Wisdom, Virtue and Some Common Sense

In one of the best TED talks I’ve seen, here is Barry Schwartz:
http://video.ted.com/assets/player/swf/EmbedPlayer.swf

The talk applies to everything we do but (staying on subject) I’m going to talk about its relation to business.

In my post The Real Causes of the Financial Crisis, I talked about how misaligned incentives led the system astray. But even if you properly incentivize people to do the right thing, that doesn’t mean everything is going to work out. In my previous post, I left it at “However, there’s no perfect solution.” But now I’d like to elaborate.

Dick Fuld, Jimmy Cayne and other financial execs had significant share ownership relative to their personal net worth. In other words, their interests were strongly aligned with shareholders. But that didn’t stop them from making bad decisions that were not only harmful to their company, but bad for society as a whole.

Optimally, you want management that doesn’t need incentives to do the right thing. Good incentives can help, but they aren’t going to cut it. Financial managers in particular need risk aversion ingrained in their personality. They need to be willing to stray from the herd and not follow the crowd. They need to have the wisdom, as Barry Schwartz described it, to do the right thing.

In looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if they don’t have the first, the other two will kill you. … If you hire somebody without the first, you really want them to be dumb and lazy.
Warren Buffett

In terms of business and finance, you can’t find a better example of a wise person than Warren Buffett.

As an investor or an employee, you want a business leader who is passionate about their company and the product they are selling—not about the money.* Qualities like this can be very difficult to determine. Buffett not only shares them, but he’s good at seeing them in others (one of the major reasons he is so successful).

In business school, you’re not taught to have character. You’re given the numbers, the statistics, the “how to” in a step-by-step fashion. But sometimes, its better to focus on common sense instead of what the figures say. Wisdom, virtue and common sense: all things that can’t be taught, no matter how prestigious the school.

* One last note — if I were the shareholder of a company that has received TARP funds, and will now have salary/bonus caps at $500k, here’s what I’d think: 1) if management gets paid a little less while we’re receiving a safety net from our government, that’s fine. 2) If one of my managers wants to jump ship so he can get paid more somewhere else, then great. It turns out I didn’t want him at the company in the first place.

1908 – 2008 – 2108

MrMorgan
The New York Times, 11/4/1907

In October of 1907, financial markets in the United States came to a complete halt. Credit markets froze, major banks collapsed, and the stock market plunged. Heads of industry, like J. P. Morgan, were forced to inject massive amounts of capital to prevent a complete collapse.

The circumstances of the Panic of 1907 are very similar to our current crisis. In both, the economy had experienced huge growth over the preceding decade. Banks lowered lending standards, which led people to take on more and more debt. When bank assets began to decline, depositors panicked, and there was a run on the financial system.

But for the rest of this post, I’d like to focus on the period that follows a financial crisis—not on the crisis itself. (Keep in mind that although I speak in terms of American progress, my point applies to any country around the world.)

* * *

The period following 1907 was monumental in American history. Continue reading “1908 – 2008 – 2108”

A Few Good Articles

Before I finish up with a longer post I’ll get to tomorrow, I thought I’d relay a few good articles on the financial crises:

$700 Billion Bailout Celebrated With Lavish $800 Billion Executive Party

How Did The Economy Go Bad?

The Onion’s 2008 In Review: The Economy

And this: (not too far from the truth)
http://www.theonion.com/content/themes/common/assets/videoplayer2/flvplayer.swf

In The Know: Should The Government Stop Dumping Money Into A Giant Hole?

Value Investing Word Clouds

Berkshire Hathaway Letters (1983-1987)

Berkshire Letters 83-87

Berkshire Hathaway Letters (2003-2007)
Berkshire Letters 03-07

A word cloud is a visual representation of a group of words, with the size of each word weighted to how many times it appears. The above two examples use the Berkshire Hathaway shareholder letters for the 5-year periods ending in 1987 and 2007. You can see some often-used words between the 20-year period: business, earnings, value, company, insurance. Word clouds are a good representation of what subjects the author is focusing on.
Below are a few more examples: (all created at Wordle) Continue reading “Value Investing Word Clouds”

3 Great Videos from TED

The following three videos from TED are not necessarily related to business or investing. But you should watch them anyway.

Benjamin Zander: Classical music with shining eyes

Benjamin Zander has two infectious passions: classical music, and helping us all realize our untapped love for it — and by extension, our untapped love for all new possibilities, new experiences, new connections. [See Zander’s book “::amazon(“0142001104″,”The Art of Possibility”)::”].

http://video.ted.com/assets/player/swf/EmbedPlayer.swf

Chris Abani: Telling stories of our shared humanity

Chris Abani tells stories of people: People standing up to soldiers. People being compassionate. People being human and reclaiming their humanity. It’s “ubuntu,” he says: the only way for me to be human is for you to reflect my humanity back at me. [See his first TED speech here].

http://video.ted.com/assets/player/swf/EmbedPlayer.swf

Sir Ken Robinson: Do schools kill creativity?

Sir Ken Robinson makes an entertaining and profoundly moving case for creating an education system that nurtures (rather than undermines) creativity. [This is an old talk, but if you’ve never seen it, stop everything you’re doing and watch it now.]

http://video.ted.com/assets/player/swf/EmbedPlayer.swf

FutureBlind Digest 4/22/08

A few good articles on the Freakonomics blog:

Phil Gordon Answers Your Poker Questions / Great interview with poker pro Phil Gordon where he talks about randomness, psychology and the future of card playing.

Not-So-Free Ride: The trouble with negative externalities / On creating better-aligned incentives to deal with the effects of cars and the environment/costs to society. Perhaps some good suggestions for Buffett’s GEICO subsidiary.

This article by Sanjay Bakshi courtesy of Reflections on Value Investing explores the sunk-cost fallacy and the endowment effect. Both good heuristics to be aware of when making decisions.

Blog update 4/08

Over the next few months, due to other commitments I won’t be writing posts as frequently. [Removed] Until then, you’ll have to settle with a few posts here and there with links I may find interesting.

On that note, I’ll take this time to thank all the readers and subscribers of this blog. It’s been running for about 6 months now, and has received about 15k views from 78 countries around the world. I don’t write as often as some other blogs, but when I started FutureBlind I wanted the quality of the posts to make up for it. So hopefully you’ve either enjoyed the articles, learned something new, or gotten some kind of insight from this blog.

In the first part of May, I will be attending the Berkshire Hathaway annual meeting in Omaha, Nebraska. I hope to see any readers who will be at the meeting or at the Yellow BRK’er party Friday night. For those who can’t make it, I’ll probably be posting a brief summary of my experience (every year it seems there are plenty of bloggers/writers who give great summaries of the meeting). This is the second Berkshire meeting I’ll have gone to (first time in 2006), and hopefully it will be just as good as the last.

Here’s a few good links before I go:

Fear of a Black Swan — interview with Nassim Nicholas Taleb.

Sam Zell: A Tough Guy in a Mean Business

Evolving the Wow! Factor — Olivia Judson is a science writer for the NYT. She is an evolutionary biologist and always has very fascinating articles. For anyone interested in evolutionary mental models, Olivia is one of the best writers out there.

Place Your Stock Bets Here — A post on the Freakonomics blog on the site Inspectd.com. A good site to show you how futile charting and technical analysis techniques are (once again, the rear-view mirror doesn’t help much).

The above also links to another good Freakonomics post on the media’s insistence on finding a reason for every market move. My favorite future headline: “Stocks Dive: Three First-Movers Sold Hard and Then Everyone Else Inexplicably Followed“.

Decisions in the face of uncertainty

Studying Students’ Reaction to Chance

An interesting article on a contest held at University of Virginia’s Darden School of Business. The contest split 269 students into two groups:

1. The first chooses one of two unmarked briefcases. One has a check for $18,750, and the other has nothing. Before opening the case, they are offered a chance to receive a fixed amount of cash in its place. It’s their choice.

2. The second group is given the cash upfront, and then offered the chance to buy one of the briefcases. For the student mentioned in the article, he was given $3,000. He could have walked away with the $3k, or bought the right to choose one of the cases.

The research showed that “buyers” (the second group) were more likely to keep the cash. Of course that isn’t rational, because the expected value of the case selection is $9,375 (a 50% chance of getting the $18,750 check).

The students admitted the decision is easier on paper, and more difficult when you have a handful of cash.

Overall, I’m glad Darden is doing research like this and teaching the students about decision making in the face of uncertainty. More schools should be doing the same.

More Holiday Reading

Death, Taxes, and Reversion to the Mean / Michael Mauboussin’s latest paper on reversion to the mean – why high return on capital can’t stay high forever – incorporating reversion to the mean in DCF valuations – “Good to great” and “Great to good”.

I came across Shahin Khezri’s blog a few days ago, and really enjoyed his post “Lessons From Ted Williams“. Shahin talks about Buffett’s comparison of the stock market to baseball. The market throws thousands of pitches a day, but you must decide which to swing at and which to let fly by. The difference between an investor and a baseball player is that the investor never has to swing. Great investors like Buffett don’t swing very often, even if the ball is in the strike zone. They wait for the obvious ones—the fat pitches—that can be hit out of the ballpark almost every time.

Reflections on Value Investing points readers to Authors@Google – a series of talks with respected authors hosted by Google. I’ve only watched the talk with George Soros (which was very good), but many of the other talks look interesting. See also my post on the TED Talk Videos.