge of being a citizen in today's risk societies. It seems to me that reasonable people can argue as to the urgency of the climate crisis, and how much should be done to prevent further man-made climate change (for example, see Matt Ridley on being a "climate lukewarmer").
Nassim Taleb suggests the use of the "precautionary principle" in such matters. Essentially, he and others argue that if an action or policy has a suspected risk of causing harm to the public or to the environment, in the absence of scientific consensus that the action or policy is not harmful, the burden of proof that it is not harmful falls on those taking the action. I'm not quite sold on this. He raises the question of drugs such as Vioxx, which reportedly caused 88,000 heart attacks and 38,000 deaths in the US. While Vioxx is a tragic and horrific story, the "seen and unseen" dictum creates complexity, in that there are presumably many people who deteriorate or die from drugs that are held up from approval.
Let me move from national security issues to security issuances (geddit?). Taleb is certainly known better for his writing on financial and economic risk, and I quoted him in an earlier post on risk. A recognition of black swan events leads to an emphasis on robustness (or even anti-fragility). Last week brought a reminder of the importance of robustness: The Swiss central bank decided to remove its de facto peg to the Euro, causing several hedge funds to shutter after suffering heavy losses. Retail FX investors similarly learned the pitfalls of 50:1 leverage when a currency moves 28% in a day.
I don't want to make this post longer than it already is, so let me end with some brief comments on how to increase robustness in one's financial portfolio
(1) Recognize sources of leverage. Leverage introduces fragility into one's financial position. Besides explicit leverage (that is, the borrowing of money to finance an asset), there is implicit leverage in businesses through high fixed or total production costs (operating leverage).
(2) Be reasonable about one's knowledge. A long familiarity with a name or industry should decrease (though never eliminate) the unknown unknowns over time. Again, this lends itself to sticking within one's circle of competence.
(3) Think about asset correlation, but realize these correlations can change in a globalized, financialized world.
(4) Size positions accordingly, in line with points 1-3.
(5) Be committed to learning appropriately from mistakes. Learning not to repeat mistakes is an example of Taleb's anti-fragility, since the individual or organization grows stronger from small losses. But we can sometimes take away too much from mistakes, as Ed Catmull learned when dissecting Pixar's missteps.
None of this requires fancy quantitative methods, as I argued in my earlier post. It does require common sense and humility to recognize that the world is viciously unpredictable. There's no use lamenting this fact. But we can take steps to prevent ourselves - or at least our portfolios - from being buffeted by our world of risk.
9/11 clearly demonstrates the risk society at work. 19 men were able to turn the fruits of modernization (airplanes and skyscrapers) into weapons of mass murder and terror. In response, the US and its allies launched a global "war on terror" that at the least inconveniences us as air travellers, and in its worst form seems to have resulted in the torture of suspected terrorists, giving fuel to anti-Western sentiment.
This certainly poses problems for those attempting to be thoughtful citizens. While we may hope to be rational and well-informed about political issues, it is incredibly difficult to do an informal mental cost-benefit analysis. Indeed, one of the best guides to public policy is still Bastiat's urging to consider "that which is seen, and that which is not seen". Take national security for example. Its very nature prevents citizens from ever learning the full extent of threats or the cost of steps taken to deal with those threats. So how can citizens assess whether increased safety has merited the extraordinary costs (as the Cato Institute asks here)? These costs refer not only to the financial outlay combating terrorism since 9/11, but also the possibility that terrorism is better allayed by supporting poverty and disenfranchisement across the globe.
Climate change offers another example of the challenge of being a citizen in today's risk societies. It seems to me that reasonable people can argue as to the urgency of the climate crisis, and how much should be done to prevent further man-made climate change (for example, see Matt Ridley on being a "climate lukewarmer").
Nassim Taleb suggests the use of the "precautionary principle" in such matters. Essentially, he and others argue that if an action or policy has a suspected risk of causing harm to the public or to the environment, in the absence of scientific consensus that the action or policy is not harmful, the burden of proof that it is not harmful falls on those taking the action. I'm not quite sold on this. He raises the question of drugs such as Vioxx, which reportedly caused 88,000 heart attacks and 38,000 deaths in the US. While Vioxx is a tragic and horrific story, the "seen and unseen" dictum creates complexity, in that there are presumably many people who deteriorate or die from drugs that are held up from approval.
Let me move from national security issues to security issuances (geddit?). Taleb is certainly known better for his writing on financial and economic risk, and I quoted him in an earlier post on risk. A recognition of black swan events leads to an emphasis on robustness (or even anti-fragility). Last week brought a reminder of the importance of robustness: The Swiss central bank decided to remove its de facto peg to the Euro, causing several hedge funds to shutter after suffering heavy losses. Retail FX investors similarly learned the pitfalls of 50:1 leverage when a currency moves 28% in a day.
I don't want to make this post longer than it already is, so let me end with some brief comments on how to increase robustness in one's financial portfolio
(1) Recognize sources of leverage. Leverage introduces fragility into one's financial position. Besides explicit leverage (that is, the borrowing of money to finance an asset), there is implicit leverage in businesses through high fixed or total production costs (operating leverage).
(2) Be reasonable about one's knowledge. A long familiarity with a name or industry should decrease (though never eliminate) the unknown unknowns over time. Again, this lends itself to sticking within one's circle of competence.
(3) Think about asset correlation, but realize these correlations can change in a globalized, financialized world.
(4) Size positions accordingly, in line with points 1-3.
(5) Be committed to learning appropriately from mistakes. Learning not to repeat mistakes is an example of Taleb's anti-fragility, since the individual or organization grows stronger from small losses. But we can sometimes take away too much from mistakes, as Ed Catmull learned when dissecting Pixar's missteps.
None of this requires fancy quantitative methods, as I argued in my earlier post. It does require common sense and humility to recognize that the world is viciously unpredictable. There's no use lamenting this fact. But we can take steps to prevent ourselves - or at least our portfolios - from being buffeted by our world of risk.
Thursday, January 15, 2015
Commodity Isn't A Dirty Word
Warren Buffett popularized the metaphor of the economic moat to describe a firm's competitive advantage. As quoted in what I consider one of the best articles on the topic, Buffet explains, "What we refer to as a "moat" is what other people might call competitive advantage... It's something that differentiates the company from its nearest competitors - either in service or low cost or taste or some other perceived virtue that the product possesses in the mind of the consumer versus the next best alternative... There are various kinds of moats. All economic moats are either widening or narrowing - even though you can't see it."
Assessing companies' economic moats is generally considered sound practice for investors of all stripes. Value adherent Glenn Greenberg (of Brave Warrior Capital, and formerly of Chieftain Capital) urges the discriminating investor to "single out truly good businesses". In a similar vein, growth investor and writer John Train summarily lowers a scythe on a large class of investable equities, saying "I would avoid the large, cyclical industries even if they are supposed to be ripe for an upward swing." Instead, he exhorts us to invest in oligopolies and growth industries. Finally, noted entrepreneur and venture capitalist Peter Thiel states flatly, "You always to want to aim for monopoly and you always want to avoid competition... Competition is for losers."
I have no arguments with the importance of a company's economic moat to its ability to generate returns. However, I don't feel the need to invest only in truly magnificent businesses. This seems to shrink the universe of investable companies quite meaningfully. Furthermore, it introduces the risk of overpaying for an economic moat. Investors often tout the "high quality" of their portfolio companies, which is generally shorthand for high and predictable returns on invested capital. But this quality rarely comes cheap. You'll never lose your portfolio management job owning "quality" names, but returns may be disappointing. Finally, I'm hesitant to label a company "high quality" since it seems to imply that this quality is inherent and immutable. As Buffett correctly notes, one's moat is constantly widening or narrowing. Train similarly warns readers, "Beware of the company with a franchise that has turned into a commodity."
Perhaps the solution is declare oneself a MARP investor - Moat At Reasonable Price. But I think it might be even easier to realize that the lines drawn between different investing styles are often quite arbitrary. I'm often reminded of this when I look through the countless products peddled by investment management firms. At the heart of it, all investors are presumably trying to buy stocks that are cheap relative to their future prospects. Why not, then, remain style and industry agnostic? The value of every asset is the sum of discounted cash flows, whether those cash flows are growing fast or slow, or whether they are steady or cyclical. Two caveats: (1) Value is admittedly better thought of as a range rather than a single number, and (2) Investors are well-advised to develop a deep understanding of several industries, and admit when a valuation project simply appears too difficult. But this doesn't negate the basic point that there are times when value-oriented investors would be wise to consider cyclical stocks fair game. In his interview for a book on global macro, Ospraie Management's Dwight Anderson demurred, "We are global micro, not global macro. What we do is pure Microeconomics 101: supply and demand, identifying which companies are low cost, which have cash, and so on. We are constantly striving to understand the changes in our industries: how the composition of demand is changing, how the cost curve is changing, what currencies are doing to change the cost curve, and who the competitive players are." (I have to concede that Ospraie had serious issues in 2008, but this should not be seen as an indictment of the whole strategy of investing in commodity-related firms. Perhaps they swung too far in ignoring global macro.)
This seems particularly relevant given the collapse of commodity prices that has occurred over the past 18 months, and the concomitant decline in equity prices of firms in the sector. While the press seems obsessed with deciding when and at what price crude oil will bottom, this should be of less importance to a fundamental investor. It is far more important to ascertain a likely range of commodity prices in the medium term, and understand how this price scenario will affect a company's cash flows and balance sheet. There's little doubt that low-cost producers with strong balance sheets will be survivors despite the inevitable fluctuations of commodity prices. These turn out to be the moats needed to survive in cyclical and economically sensitive industries. Dwight Anderson is very clear on this point, cautioning, "You can't buy a high-cost asset cheap enough... When you have a high-cost asset, you have to get the price and the timing right... we will only invest in low-cost companies because we don't have to get the timing right."
In describing the "Washout Phase" of a stock market cycle, Train notes that this is when "the really big money shows its hard...Mr. Getty buys a string of oil companies for two times cash flow." We don't appear to be there yet and Mr. Getty is no longer with us, but the revulsion against owning commodities suggests we're getting closer. In the meantime, patience is required, as is the occasional gentle reminder that "commodity" isn't a dirty word.
Assessing companies' economic moats is generally considered sound practice for investors of all stripes. Value adherent Glenn Greenberg (of Brave Warrior Capital, and formerly of Chieftain Capital) urges the discriminating investor to "single out truly good businesses". In a similar vein, growth investor and writer John Train summarily lowers a scythe on a large class of investable equities, saying "I would avoid the large, cyclical industries even if they are supposed to be ripe for an upward swing." Instead, he exhorts us to invest in oligopolies and growth industries. Finally, noted entrepreneur and venture capitalist Peter Thiel states flatly, "You always to want to aim for monopoly and you always want to avoid competition... Competition is for losers."
I have no arguments with the importance of a company's economic moat to its ability to generate returns. However, I don't feel the need to invest only in truly magnificent businesses. This seems to shrink the universe of investable companies quite meaningfully. Furthermore, it introduces the risk of overpaying for an economic moat. Investors often tout the "high quality" of their portfolio companies, which is generally shorthand for high and predictable returns on invested capital. But this quality rarely comes cheap. You'll never lose your portfolio management job owning "quality" names, but returns may be disappointing. Finally, I'm hesitant to label a company "high quality" since it seems to imply that this quality is inherent and immutable. As Buffett correctly notes, one's moat is constantly widening or narrowing. Train similarly warns readers, "Beware of the company with a franchise that has turned into a commodity."
Perhaps the solution is declare oneself a MARP investor - Moat At Reasonable Price. But I think it might be even easier to realize that the lines drawn between different investing styles are often quite arbitrary. I'm often reminded of this when I look through the countless products peddled by investment management firms. At the heart of it, all investors are presumably trying to buy stocks that are cheap relative to their future prospects. Why not, then, remain style and industry agnostic? The value of every asset is the sum of discounted cash flows, whether those cash flows are growing fast or slow, or whether they are steady or cyclical. Two caveats: (1) Value is admittedly better thought of as a range rather than a single number, and (2) Investors are well-advised to develop a deep understanding of several industries, and admit when a valuation project simply appears too difficult. But this doesn't negate the basic point that there are times when value-oriented investors would be wise to consider cyclical stocks fair game. In his interview for a book on global macro, Ospraie Management's Dwight Anderson demurred, "We are global micro, not global macro. What we do is pure Microeconomics 101: supply and demand, identifying which companies are low cost, which have cash, and so on. We are constantly striving to understand the changes in our industries: how the composition of demand is changing, how the cost curve is changing, what currencies are doing to change the cost curve, and who the competitive players are." (I have to concede that Ospraie had serious issues in 2008, but this should not be seen as an indictment of the whole strategy of investing in commodity-related firms. Perhaps they swung too far in ignoring global macro.)
This seems particularly relevant given the collapse of commodity prices that has occurred over the past 18 months, and the concomitant decline in equity prices of firms in the sector. While the press seems obsessed with deciding when and at what price crude oil will bottom, this should be of less importance to a fundamental investor. It is far more important to ascertain a likely range of commodity prices in the medium term, and understand how this price scenario will affect a company's cash flows and balance sheet. There's little doubt that low-cost producers with strong balance sheets will be survivors despite the inevitable fluctuations of commodity prices. These turn out to be the moats needed to survive in cyclical and economically sensitive industries. Dwight Anderson is very clear on this point, cautioning, "You can't buy a high-cost asset cheap enough... When you have a high-cost asset, you have to get the price and the timing right... we will only invest in low-cost companies because we don't have to get the timing right."
In describing the "Washout Phase" of a stock market cycle, Train notes that this is when "the really big money shows its hard...Mr. Getty buys a string of oil companies for two times cash flow." We don't appear to be there yet and Mr. Getty is no longer with us, but the revulsion against owning commodities suggests we're getting closer. In the meantime, patience is required, as is the occasional gentle reminder that "commodity" isn't a dirty word.
Monday, January 12, 2015
Books I Enjoyed In 2014
Regular readers of this blog will know that many of my posts are sparked by books or articles I've read. I thought it might be helpful to put together a short list of things I particularly enjoyed in 2014. While I've restricted the list to things I read for the first time in 2014, it must be said that I vastly prefer reading old classics to newer but less memorable tomes. I recently decided to pack up roughly 1/3 of the books that I own since I saw very little likelihood I would re-read them in the next 24 months. Of the remaining 2/3, I estimate I have yet to read 40% of the titles - but I'll get there! Still, there's no way to discover new favourites without breaking some new ground, so here's the 2014 list.
Business, Finance & Economics
Creativity, Inc: Pixar's Ed Catmull recounts how the company was built. An enjoyable look at the origins of this path-breaking company, and also very informative in thinking about how creative organizations can be nurtured. I wrote about it here.
Salt Sugar Fat: Part history of the food industry, part expose of its unseemly practices to hook us on unhealthy foods. Like Jonathan Safran Foer's "Eating Animals", it truly changed how I view food and how I eat. It also made me think hard about equally unethical practices in the financial services industry.
The Second Machine Age: MIT professors Brynjolfsson and McAfee follow on from their previous work describing how technology is changing our economy, and how it will affect us as consumers, producers and workers. One of the greatest challenges is avoiding "this time is different" thinking while appreciating when genuine secular change is in the works. 2MA raises as many questions as it provides answers.
Conspiracy of Fools: The story of Enron's rise and fall is well-known, but this account reads just like a thriller. The combination of greed, corruption, stupidity and fear of standing out is breathtaking, as is the juicy array of characters.
The Rotten Heart of Europe: Regular readers will know I'm often bearish and sometimes just plain confused about the future of the Eurozone. Connolly's book talks mainly about the cracks that were visible in the European project well before the European Exchange Rate Mechanism came to pass (predating the ongoing Euro crisis). Remarkably prescient about the crisis, and skillful in describing the politics and economics behind the flawed idea. I wrote about it here.
And The Money Kept Rolling In (And Out): I'm a huge fan of Paul Blustein's work, and this work on the collapse of Argentina in the early 2000s is as good as I'd expect from him. It was particularly pertinent in 2014 as Argentina's sovereign debt woes continued, a legacy of the era Blustein recounts so skillfully.
The Life You Can Save & The Great Escape: It may surprise some to see Singer's "The Life You Can Save" under the Business, Finance & Economics heading but dealing with poverty is obviously an economic issue as much as a moral one. Singer's book will appeal to those who want to think clearly about how to do the most good with limited time and resources, and resonated deeply as I considered my long-term financial and life priorities. However, I disagreed with Singer's mechanical view of the economy where simple redistributions from rich to poor would create the best outcomes. This is a theme Princeton professor Angus Deaton takes up in "The Great Escape", which is a superb account of global trends in health and material well-being. Despite what appears to be a left-leaning bias, he is tepid on foreign aid and external intervention. Empathy has to be tempered with the fact that a true "Great Escape" can only occur when countries have strong organic institutions to engender postive health and economic outcomes.
Pioneering Portfolio Management: David Swensen's shepherding of the Yale endowment is the gold standard in institutional investing. Here, he describes how Yale does what it does (and doesn't shy away from attacking foolish and unethical practices in the financial industry). Of course, it must be taken with a grain of salt since not all institutions have Yale's resources and clout.
Measuring The Moat: Not a full-length book, but I loved the way Maubossin and Callahan combined a deep understanding of strategy and finance in this piece to explain how companies produce returns. This should be required reading for management and investment professionals alike.
Others
Make It Stick: I'm always trying to learn about learning, and this book is absolutely terrific. I gained so much from the authors' explanations of the science of learning, which is conveyed in an accessible and memorable manner. Keeping this blog going is, in part, a reflection of some of the lessons learned from this book.
The Great Agnostic: Susan Jacoby does a superb job in bringing Robert G. Ingersoll back to the forefront of American intellectual history. Ingersoll's writing and speeches are magnificent to behold, but what's most impressive is how a contrarian streak and devotion to truth led him to the right side of many issues before his contemporaries.
Naked Statistics: If you're like me and have forgotten quite a bit of what you learned in high school/college statistics courses, Whelan's book, focusing on the intuition behind statistical thinking, is for you. We live in a world inundated with data and "statistics", so this is helpful in trying to separate fact from fiction. Whelan's humourous and accessible style had me laughing throughout - no mean feat for a book on statistics.
Hunting Eichmann: Fascinated by WWII? Of course you are. My interest was reignited after a trip to Auschwitz this year, and the story of Adolf Eichmann was particularly compelling. One of the central figures in conducting the Holocaust, Eichmann eluded capture for 15 years before being kidnapped by the Mossad in Buenos Aires. I learned a lot about the history of modern Israel, as well as Argentina's status as a Nazi haven post-WWII.
Marked: I have long been interested in the issue of returning formerly incarcerated people to the workforce, but Devah Pager's superb and creative sociological study reveals the challenges this group faces. Prepare to be shocked at the magnitude of this problem.
On China: I had this book on my shelf for 2 years before finally getting to it, and truth be told, may never read this massive tome again. But Kissinger's history of China, with a focus on foreign policy, is quite fascinating. Today, we take China's rise as a given but it's always worth remembering the domestic and international political environment necessary to allow those far-reaching economic reforms to unfold.
In the Buddha's Words: "Mindfulness" is all the rage in the West these days, but this anthology compiles the Buddha's original teachings from the Pali Canon in a thematic fashion. It seems only right that we should seek truth wherever it may be found, and the power of these teachings resonated deeply with me as a secular humanist (as opposed to a "religious" Buddhist). Naturally, I managed to connect these ideas to investing here.
Honourable Mention
The Euro Crisis and Its Aftermath: If you need a primer on the Euro crisis, Jean Pisani-Ferry has done a terrific job here.
Beyond Debt: Similarly, Nikos Tsafos has done a good job bringing together the various strands of the Greek crisis in a single volume.
Risk Savvy: I'm a big fan of Gigerenzer's work. I'd heard much of this in prior books and speeches, but he always challenges me to go against some of the biases I hold, and to try and think more clearly about risks.
The Masters of Private Equity and Venture Capital: I read this in preparation for doing some consulting work to the PE industry, and enjoyed the easy style of the interviews, along with a good introduction to how some of the industry's top minds think. I wrote about it here.
There's Always Something to Do: This is a short and enjoyable biography of the Canadian value investor Peter Cundill. While short on the nitty-gritty of specific investments, there is enough here to entertain students of the value investing niche. I wrote about it here.
The Fall of the Celtic Tiger: I'm sure you've figured out by now that I'm fascinated by financial & economic booms and busts. Ireland's particular foray into this genre is explained well by Donovan and Murphy. I wrote about it here.
The Accidental President of Brazil: I really enjoyed these memoirs of Fernando Henrique Cardoso, who should be credited with Brazil's recent rise to prominence (a legacy his successors seem intent on squandering, unfortunately). The only reason this didn't make it to the main list is that I only read selected bits on Brazil's defeat of hyperinflation. I'm sure I'll read the whole thing at some point. I wrote about it here, here and here.
Man's Search For Meaning: This is partially a memoir of psychologist Viktor Frankl's time in Nazi concentration camps, and partially a discourse on his system of logotherapy, which proposes that the primary motivational force of an individual is to find meaning. I read this just before visiting Auschwitz and was deeply moved.
Business, Finance & Economics
Creativity, Inc: Pixar's Ed Catmull recounts how the company was built. An enjoyable look at the origins of this path-breaking company, and also very informative in thinking about how creative organizations can be nurtured. I wrote about it here.
Salt Sugar Fat: Part history of the food industry, part expose of its unseemly practices to hook us on unhealthy foods. Like Jonathan Safran Foer's "Eating Animals", it truly changed how I view food and how I eat. It also made me think hard about equally unethical practices in the financial services industry.
The Second Machine Age: MIT professors Brynjolfsson and McAfee follow on from their previous work describing how technology is changing our economy, and how it will affect us as consumers, producers and workers. One of the greatest challenges is avoiding "this time is different" thinking while appreciating when genuine secular change is in the works. 2MA raises as many questions as it provides answers.
Conspiracy of Fools: The story of Enron's rise and fall is well-known, but this account reads just like a thriller. The combination of greed, corruption, stupidity and fear of standing out is breathtaking, as is the juicy array of characters.
The Rotten Heart of Europe: Regular readers will know I'm often bearish and sometimes just plain confused about the future of the Eurozone. Connolly's book talks mainly about the cracks that were visible in the European project well before the European Exchange Rate Mechanism came to pass (predating the ongoing Euro crisis). Remarkably prescient about the crisis, and skillful in describing the politics and economics behind the flawed idea. I wrote about it here.
And The Money Kept Rolling In (And Out): I'm a huge fan of Paul Blustein's work, and this work on the collapse of Argentina in the early 2000s is as good as I'd expect from him. It was particularly pertinent in 2014 as Argentina's sovereign debt woes continued, a legacy of the era Blustein recounts so skillfully.
The Life You Can Save & The Great Escape: It may surprise some to see Singer's "The Life You Can Save" under the Business, Finance & Economics heading but dealing with poverty is obviously an economic issue as much as a moral one. Singer's book will appeal to those who want to think clearly about how to do the most good with limited time and resources, and resonated deeply as I considered my long-term financial and life priorities. However, I disagreed with Singer's mechanical view of the economy where simple redistributions from rich to poor would create the best outcomes. This is a theme Princeton professor Angus Deaton takes up in "The Great Escape", which is a superb account of global trends in health and material well-being. Despite what appears to be a left-leaning bias, he is tepid on foreign aid and external intervention. Empathy has to be tempered with the fact that a true "Great Escape" can only occur when countries have strong organic institutions to engender postive health and economic outcomes.
Pioneering Portfolio Management: David Swensen's shepherding of the Yale endowment is the gold standard in institutional investing. Here, he describes how Yale does what it does (and doesn't shy away from attacking foolish and unethical practices in the financial industry). Of course, it must be taken with a grain of salt since not all institutions have Yale's resources and clout.
Measuring The Moat: Not a full-length book, but I loved the way Maubossin and Callahan combined a deep understanding of strategy and finance in this piece to explain how companies produce returns. This should be required reading for management and investment professionals alike.
Others
Make It Stick: I'm always trying to learn about learning, and this book is absolutely terrific. I gained so much from the authors' explanations of the science of learning, which is conveyed in an accessible and memorable manner. Keeping this blog going is, in part, a reflection of some of the lessons learned from this book.
The Great Agnostic: Susan Jacoby does a superb job in bringing Robert G. Ingersoll back to the forefront of American intellectual history. Ingersoll's writing and speeches are magnificent to behold, but what's most impressive is how a contrarian streak and devotion to truth led him to the right side of many issues before his contemporaries.
Naked Statistics: If you're like me and have forgotten quite a bit of what you learned in high school/college statistics courses, Whelan's book, focusing on the intuition behind statistical thinking, is for you. We live in a world inundated with data and "statistics", so this is helpful in trying to separate fact from fiction. Whelan's humourous and accessible style had me laughing throughout - no mean feat for a book on statistics.
Hunting Eichmann: Fascinated by WWII? Of course you are. My interest was reignited after a trip to Auschwitz this year, and the story of Adolf Eichmann was particularly compelling. One of the central figures in conducting the Holocaust, Eichmann eluded capture for 15 years before being kidnapped by the Mossad in Buenos Aires. I learned a lot about the history of modern Israel, as well as Argentina's status as a Nazi haven post-WWII.
Marked: I have long been interested in the issue of returning formerly incarcerated people to the workforce, but Devah Pager's superb and creative sociological study reveals the challenges this group faces. Prepare to be shocked at the magnitude of this problem.
On China: I had this book on my shelf for 2 years before finally getting to it, and truth be told, may never read this massive tome again. But Kissinger's history of China, with a focus on foreign policy, is quite fascinating. Today, we take China's rise as a given but it's always worth remembering the domestic and international political environment necessary to allow those far-reaching economic reforms to unfold.
In the Buddha's Words: "Mindfulness" is all the rage in the West these days, but this anthology compiles the Buddha's original teachings from the Pali Canon in a thematic fashion. It seems only right that we should seek truth wherever it may be found, and the power of these teachings resonated deeply with me as a secular humanist (as opposed to a "religious" Buddhist). Naturally, I managed to connect these ideas to investing here.
Honourable Mention
The Euro Crisis and Its Aftermath: If you need a primer on the Euro crisis, Jean Pisani-Ferry has done a terrific job here.
Beyond Debt: Similarly, Nikos Tsafos has done a good job bringing together the various strands of the Greek crisis in a single volume.
Risk Savvy: I'm a big fan of Gigerenzer's work. I'd heard much of this in prior books and speeches, but he always challenges me to go against some of the biases I hold, and to try and think more clearly about risks.
The Masters of Private Equity and Venture Capital: I read this in preparation for doing some consulting work to the PE industry, and enjoyed the easy style of the interviews, along with a good introduction to how some of the industry's top minds think. I wrote about it here.
There's Always Something to Do: This is a short and enjoyable biography of the Canadian value investor Peter Cundill. While short on the nitty-gritty of specific investments, there is enough here to entertain students of the value investing niche. I wrote about it here.
The Fall of the Celtic Tiger: I'm sure you've figured out by now that I'm fascinated by financial & economic booms and busts. Ireland's particular foray into this genre is explained well by Donovan and Murphy. I wrote about it here.
The Accidental President of Brazil: I really enjoyed these memoirs of Fernando Henrique Cardoso, who should be credited with Brazil's recent rise to prominence (a legacy his successors seem intent on squandering, unfortunately). The only reason this didn't make it to the main list is that I only read selected bits on Brazil's defeat of hyperinflation. I'm sure I'll read the whole thing at some point. I wrote about it here, here and here.
Man's Search For Meaning: This is partially a memoir of psychologist Viktor Frankl's time in Nazi concentration camps, and partially a discourse on his system of logotherapy, which proposes that the primary motivational force of an individual is to find meaning. I read this just before visiting Auschwitz and was deeply moved.
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