I found this and thought of the Hobo.

Churchill on Chaplin:

Even poverty wore a different face in America. It was not the bitter, grinding destitution Charlie had encountered in the London slums and which has now, thanks to the extension of social services, largely disappeared. In many cases it was a poverty deliberately chosen, rather than imposed from without.

Every cinema goer is familiar with the Chaplin tramps, but I wonder how many of them have reflected how characteristically American are these homeless wanderers. In the dwindling ranks of the English tramps one finds all sorts of people - from the varsity graduate whose career has ended in ruin and disgrace, to he half imbecile illiterate who has been unemployable since boyhood. But they all have one thing in common - they belong to the great army of the defeated. They still maintain the pretence of looking for work - but they do not expect to find it. They are spiritless and hopeless.

The American hobo of twenty-five years ago was of an entirely different type. Often he was not so much an outcast from society as a rebel against it. He could not settle down, either in a home or a job. He hated the routine of regular employment and loved the changes and chances of the road. Behind his wanderings was something of the old adventurous urge that sent the covered wagons lumbering across the prairie towards the sunset.

There were also upon the highways of America, in the old days of prosperity, many men who were not tramps at all in the ordinary sense of the term. They were traveling craftsmen, who would work in one place for a few weeks or months, and then move on to look for another job elsewhere. Even today, when work is no longer easy to secure, the American wanderer still refuses to acknowledge defeat.

That indomitable spirit is part of the make-up of the screen Charlie Chaplin. His portrayal of the underdog is definitely American rather than British. The English workingman has courage in plenty, but those whom prolonged unemployment has forced on the road are nowadays usually broken and despairing. The Chaplin tramp has a quality of defiance and disdain.

The hobo responds: 

There is a better ground than choosing poverty or riches for us. That is the Prince & the Pauper condition that's available to nearly anyone reading this. Skid row is a vast experimental laboratory and nowhere else have I discovered & set limits than in those rows across America. An American hobo is defined as a worker who wanders from job to job. The USA allows this with grand territory and a thick network of railroads to enter it. England is cramped; USA is wide open. So it is that the hobos who today in spring are hitting the flatcars and boxcars by the thousands are rebels against tight living and a diurnal job. Almost all are forced by hunger to climb aboard Dirty Face but some of us do it for the adventure, and for self-discovery.

Charlie Chaplin, though British, is convincing as an spirited American tramp because he grew up in the poor district laboratory that I pass through by choice. Charlie's childhood in London was hemmed by poverty and hardship. His father absent and mother struggling financially, he was sent to a workhouse twice before the age of nine. It puts me in mind of my friend George Meegan who climbed a ship's mast on River Thames at a similar age, saw the horizon, and sailed at it for seven years on tramp steamers at sea. Then he jumped down and found his land legs in walking from Tierra del Fuego to the arctic circle via NYC. You cannot hide the backdrop of such talent on screen or in print. When Chaplin was 14 his mother was committed to a mental asylum. I've worked those also as another laboratory of experience, and old folks homes, jails, and even sold Nut Cracker Sweets on 57th street of Manhattan outside Niederhoffer, Cross & Co. after working a day upstairs as a technical analyst. To point, Chaplin toured as a tramp comedian before attracting notice and coming to America to become the premiere tramp. In his floppy footsteps followed Weary (Emmett Kelly) Willie and Happy (Red Skelton) Hobo. Emmet was literally born into a circus while Red beginning at age 10 was part of a traveling medicine show.

They had the spirit, all right, from experience & passed it on to their audiences. For the real deal on the skid rows read anything by Nels Anderson.

And so that brings me to today's choice after paying the IRS. I can use the leftovers to go on an African safari or a walk in Baja, Mexico. Life is a series of T-mazes, if one takes it seriously, and I think I'll take a walk.

anonymous asks the hobo: 

Have you spent any time on Skid Row in Los Angeles?

The hobo responds: 

 LA was my first skid row. I checked into the Midnight mission and sat in a pew next to a black man with 6's tattooed across his knuckles as we listened to an ass-whopping sermon. That's where I 'fell in love' with mission preaching. Then we ate a hearty meal of meat loaf, potatoes & gravy. Then we lined up for bug check. What's that? I didn't know but everyone had to do it before getting a bed. The housekeep must have spotted me as a virgin tramp for I was called first to wind down the stairs into the bowel of the mission where a man I couldn't see waited with a blue light. He told me to drop my drawers and proceeded to shine the light to fluoresce pubic lice. 'Clean! Next!' he yelled. That night i was grateful for being dead tired from catching a freight into town the previous ones. The dorm room of fifty soon filled with snores & flatulence while gunshots outside on skid row shook the broken windows. The next day I caught a freight to the next skid road. That's a hellofa education.



 Kenneth Roman is the former Chairman and CEO of Ogilvy & Mather Worldwide. He is author of a book about his firm's buccaneering founder, David Ogilvy. The following eighteen lessons in leadership are inspired by Ken's book The King of Madison Avenue: David Ogilvy and the Making of Modern Advertising.

1. On principles (borrowed from J.P. Morgan): "Our policy is only first-class business, and that in a first-class way."

2. On professional standards: "Top men must not tolerate sloppy plans or mediocre work."

3. On setting lofty goals: "Raise your sights. Blaze new trails. Compete with the immortals."

4. On knowledge: "Suppose, your gall-bladder has to be removed this evening. Will you choose a surgeon who has read some books on anatomy and knows where to find your gallbladder, or a surgeon who relies on his intuition?"

5. On focus in an organization: "If we are to prevent the eventual disintegration of our world-wide church into a Tower of Babel, we must continue our evangelism, make sure that every office is headed by a member of the True Church, and not by a stranger and, never again entrust the supervision of offices to outsiders or lay brothers. This errors leads to schism, balkanization, apostasy, bankruptcy and ultimate disintegration."

6. On size in an organization: "If God is on the side of the big battalions, and that seems to be the case, the path of wisdom lies in becoming one of the big battalions."

7. On committees: "Search the parks in all your cities, You'll find no statues of committees."

8. On mergers: "Clients never like mergers. They hate them. They don't like their accounts being sold. I don't blame them. If my doctor said he had sold his patients to another doctor, whom I had never met and must consult for all future health care, I wouldn't jump up and down with joy."

9. On acquisitions: "Finance aside, I have always thought [acquisitions] a rickety way to grow. Good agencies are never for sale."

10. On hiring: "If you hire people who are smaller than you are, we shall become a company of dwarfs. If you hire people who are bigger than you, we shall become a company of giants. Hire Big People, people who are better than you. Pay them more than you pay yourself, if necessary."

11. On meritocracy: "No spouses. No nepots"

12. On corporate culture: "We treat our people like human beings. We help them when they are in trouble. We help our people make the best of their talents. Our system of management is singularly democratic. We abhor ruthlessness. We like people with gentle manners. We admire people who work hard. We despise and detest office politicians, toadies, bullies and pompous asses. The way up the ladder is open to everybody. In promoting people to top jobs, we are as influenced as much by their character as by anything else."

13. On minimizing office politics: "Sack incurable politicians. Crusade against paper warfare."

14. On compensation: "Pay peanuts and you get monkeys.

15. On checking expense accounts: "Even the Pope has a Confessor."

16. On firing people: "I think the most cruel thing you can do to people, especially I am sad to say, to men, is to fire them, to put them in a situation where they don't work. Always do your damndest to avoid condemning people to the hell of unemployment."

17. On losing clients: "Clients come, they go, they come back, we'll get a new one. The only thing that can affect who we are as a company is if [the Chairman] feels any less committed."

18. On clear and honest writing: "People who think well, write well. Woolly-minded people write woolly memos, woolly letters and woolly speeches. I believe in the dogmatism of brevity."

Stefan Jovanovich writes: 

I hate to argue yet again with an Eddy Top 10 but the central fact of David Ogilvy and his successor's careers is that they allowed two kids from Stanford to swallow their entire business. The Mad Men were terrible snobs– even worse than their publisher and broadcaster vendors. As a result they lost out on an opportunity that the inventors of their business– Wanamaker and Stewart– would have jumped at the chance to develop. Ogilvy is also wrong about canning people; it is usually the kindest thing you can do to people if they cannot do the job. We all fail; the illusion of schooling is that somehow that law of nature can be repealed.

Richard Owen writes: 

Interesting analysis Stefan! Indeed one of the anecdotes from Ken Roman is

Following a hostile takeover of his agency, Ogilvy was in the audience when the chairman of the acquiring company was asked what was next after buying J. Walter Thompson and Ogilvy 3: Mather. He had completed his goals, was the answer, and planned no further acquisitions. From the middle of the audience came a stage-whispered comment from the founder: "Just like bloody Hitler after Czechoslovakia."

Ogilvy states various things about firing people: I guess it was something along the lines of striking a balance, having long term vision, and being humane. Indeed, he encouraged one colleague who's passion wasn't advertising to pursue wildlife matters, and as a result became one of the pioneers of the WWF.

Gary Rogan writes: 

In a significant percentage of cases "cannot do the job" is too definitive of a conclusion. Also, obviously people are often let go not because they cannot do the job, but a lot of other factors. It seems like not being too random in getting rid of people even if you can easily get away with it is a mark of a humane person.



 A recent documentary on the BBC about Tim Hetherington, the war photographer, was very poignant. Tim died aged 40 in the conflict in Tripoli. Something about the mixture of humanitarian intent, film star good looks, big brotherly persona, and artistic skill made him very likeable.

It was interesting that in the run-up to his death Tim spoke at a conference where he foreshadowed his own accident and commented to the effect that: You are at more risk as you age as a war photographer. You instinctively know where the hot story is, but that is often also where the greatest danger is. When you are young, it takes you time to get the story and you approach it with caution. But when you know, you are desensitized, you go straight there and go all-in to get it.

One needs to be careful not to make glib analogies of risk in war zones to risk in finance. But does the old successful trader risk developing a sense of invincibility, go straight for the good risks, and go all-in?



 I read over the weekend about Al Oerter and Lance Larson. Their stories are pretty amazing.

They were both Olympic gold medalists as young men who, after either a long break of almost a decade or professional retirement, returned to the sport.

Amazingly, Oerter after ten years got back in the Olympic team and beat all his old records. Similarly, Larson beat most of the times he produced twenty years earlier when swimming as a master.

Other examples of mature mastery are Sir Christopher Wren who built 52 churches and retired at 86, after which he spent 5 years pursuing literature and astronomy. Cato at 80 studied Greek and Plutarch, at a similar age, Latin. Verdi wrote Othello at 74 and wrote Falstaff at 80.



 My dad, who's on his deathbed, when lucid last week offered some advice to my nephew (who's struggling) and my son (who's not struggling). My dad said that in order to get ahead in life, one must hustle for money all the time, always look out for a better deal and more money, work very hard and smart, marry the correct woman, not necessarily the one you currently have the hots for. He mentioned thrift, and said that although cash offers a negative return, that personal thrift in all areas will keep you comfortable in the long run. He nailed both grandsons on their $5.00 a day Starbucks habit and ran some numbers by that over 30 years. He also nailed my nephew who smokes on how smoking will not only lower his life expectancy, it will affect his net worth and retirement. He said, "I bet between your Starbucks, smoking, and fast food lifestyle, you are spending 35% of your net income on bulls**t." He told both of them to think 3 generations down the road and plan for that and save, accumulate, and save some more. His final word to my nephew was that he is only inheriting $1000, but he had the tact to not mention that my son is getting my half of their estate that I surrendered. I did a good job raising my son. My son is already figuring out how to not dip into capital, which is a lesson everyone should be required to learn. Sadly, most don't.

Rocky Humbert writes:

Economics question/thought: What would happen to the economy if everyone followed that lesson: "My son is already figuring out how to not dip into capital, which is a lesson everyone should be required to learn. Sadly, most don't." If the only consumption is from a return on capital and earned income, what effect would this have on personal income and economic growth? I haven't thought this through, but my gut reaction is that this would pose a serious problem.

Richard Owen writes:

This is a good point. And any major shift by economic actors would be destabilizing over some period. In Jeff's instance Starbucks would go bankrupt and many baristas would lose their job and the capital employed in coffee houses rendered worthless.

But a steady state situation of high capital reinvestment by everyone can be envisaged. It would eventually lead to an increased level of capital per capita and thus the dividend would eventually dwarf what could previously have been received by eating into capital. The question is, if people are then rid of an appetite for Starbucks, what capital assets should be created other than coffee bars from which to receive the enlarged dividend? Luxury houses? Personal libraries?



 Apparently, in the mid 1920s, a washing machine and a Ford Model T both cost around $300.

The ratio of those prices has changed dramatically.

I wonder why?

Shane James writes:

A magnificent relationship to ponder.

Richard Owen adds: 

Another strange example of deflationary monetary flows is that in the 1990s, when Operation Tuxedo stopped the December flow of 120k MDMA tablets, 108kg of amphetamine and 60kg of hash into Liverpool, armed robberies of bookies and posts offices in Merseyside increased by 80% the following Jan and Feb.

Pete Earle writes:

My off the cuff answer: the political machinations surrounding auto manufacturing (labor, corporate and military acquisition, etc.) leads to a large degree of government intervention, price controls, etc., in turn producing distortions, whereas washing machines are (far) less 'corporatistically' engaged. Also, a washing machine is still, for the most part (excepting, I guess, credit cards) an outright purchase, where rarely if ever is a car purchased without some sort of long-term financing. (Although the latter may be effect, and not cause.)



 A documentary on the Yesterday channel just now about the Netherlands had a brief segment on tulip trading. Today tulips are sold by Dutch auction: an odometer graphic winds down marked with price and the first trader to hit his button wins the consignment.

Interestingly, a tulip history expert alleged that nobody went bankrupt due to the tulip bubble. She alleged Charles Mackay drew the myth from playful Dutch art painted in the period and it perpetuated from there.

The most desirable and expensive tulip in the Dutch bubble was the Semper Augustus. Its flamed appearance is now recognised to be a form of crop disease and so any such flowers in today's fields are immediately ripped out and destroyed.



"Jerome Bruner, the Harvard psychologist, says that he has never visited a lab that was worth a damn where the people weren't having a lot of fun. The physicists at Niels Bohrs lab in Denmark, where they split the first atom, were always playing practical jokes on each other."



The Theory and Practice of Selling the AGA Cooker has been called the finest sales manual ever written.



 Has anyone put into practice or examined Ray Kurzweil's (of Google fame) lifestyle advice for living long enough to make it to the singularity (the point where nanotechnology will allow you to live forever?). It's described in his book, Fantastic Voyage: Live Long Enough to Live Forever

(I have not read it yet).

anonymous writes: 

I have a copy of the book, and have read it. I am interested in working with a doctor who is Kurzweil friendly but have not actually broached the topic with mine. My biggest concern with some of the content is the large number of unproven supplements Kurzweil is ingesting. He is a believer in the health properties of alkaline water which I have a very hard time buying into. There are also other supplements that I don't think bear out under scrutiny. A lot of its recommendations are common sense in terms of what to eat and what to avoid. However, I did find other parts of the book to be interesting though, and think it is worth a read. Some of the theory in particular will be of interest for those inclined to go down the rabbit hole.

If you go to their website, you can actually download a short guide to much of what the book goes into depth here.

After doing a lot of my own research, I think Vitamin D is probably a key supplement for most people, and I am now taking it daily.

I've actually read all of Kurzweil's stuff and am a fan overall. I would question though why the singularity has not already happened somewhere else, unless we truly are the only intelligent civilization in the entire universe. It seems like at the very least we should have encountered probes by now.

David Lillienfeld writes: 

There are some data available, and those have been looked at many times. The Mediterranean diet, for instance has repeatedly come up in the Seven Countries Study, and ditto for the Adventist Health Study. Migration study findings of differences in mortality likely includes differences in diet, but what exactly that is remains unclear. I don't thing there's much debate about the Ornish diet reducing mortality, though the practicality of getting anyone to remain on it for any length of time may be questioned. Depending on how one looks at alcohol consumption (whether a food or something else), one can say that there's pretty good data that reductions in alcohol consumption are associated with relative reductions in mortality, though the effect is best seen at higher levels of consumption. In contrast, trying to make sense of any of the data collected using FFQs has been challenging at best.



 All is calm, all is bright.

Richard Owen writes: 

Further proof one should never forget obscure cross-market correlations, and here is a link for those who didn't grow up in the UK.



 The purpose of this post is to stimulate discussion about an important market development. It's not a prediction.

I believe that one of the most widely accepted memes in the financial markets over the past several years has been that the Chinese Currency was/is undervalued, manipulated and would not go down and must eventually go much higher. The fundamental arguments for this were the persistent balance of payments surplus, purchasing power parity, competitive advantage/cost, political pressure, the history of currency movements in places like Japan, relative growth rates and growth potential; monetary base; and the list goes on and on and on. In fact, I can't find any credible opinion to the contrary. (A couple of summers ago, Bill Ackman made a big PR splash buying "cheap" calls on the HK dollar predicting an inevitable and massive revaluation.)

Over the past few weeks, the Yuan has reversed course and started to decline. It has had a violent and 3 sigma decline in the past 3 days. The story is that the Chinese authorities are encouraging a "wider trading band."

I am not offering any predictions here. But it is striking that the impulse move is in the down direction, not the up direction … all the more so, when the universally accepted truth is that the Yuan can only rise.

Is this just a counter trend move? Or is something bigger going on? If the Yuan starts declining instead of rising, what are the second order effects on other markets? If this is more than a counter trend move in a secular bull market for the Yuan, then I believe there are some very important implications. Unfortunately, I'm not smart enough to know whether the supposition is true and/or what the second order effects may be.

A good place to start thinking about this might be historical analogs. What are the historical analogs? And when does the perma bull Yuan story get stopped out?

Alston Mabry writes: 

I agree. With all the issues out there on shadow banking, credit bubble, CBOC actions, ghost cities and shopping malls…who actually knows what's going on? If anybody "knows', it's the market itself. Once China frees up capital controls, import controls and currency controls and becomes relatively transparent accounting-wise…then the RMB will move on economics…mostly. But right now there are so many "shadow issues" in play that it's hard to assess the situation other than on a short-term trading basis.

Richard Owen writes: 

Disregarding the background 'China story' which is the key determinant of the secular factors (eg, do you believe China is massively insolvent or not, does it matter), when currencies are 'newly' brought to market (in the sense of being a new regime, if not a new currency), they often trade off initially. Domestic holders want to diversify and foreign buyers have no structural reason to accumulate inventory, thus have a 'show me' attitude on price. And since fx is a short duration asset, nobody is holding for the carry and a trend begets itself. Or to put it another way, as yuan trading is liberalised, does the marginal holder likely want to diversify out of existing stock more than a foreign holder wants to get into? Comparables are perhaps the euro introduction, where despite a hugely profitable convergence carry on long bonds, even underwritten by the ECB discount window, it initially sold off. Perhaps more analogously, when South Africa empowered its blacks, the Afrikaans community thought the end was nigh (as some chinese entrepreneurs do now) and began liquidating everything and selling into offshore currencies. They misread the situation, however, and the sandtown community provided a bid to the Afrikaans. My friend's uncle bootstrapped a working mans savings into a billion by buying the real estate liquidation, putting in newly arriving AAA multinationals as tenants and riding the yield curve down from teens to single digits.

anonymous writes: 

In the face of 2008 downturn, the Chinese government created more money than was done by the ECB or the Fed. The shadow banking system carried on making new loans to reestablish the housing bubble. Based on that slice of data, the RMB should not be rising against other foreign currencies, but falling.

Yes, trade surpluses are supportive to a currency, but China's big trade surplus with the US is balanced by some trade deficits with sources of raw materials, and production machinery, so that their trade surplus overall is not as big as with the US. The foreign direct investment into China has been very high as has the Carry Trade where borrowing in low interest rate countries like Japan and buying higher rate Chinese Treasuries, was profitable and gained even more as the RMB rose. This looks to be reversing and is thus a negative for the RMB and is big at maybe a half trillion dollars of hot money.

The image is of the Chinese government suppressing the currency to keep its exports growing and doing so by buying US Treasuries, and that was also pushing the image higher. But Chinese people are buying gold for safety, indicating that they have seen government spending and do not have confidence in the RMB. I think a downward spike in RMB could be followed by more selling if Carry Trade unwind becomes big. But PPP and Trade surplus will limit the move eventually, IMO.

anonymous writes: 

I also agree, (Chinese financial reporting is awful) but the assertion that we can know many outside variables from the US$ of the equation is very important. (Current account surpluses and deficits bear many similarities to double-entry accounting, in that aggregate balances in one direction or another should balance each other out.)

I submit that the current state of Chinese property and credit markets bear many similarities to what Hyman Minsky termed a "deviation amplifying" mechanism in his Financial Instability Hypothesis.

However, if asked how it will play out, my tendency is to say that at some point over the next few years, they are at substantial risk for a debt deflation. Personally, I'd have a tough time convincing myself to be short a deflating currency.

Charles Pennington writes: 

OK, here's an "N=1" kind of study…

Back in mid/late 2011 the Swiss franc ("CHF") was strengthening violently against the Euro, with the Euro almost going down to parity with CHF. Then the Swiss stepped in to weaken the CHF and forced the Euro back up to 1.2 CHFs. The Euro sat there, pegged at 1.2, but everyone feared that the risk was that the Euro would fall below 1.2. Instead the Euro ended up moving higher against the CHF in mid-late 2012 and 2013. Very similar to Rocky's China story.

Since mid 2012, EWL (the Swiss market etf) is up about 55% and FEU (the EuroStoxx etf) is up about 40%. EWL is probably a bit less volatile than FEU (though I didn't check), so EWL's gain is yet more impressive.

So the N=1 conclusion is that you should buy Chinese stocks.



 I read two great books lately. The first was Milady Vine, The Autobiography of Baron Philippe de Rothschild and the second was The News: A User's Manual by Alain de Botton

The Rothschild biography begins an ending chapter with a quote from Laurence Sterne:

"His opinion was that there was a strange kind of magic bias which good or bad names, as he called them, irresistibly impressed upon our characters and conduct. How many Caesars and Pompeys, he would say, by mere inspiration of the names, have been rendered worthy of them? And how many, he would add, are there who might have done exceedingly well in the world, had not their characters and spirits been totally depressed and Nicodemus'd into nothing"

Philippe de Rothschild was a French family member with lineage in the arts, society and agriculture rather than the banking franchise which other cousins inherited. The quote captures the burden upon (and rocketship beneath) Baron Philippe as he goes about his adventures. His principal asset becomes Chateau Mouton which, alongside Chateau Lafite is one of France's premier wine estates.

The quote possibly also applies to the author of The News: Alain de Botton is son of Gilbert de Botton, formerly president of Rothschilds in New York and founder of asset manager GAM. de Botton is a specialist in the application of classic philosophy to modern situations and to quote him "somebody who has made a few stabs at trying to bring elite culture into the wider culture".

This is manna to the broadsheet newspapers and possibly why many reviewers of his work try and unfold a psychoanalysis of de Botton's background, rather than taking his writing on its merits. In the case of The News, however, we at Daily Specs can legitimately hope something of de Botton Snr's financial genius was channeled from the ether into de Botton Jnr's assessment of the media's reporting of Economics, Politics and beyond. But nonetheless, de Botton Jnr's flair - like Barron Philippe's - is fully self-made.

But first, back to Barron Philippe. The biography is an efficient and entertaining one, with plenty of salacious content covering Philippe's love life and - perhaps uniquely for a Rothschild biography (albeit I speculate with limited data) - some detailed analysis of his private parts.

It also contains several interesting lessons on business and wealth. Every man is ultimately self-made, and this is no less true for Philippe. One of the themes is how much unhappiness, isolation, and jealousy can come from privilege. High birth has its own unique challenges: Philippe has a very difficult relationship with his mother who openly mocks him as a child in front of friends, until Philippe finally snaps and runs away to live with an Aunt. He then doesn't speak to his mother for many years.

Nonetheless, he inherits his principal asset from his mother: Chateau Mouton. At the time that he takes the estate over, it is in heavy disrepair and loss making. Indeed, a key staff-member has been siphoning off the profits to build his own estate and has even stolen the vines. Barron Philippe is remarkably sanguine about this discovery and doesn't pursue the thief, reasoning that they deserved what they got as negligent landlords. The book is full of examples of the difficulties of managing a large estate and the various dissipations that occur. When his father passes away, many assets cannot be properly traced or tracked.

Philippe's key business success is vertically integrating Mouton as wine producer. At the time he takes over, wine is not fashionable, having taken a backseat to cocktails. Mouton takes the wine only as far as the barrel, and wine is bottled, wholesaled, and retailed via a complex supply chain. Philippe takes out the middleman, and begins bottling on-site. This gives much higher control of the vintages and prevents any interference or fraud by the bottlers.

Baron Philippe has an instinctive understanding of luxury goods with a commodity input. He forms a combine between five elite wine estates who all begin bottling on site. He manages the quality ruthlessly, and happily disposes of 90% of the vintage if it isn't up to spec. This creates supply squeezes and heightens emotional desire through occasional withdrawal. Philippe hires famous artists such as Warhol to provide unique labels each year. Philippe perfects the protection of brand equity whilst delivering a more accessible product: he forms a junior brand "Cadet Mouton" which has a price point accessible to all. This creates a virtuous circle, cementing the name with the public whilst bolstering the inaccessibility and privilege of the elite brand.

Perhaps the most interesting part of the book is Barron Philippe's experience during WWII. Despite a decade of run-up, much political data on the horizon, and plenty of financial resources to prepare, when the moment comes, Philippe has zero assets offshore, has made no preparation for escape, and is rendered an everyman (well almost) by the Vichy government.

Philippe socialises with wealthy French families who sympathise with the Nazis and, having listened to them delivering excoriations about the "jews and freemasons" being responsible for societies ills, he is graced with a caveat that - of course though - they don't mean Philippe: he and the Rothschilds are different.

Ultimately, Philippe has to escape alone on foot to Spain, Portugal, then England. His wife refuses to leave. Albeit she is protected somewhat by membership of an old Catholic French family, the mental hysteresis of uprooting to England is so great that she prefers to face danger at home.

Such is the lack of preparation of his affairs that, had Philippe's estate not been focused upon a hard asset like Mouton (which is commandeered by the Germans), and France not liberated, his financial losses may have been total.

The book is entertaining, Philippe writes very well (albeit he has a ghostwriter), and did I mention the bit about (to adopt own terminology) his cock?

 Now onto The News: A User's Manual by Alain de Botton

de Botton's book is an fascinating essay on the modern media. His ambition, well realised, is to answer "what should the news ideally be? What are the deep needs to which it should cater? How could it optimally enrich us?". de Botton moves by category, and we can contract the answer to his questions as:

- Celebrity News should let us draw inspiration and insight;
- Disaster News, a sense of our ephemeral lives and a gratefulness for our blessings;
- Consumer News, a sense of which goods might best assist us in answering our underlying aspirations for a fulfilled existence;
- Political News should help to create a rounded, tolerable nation;
- World News should open our eyes to the nature of life in foreign countries above and beyond their moments of crisis; and
- Economic News should evoke the human realities that lie beneath the data.

de Botton makes a good case for why we are drawn to celebrity ephemera over serious news. And like Freud, having dawn the underlying neurosis from his own experience, makes us feel more normal for having experienced it too.

Perhaps most interesting for Daily Specs readers are his chapters on economic news. de Botton states *"to assess a nation through its economic data is a little like re-envisaging oneself via the results of a blood test, whereby the traditional markers of personality and character are set aside and it is made clear that one is at base, where it really counts, a creatinine level of 3.2, a lactate dehydrogenase of 927, a leukocyte (per field) of 2 and a C-reactive protein of 2.42". Amen. And this is before adding the Camp Kinder layer of obfuscation that our Daily Specs Chair comments upon regularly.

de Botton even provides a chapter specifically on Investor News, which again to quote him: "investors are like pilots flying high over a landscape at night. For navigation, they rely on only a few beacon signals and visual cues: the nuclear power station on the peninsula, the main north-south motorway and the medieval city, glowing like an encrusted diamond ring at the foot of the mountains. But there is no need to worry about the discussions in the apartment block near the piazza; the dilemmas of the lorry driver at the service station or the dreams of the technician in the turbine hall."

This seems correct, albeit that extending oneself to discover clues in the latter non-standard, non-quantifiable minutiae is possibly a sign of profitable maturity in ones financial analysis.

Overall, the book is perhaps utopian in its aims: to create a news media that serves to enhance us rather than just capture our clicks and attention. But I am sure de Botton well realizes this. One must always have a mighty target on the horizon in order to appropriately set nearer, more realistic goals.

de Botton makes cogent points on the personalisation of news streams available with modern technology. That we risk confining ourselves to informational cul-de-sacs to our own detriment. Indeed, he proposes, "only after extensive self-examination, perhaps with the help of a psychoanalyst, would they be adequately prepared to set the dials on their personal news engines, aware of the sorts of stories that were needed to challenge their defences, expand their horizons and excite in them the right sort of envy."

Or perhaps, as the Chair cogently advises, we should all stick to the National Enquirer.

In sum, an efficient and educative read, and did I mention that there is no bit about (to adopt my own terminology) his cock?



 The Hudsucker Proxy is one of the best stock scam movies Hollywood has produced. Much more relevant to the realities of Wall Street than the hookers and blow cartoon of Scorcese's Wolf (not that I am criticising the latter: art isn't documentary).

The script has some beautiful subtleties in it.

And the film is perhaps a sign of how those who love their trade can sometimes carry a lucky star: it was part of a string of low financial ROI movies for the Cohen Brothers, but did not hamper their progress.

Sidney J. Mussburger: It's working already. Waring Hudsucker is abstract art on Madison Avenue. What we need now is a new president who will inspire panic in the stockholder.

Board Member 6: A puppet.

Board Member 5: A proxy.

Board Member 2: A pawn.

Sidney J. Mussburger: Sure, sure. Some jerk we can really push around.



 The film White Men Can't Jump features two basketball hustlers: Billy Hoyle (Woody Harrelson) and Sidney Dean (Wesley Snipes).

1. Billy consistently bets his whole account on each game. He gets ahead quickly for a number of games, but also repeatedly wipes out.

2. Sidney, on the other hand, is diversified. He bball hustles, but also runs a food stop and decorating business. He takes a share of the bets Billy fronts.

3. Billy owes hard money. As a result, he has two mafiosos trailing him.

4. Sidney (per Billy) would rather look good than win. He takes risks which don't further his financial goals.

5. Sidney and Billy eventually meet with success by entering a competition funded by sponsors. No money is risked. They have learnt to leverage OPM.

6. When either winning or losing, Billy goes on tilt if criticized. After his biggest victory, having won his money back, he bets Sidney his whole proceeds that "white men can jump".

7. The biggest financial success turns out to be Billy's girlfriend, Gloria. She believes - seemingly irrationally - that her destiny is to be selected for quiz show Jeopardy. Sidney eventually persuades the security man from the Jeopardy studio lot to get her in. Such was her persistence that the irrational became actual.

8. Deception operates repeatedly. There is:

- the trojan horse: offering to play with any partner, having placed preppy doofus Billy in the court stands;
- the thrown game: Billy is paid by some mafiosos to throw a championship match;
- the false friend: Billy and Sidney form a hustling team, but Sidney plays to lose thus hustling his own partner;
- the shakedown: to make a grub stake, a bball player tries to rip off a liquor store;
- rule changes: a hustlee, having realised that he is the mark, refuses to pay up and pulls a gun; and many others.



Disabled people are 1 in 6 of the population but have spending power the same as gay folks who are 1 in 20. Both control only a quarter as much spending power as ethnic minorities who are 1 in 8. Ethnic minorities control almost a third of total UK expenditure.

All seems internally consistent and reasonable. Good to see the government has such a clean handle on the statistics.

"Why is the Disabled Pound Purple?":

The UK's 11.9 million disabled people are said to have disposable income collectively worth £80bn. Campaign groups regularly cite this figure and find it useful to remind businesses and politicians that disabled people are a sizeable economic force and should not be forgotten.

Black and ethnic minority spending power, £300bn - 12% of the population of the UK, according to the Institute of Practitioners in Advertising, IPA,

Consumer power of the gay community, £70bn to £81bn - thought to be 6% of the UK, according to OutNow Consulting, 2007.

Overall UK disposable income of its 25 million households plus non-profit sector, 1.078 trillion pounds, according to the Office for National Statistics, ONS, 2012



 "Gambler 'Killed Wife' After Losing Bank Millions"

As Artie said. "All gamblers die broke and become degenerates. Don't gamble".

Richard Owen writes: 

This is such an incredibly sad story. I think I recall reading on spec-member, Mark Goulston's, blog the idea that the suicide rate is higher in young men because they attach so much to their perception of other's assessment of their competence. Thus experiencing a material failure can make them do insane things. In contrast, women are much more self-assured plus their parenting of children, who can be unintentionally cruel, has prepared them to cope readily with criticism.

I recall reading a statistic that in the UK, if you strip out inherited wealth and the like, almost 100% of individuals of net worth over £50m come from one of three categories: (i) immigrants, (ii) they attended boarding school, or (iii) they were Jewish. What is the common factor among these categories? Probably some element of "otherness" in their upbringing. British boarding schools of the era of those featured in the statistics were brutal places where bullying was a standard ingredient in toughening up the kids. There is a great book by Sir Peregrine Worsthorne ("silly Perry" as Thatcher once called him) called Democracy Needs Aristocracy. One point he makes is that part of how aristos used to earn their place was the excruciating right of passage of attending a boarding school. Ironically, the spine building experience that foreigners now pay through the nose to obtain has disappeared through their own subscriptions. To attract foreign wealth, 'brand' boarding schools have been turned into a combination of five-star hotel and country club.



A Case of Hutber's Law:

Hutber's Law states that "improvement means deterioration". Patrick Hutber is the much missed City Editor for The Sunday Telegraph in the 1970′s. His law was founded on his cynical observation that a stated improvement, mostly to be found in business, actually hides a deterioration.

I feel sure we've all been in receipt of a letter, most often from a utility company, that informs us of some wonderous improvement in their service, only to be attached to the loss of some other useful aspect of their service.

Another area where Hutber's Law is to be found is in updates to computer software. I don't want to sound too much like an old fogey, resistant to change, but I'm stumped to do what was simple in one version, yet is oh so complicated or impossible in a newer, or so-called improved version.

Hutber's Law lives on.



An interesting idea I heard is to apply open source principals to speculation.

I started thinking, where has open source historically been successful? Software. And it interesting to note that many of the titans in open source software were quite zealous left-libertarians who believe in things like "information wants to be free". Profit was not high on their lists. What we do here is, already, perhaps somewhat akin to this, but quite unstructured. There is a lot of thoughtful debate, but relatively few actionable investment ideas. But that's not to say that the debate doesn't spur profitable thought processes.

The problem with actual investment ideas is 1. trade signals dissipate once published, 2. investment is a bit like the Chinese civil service exam, in that one must state everything that one knows in order to answer the question successfully. That's probably why Izzy Englander settled on a. a track record, b. fiduciary checks, and c. some investment of his own assets in selecting managers, rather than heavy diligence of the investment ideas themselves.

Similarly, there is an analogy to the Chair's book. It was full of structural ideas, but not full of trade signals. I believe someone followed up by publishing a book of the Chair's trade signals. I do not know what impact that had upon the signals.

One could say that the theoretical academic finance arena is a little like the open source version. And the profit potential of published finance papers is… mixed.

Open source cars are probably somewhat about fulfilling the product desires of "hobbyists" and its interesting to see how that scales. But is "hot rod" design part of the spectrum of things like stabling a racing horse and sponsoring an off-broadway show, for which the rate of return is typically low, because the wealthy, intentionally or otherwise, provide subsidised funds for their passion.

Product design feedback, hobbyism, and scaling profitable products all have intersections, but blending them is difficult. Where this sort of thing has existed with fund managers is a creating a virtuous circle of high quality investors, who will sometimes feedback their own investment ideas, as it will improve their product experience.

Obviously one needs to counterbalance that against just upping the noise signal.



 On the highway, speeding down the outside lane (I only drive at 69.9 mph), one's mind is concentrated. It is much safer. The dings and bumps come on windy country roads at 40 mph. But very occasionally, the former kills you stone dead and you survive the latter, but your passengers get mad and take the train next time and tell everyone you're an incompetent.



 The management of sexual energy is a topic rarely discussed. It's not something that parents typically talk to their children about. Yet it is clearly something that features.

Buffett currently has a thirty year old blonde in the office next door to him as an investment assistant. In Freud's book on Michelangelo, his thesis is that part of M's brilliance came from the sublimation of his sexual energy. Then there are all the ideas of Kundalini and so forth and Napoleon Hill's works has whole chapters on the topic.

Perhaps we should lobby for a HBS class?



 Last night I had a dream about an investment opportunity, which seemed so improbable that I started to suspect I was dreaming. I had before dreamt about it (and woken up to recognize the nonsense) and this made me extra suspicious. However, I eventually used the internal logic of the dream to convince myself of its validity, and also the absurdity that I had previously suspected it as nonsense. I eventually came to believe that one of the UK's richest families was an investor. How often does this happen with investments when fully awake?



 In a quick test of whether the scholarly market gets the skinny of the open market announcement by one means or another, or just anticipates it, inspired by my experience as a business broker where I never was able to collect a full fee from a scholarly owner, I find that before the big up days the scholarly market tends to be up, and before the big downs, the scholarly markets tends to be down. Big ups on open market day in US occurred on 9/18/2013, big downs occurred on 10/30/2013, 6/19/2013, 5/1/2013, 3/20/2013 and 10/24/2013. Presumably no cats will inculcate lymphoma around here based on this.

Victor Niederhoffer writes:

A senior poster writes that in his career as a business broker, he often was chiseled on the fee at the closing, especially by those who were men of the Good One. The below post is in response:

Richard Owen writes:

Chisiling a fee pre close is on the list of business tactics alongside reducing your bid or offer at the last minute, forgetting to pay someone's bonus in year one as quitting after twelve months is their problem more than yours, running lots of accruals or prepaids into your closing numbers, and many others.

The 'theory' is that over time, if you run this playbook, word gets around and people stop doing business with you or adjust for it so it is priced in. In practice…

What are some of the senior hands views on the list of such tactics? And is one at an advantage or disadvantage by not participating? A chump, a prude or a good businessman?

Two of my business heroes are Pete Peterson and Ron Howard. As far as one can tell, they turned their fortunes without turning anyone over.

For those big successes who were 'strokers' - did sharp practice help them? Was it a material or immaterial component in their overall success? And if it was immaterial, did it correlate to other personality characteristics that were essential? So one takes the rough with the smooth?



 Clarke took Brom to its best ever placing last season, but four consecutive losses takes his job.

There are many counting lessons in this story: "West Brom Sack Head Coach Clarke".

Draw down after a big year. Should four losses be a mean reversion or elbow point? If only busted stocks could be as apologetic as Mulumbu.

"Steve Clarke has been sacked as head coach of West Bromwich Albion following a fourth straight Premier League loss

"It's very harsh," Shearer commented. "They overachieved last year and that put pressure on him. When you have a slow start to the season questions will always be asked. The chairman might look at it and think other clubs have improved [after changing manager]. But even so, you have to say it's extremely harsh."

"I feel sorry for the manager," Mulumbu tweeted.(external)"Us players are on the pitch but he's the one who's getting the consequences of our bad play. I wish him all the best for the future.""



 Here am I in New York City, no time for longer philosophy right now, but quick observations. After talking to friends in recent days, left and right, all ages, NY TX IL …. I'm not sure the real problem is left vs right or statists vs libertarians or socialists vs capitalists, etc.

Because all those worldviews have deeper roots…

Here is what strikes me as possibly the REAL issues…

1. Emotionally driven public policy. (Holy Moses, there is a homeless man, somebody give him some money now! Raise the minimum wage! Ok, problem solved!)

2. A public that is illiterate in arithmetic (not math) and afraid of it, of data, of statistics.

3. A public with no education in economics, even the most basic understanding of how prices clear markets and how that is just as beautiful as dinosaurs and butterflies.

Of course I am saying it's a failure of our k-12 education system.

Its not socialist teachers…I see little evidence of that though of course some exist but I don't know that the students believe them….it's teachers and students piling up over the years who were never shown these things (analysis, rationality, economics) in the first place. It's a problem of curriculum balance. Every grade schooler probably knows how to recycle and figure their carbon footprint. And how to "give back."

I also think there is a real gender gap in these items, especially the emotion point for many women voters. Perhaps not unlike the gender gap in science and technology.

Or something along those lines…you get my drift….


Gary Hoover


Chairman/CEO Bigwig Games, Inc. Play Hard and Prosper

Chris Tucker writes: 

Here is a video of the talk Gary gave at the Junto, almost verbatim.

Richard Owen writes:

Mr Hoover should add John Lewis in the UK to his list of impressive department store business models. Great talk.

anonymous writes: 

I also enjoyed Gary's talk very much. Seems the historical mechanism for success in retailing has been increasing quality while reducing price. I have been wondering about this lately with respect to healthcare. Along the lines of retailing, in the wake of the recession my patients seem more sensitive to cost, and they don't want to be "nickled and dimed".

Over recent years in my periodontal practice, I have reduced fees, increased service, and do many more things without charging. Despite loss in local employment (Amgen layoffs, etc) and increasing competition, we've stayed quite busy. However like some of the retailers, our profits are down. Presumably by keeping fees low we have preserved market share.Some of my nearby colleagues take a different approach. Since their busyness and revenues are down, they raised fees - as if this will compensate for lack of demand. They are still not busy, but they do have patient flow and stay in business.

Recently I did some grocery shopping at a local supermarket I usually stay away from, which is a small chain known for high prices. One bag with a few items (including Chilean Sea Bass) cost $126, and I vowed not to come back. While in the market I saw several patients from my practice who looked very happy to be shopping there. Like many in our community, these were affluent people who don't need to budget for groceries. Perhaps they obtain status by paying extra to go to an expensive fancy grocery? The exact value of health care services is much harder for the consumer to judge than groceries. Perhaps my high priced colleagues are aiming for this demographic, and are willing to sacrifice market share. And if so, status-spending is a different twist to supply/demand.

Gary Rogan writes: 

 It is well known in high-end retailing (or actually retailing of any "prestige" products) that raising prices often increases sales. The function of prices is to communicate information about quality in that world. How can any self-respecting "prestige" buyer think highly either of themselves or the product if it's priced like cheap junk? I don't like people who think better about themselves when they pay more, but that doesn't change the reality of what sells at the high end. 

Rocky Humbert adds: 

Shopping in our local over-priced "gourmet" market last weekend, I noticed some brilliant-looking Chilean Sea Bass for $29/pound. I didn't buy any. I noticed an in-store special for Starkist Tuna for $0.99/can. I bought 15 cans. What are the lessons here?

1. It is arrogant and foolhardy to make judgments about other market participants and their motivations. The market and the economy works because participants have different preferences, values, and information. The vendor wants to know, and big corporations spends billions to shape the preferences. But they really don't and can't without unintended consequences. I didn't buy the Sea Bass because I was making a Paella. I bought the tuna because one of our cats is on a high-protein diet and at 0.99/can, the tuna is substantially less expensive than gourmet high-protein cat food!

2. Shaping customer preferences is not the same as offering a product that consumers want in a shopping environment that consumers enjoy. The couponization of consumers and the recent experiences of JCP and Sears illustrate this point well. My Lexus dealer offers an oil change for $50 whereas the Jiffy Lube charges $30. Lexus can take 3x as long as Jiffy Lube. Where do I go? Surprise! I go to the Lexus dealer because the waiting area is more comfortable, they treat me better, they have "free" coffee and danish; they give me a "free" car wash; I can do work while waiting so it's productive; and it's a generally more "enjoyable" experience. What is my enjoyment worth? Do the math. Are other people there because they are making a statement about "being seen" at the Jiffy Lube? Who knows. Product differentiation occurs at many different levels. But overall, it's rational and derives from utility curves.

3. I find that many people who have missed this stock rally (and I wish I had been more aggressive) rationalize the opportunity cost by thinking that the people who participated are "wrong". The rally has been "engineered" by the Fed. The long term fundamentals don't support the expectations. It's going to end badly. The Nikkei didn't go anywhere for X years so the S&P will do the same. Blah blah blah. I think the real story and lesson is that making value judgments about other people is not a productive exercise. Not in business. Not in the markets. And not in life.

Gary Rogan adds: 

 My favorite example of a case where judging motivation is easy comes from one of the behaviorist books I've read where a lady who owned a boutique in New Mexico had a display case of handcrafted Indian jewelry that wasn't selling at all. Once, preparing to go out of town she left a not to her assistant instructing her to mark down the jewelry with a suggested percentage. Due to her poor handwriting, the merchandise was substantially marked up instead of down, and to the owner's surprise almost completely sold out in just a few days. I will arrogantly (but not foolhardily) assume that the marginal utility of the jewelry came from the high price and not the suddenly changed quality or usefulness.

Rocky Humbert responds: 

Mr. Rogan, we both agree that there are many such examples of what you describe. Brands and pricing and intangibles matter. However, the academics often argue that these consumer preferences demonstrate irrational or gullible or other behaviors that are not "efficient" or not "optimal." My point is that the underlying supposition that "optimal" or "efficient" is a universally accepted, static, independent variable, is questionable at best, and misleading at worst. . If you voluntarily partake in an activity, you are getting "value" from it. If the activity is transactional and involves a seller and buyer, then both participants are getting "value" from the activity — or they would not engage in it. To the extent that the transaction is "zero sum" financially does not mean that some other intangible value is not being created. An observer might just not understand what the value is. It's all about personal utility curves.

An observer watching me decline the $29/lb Chilean Sea Bass and buying 15 cans of $.99 tuna would reach a very different conclusion than the truth. An observer wondering why any particular individual decides to shop at Whole Foods, Trader Joes, or the local A&P will similarly come up with questionable conclusions. (I'll bet that the person who started this whole thread doesn't shop for food regularly! Spending 60-90 minutes every week in a supermarket can be a huge chore and one of the attractions of Whole Foods is its environment and presentation.) Sure you can buy the same diamond on 47th street as at Tiffany's for a fraction of the cost. Is it the status of the blue box? Or is it the certainty and comfort of the buying experience? Or is it laziness? Or something entirely else. Countless examples of this.

Gary Hoover writes: 

 The books about marketing luxury and super luxury goods list many techniques which are the opposite of standard marketing wisdom for mainstream products. These include creating product shortages, ignoring negative reviews and keeping them off your website because you only want to talk to your advocates, raising prices to create status appeal etc.

While a walk down Fifth Avenue or other luxury districts worldwide might make you think otherwise, luxury goods are still a relatively small part of the economy. Neither BMW nor Daimler-Benz are in the world's top ten vehicle makers in units, though their dollar revenues rank them higher (especially due to Daimler's big truck and bus operations).

But the luxe segment has grown dramatically in recent years.

Nevertheless, the real dollar volume rests, like the last hundred years, in serving the huge and growing global middle class. Those companies have to pay attention to "old school" rules like price elasticity and great product availability and distribution.

In walking stores in New York the last few days, I was intrigued by the volume done by Swiss Chocolatier Lindt, with multiple Fifth Ave locations, who now drives their product through mass merchandising outlets like the drugstore chain, apparently without ruining product quality or perceptions thereof.

Amanda K comments: 

 Gary (aka Free Market Liberal),

As a female libertarian who has worked in the tech field for years, I definitely see the gender gap in both areas. I suspect that there is a higher percentage of people in tech that are libertarian-minded than other fields. Is it because they are more logical? Because they spend a disproportionate amount of time surfing the web for good ideas? I don't know. Even my female scientist friends reject small government… and they are supposed to be so logical! Of course, they are paid by the government so they may be a bit biased:)

Warning – Politically Incorrect Paragraph (or PIP) below:

I suspect that many of my girlfriends voted for Obama because he is handsome and youngish, they are more easily guilted into voting based on ethnicity, it's cool to vote Obama, to vote against him is to admit that they were wrong the first time around, and Mitt Romney is a plastic man – there is nothing to latch onto. In other words, they vote for emotional reasons.

There may be another issue in addition to the three issues you outlined:

4) A public that has abandoned basic moral principles. For example, if everyone recognized that it is wrong to steal, then it would be obvious that asking the government to steal in order to give money to the homeless guy is also immoral. Schools would be a symptom, not a cause of this problem.



P.S. – ENFPs and INTJs are the most likely to be libertarian with 5% chance each. The only letter in common is N: Intuition. One of the Myers Briggs websites contains the following statement as part of the description of an N: Sometimes I think so much about new possibilities that I never look at how to make them a reality. Sound like any libertarians you know? ;-)



 Hi Victor,

I'm wondering if you have studied bitcoin at all? Or do you only consider a market once its very liquid?

Victor Niederhoffer writes: 

Seems ready to implode.

Barry Gitarts writes: 

Based on what?

Victor Niederhoffer writes: 

Crooks are using it.

Barry Gitarts writes: 

Isn't that the case with all money?

Victor Niederhoffer writes: 

It will be shut down because it competes with things the government like to monopolize.

Barry Gitarts replies:

That was a fear earlier, however the senators, agency heads and Bernanke all seem to think it serves a purpose and are afraid to stifle the innovation:

Ultimately isn't the government just run by short sighted politicians who just want to be reelected? Any politician who stands up against bitcoin or any internet application stands the risk of being "Ubered" (see this article).

Bitcoin does seem to be a disruptor for traditional banking, but so was the internet for the post office, newspapers, tv and retail, that only grew the internet not kill it.

This reminds me of a half joking quote by Russian entrepreneur: "If you create a business that disrupts big business in Russia they will kill you, in America they buy your business."

Victor Niederhoffer writes:

I remember Peter Theil the founder of PayPal
saying that if they knew what he was doing, they would have shut him
down. As it is, only the Lousiana Attorney General was fast enough out
of the box to try to shut Paypal down. 

Richard Owen writes: 

Like all good bubbles, there is a legitimate story at hand. Even with Tulips there was a valid story of rarity that then seemed as psychologically permanent as does now the rarity and desirability of a Van Gogh.

Bitcoin is a bit like the currency of an island entrepot whose domestic economy is tiny and whose export base is mainly composed of criminality and laundering and for which the currency of the island is disproportionately held as wealth of a group of island oligarchs [I suspect he has sold some and someone might correct, but it appeared superficially that the founder's bitcoin may have a billion plus market value?]. Many accidental paper fortunes are held by bitcoin miners: will they stand passive in the face of volatility?

Of the three social gatherings I attended Weds to Sat of last week, all featured discussion of bitcoin and at one - of the type featuring participants who, to listen to their narrative over time, would appear as genius and never to have taken a loss - the non-documented boastage of coups won and utmost sagacity shown in the BTC market. Mr Thiel is smart: he is financing the pick and shovel providers, not running a large position in coin.

So yes, why not $10k BTC, but also, why?

Henrik Andersson writes: 

 Richard, this is clearly the mainstream/consensus view - bubble. The contrarian trade is not always right (far from it), but was is clear is that many commentators don't understand the many faces of bitcoin. What is also clear is that a good investment decision (long term, not trading) can be done on the premise that the highest probability is that the ultimate value is zero. The question is what probability do you put to the USD 10k scenario. "Nothing is more powerful than an idea whose time has come" Victor Hugo.

Richard Owen writes: 

 You make very good points, and I am sure you know all sides of the argument well. If you are long bitcoins I hope very much it is for a large and successful profit. Please manage your risk well. I am not smart enough to assign a probability to $10k. The thoughts are offered without prejudice and are an honest sampling of my experiences as have occurred. I have no position either way and should be distrusted or discredited on that basis. There may be commentary that it is a bubble and my thoughts or analogies may be derivative and unoriginal. The price is possibly also a form of consensus and that is that each BTC is worth a bunch of money, and increasing. As many have gone bankrupt shorting bubbles as being long. 

anonymous writes:

I recall the great Jim Rogers saying that Hysteria is the first thing to look for, but one still needs to pinpoint a reason to go against it. The kind of examples he gives are buying stocks in country's whose stock markets have been closed, buying tea plantations when the price of tea has plummeted etc. Bitcoin? Might just have to let it play its course. I think its a bad joke, but even I must admit it did survive the 50% drop recently before this latest headline grabbing advance. Anyway, this is just my two cents and I have no interest in even attempting to try and speculate with or against it. 

Jan Peter-Jannsen writes: 

Bitcoin as a technology is superb. Bitcoin as a currency is questionable. Bitcoin as an investment is a bad bet.

A great strength of Bitcoin is that it is open source. Any experts can validate the code, and so far there seems to be no flaws. The crypto-curency works!

But cannot open source also be a great weakness? Anyone can copy the code, improve it, and make an even better alternative to Bitcoin. Is there any reason to stick to Bitcoin if and when that happens? Bitcoin is volatile, no prices are quoted in Bitcoins and very few have both their income and expenses in it. Those who use Bitcoin need to exchange to and from other currencies, so why not switch to another digital currency?

In terms of investment I believe it is a bubble. The supply is very low; many coins have been lost and the majority of coins are probably in the hands of the founders. I guess they are selling at the moment, but at a low enough speed to keep the bubble growing. In terms of demand; everyone talks about it these days.

In the coming years I predict new payment systems to arise based on technology pioneered by Bitcoin. But Bitcoin itself will soon be forgotten.



"Memories pass between generations"

Behaviour can be affected by events in previous generations which have been passed on through a form of genetic memory, animal studies suggest.

Prof Marcus Pembrey, from University College London, said the findings were "highly relevant to phobias, anxiety and post-traumatic stress disorders" and provided "compelling evidence" that a form of memory could be passed between generations.



 "No, it's not a exactly time machine," said Prosser. "It's much more exciting than that." Prosser handed his companion a black glove. "Put this on, please," he asked and pulled on a similar garment.

Simpson was skeptical, but did as he was told. He trusted Prosser implicitly. Luck had it that he had financed many of Simpson's early inventions. And boy had the investment gods smiled upon them. It was kismet: no other financial partnership had been more blessed since Edwin Land and the Morgans.

There were too many hits to remember. One of Simpson's favourites had been Hypnerall. It compressed the average individual's sleep cycle from eight hours to five and a half. Sixty-five percent of the US population used it daily, all on a one-cent royalty. They could have charged far more, but Simpson knew when to keep a low profile. More controversially there was UrDat. A steganographic method of storing binary data in a urine soluble genetic compound. With it, a user could carry around a petabyte of mission critical bladder-water, completely undetectable. And now this.

"So explain it again, and what's this glove?"

"It's a quantum investment simulator. The glove records your quantum signature and allows it to be mapped into the the simulation. A time machine would allow you to skip around time. The simulator, and your glove, allows you to skip around universes. In effect."

"But the universes aren't real, right?" cautioned Simpson.

"Well… that depends on your philosophy."

"And what's your philosophy?"

"ProSim Capital doesn't pay me to philosophise. It pays me for investment returns."

"And the application?"

"Our initial focus has been on modelling economic and investment scenarios. Close your eyes, please. Witnessing the boot-up phase is too disorienting for most people." Simpson obeyed. Prosser grasped Simpson's gloved thumb and squeezed.

"Open your eyes," instructed Prosser.

Simpson looked around. Two seconds ago he had been standing in a laboratory. Now… Simpson did a three-sixty. "Where are we?"

"We're inside the first simulation. Value World."

"Value World?"

"Yes, we took the regular world but edited the gene pool to make every financial professional biased towards value investing. So what do you notice?" asked Prosser.

Simpson scanned the street up and down. It looked pretty normal to him. "Looks pretty much status quo to me."

"But what if I told you that I programmed the simulator to take us to 2080?"

Simpson looked blankly at Prosser.

"It's sixty years on, Simpson! And nothing has changed. When we made everyone favour value investment, nobody could get any venture capital financed. Nothing higher than twelve times earnings could attract capital. Investors demanded earnings distributions close to 100%. When management didn't oblige, activists came knocking. Then management lobbied congress for support, and hey presto, new and improved poison pills were legislated and installed. It has ended up a mexican stand-off between investors and boards and, corporately speaking, time and technology has stood still ever since." Prosser squeezed Simpson's thumb again.

Simpson looked up and down the same street. It seemed identical, except… wait. All the signs were in a foreign language. Simpson looked at Prosser and raised an eyebrow.

"It's Hungarian."


"In this simulation, we made everybody day traders. It was a boon to Wall Street. Commissions climbed exponentially. Income to the exchanges exploded, returns to capital crashed and everyone's equity holdings gradually dissipated to nothing."

"And the Hungarian?"

"Well, Interactive Brokers cleaned up. Thomas Peterffy merged his assets into all of the major global exchanges and became the world's richest man by a factor of twenty to one. Peterffy had a pet theory about old Hungarian providing some sort of cognitive boost to reasoning through its use of complex morphology and sponsored it to become the lingua franca."

"Bizarre. What else have you simulated?

"There was Keynes World. We spliced John Maynard Keynes' genetics into the whole investment population. We expected something spectacular to happen, but nothing seemed to change financially or economically, except…"


"Well, there was a population boom. Everyone had much better sex." Prosser smiled. "There's one simulation we should visit. Thumb please." He squeezed.

"Where are we now?" Simpson asked.

"Let's go into this diner," said Prosser, pointing across the street.

As Simpson entered, there was near silence. Everyone looked depressed. They took a seat and a waitress came over.

"Can I get… your order… pl…" The waitress broke into tears.

"Why is everyone so upset?" asked Simpson.

"In this scenario we made all of the investment managers favour market-neutral hedge fund investing. Equity managers had 100% of stock out on borrow to themselves. Due to an accident by one of clearing houses, all of the stock was simultaneously recalled one day. The funds couldn't delta hedge their exposure fast enough and started to take on net-long positions. It caused a month long, exponential short squeeze in which everyone's portfolio traded at close to infinity. And for one beautiful month, the whole population thought they had got rich. Until it crashed. Nobody has got over it since."

"How can you have 100% out on borrow to yourself?" asked Simpson innocently.

"Look, the details are complex. Anyway, what else have we simulated? Well, there was Macro World - don't ask. And then Options World, where everyone sold gamma. For a decade or two everything went much better than normal, but suddenly everyone went bankrupt and it ended up in a kind of Mad Max scenario."

"What has all this cost us so far?" asked Simpson.

"ProSim Capital has spent negative $1.5bn and growing. It's the ultimate cash machine."

"And what happens if you simulate out the current investment environment without changing it?" queried Simpson.

Prosser stared blankly into the distance. "Everything ends up being owned by a textile mill controlled by the Gates Foundation."



 For whatever wonderful reasons Amazon now has a $10 Kindle edition of Bresciani-Turroni's study of what is commonly known as the German Hyperinflation. It is the only study worth reading because it is the only one that points out the obvious — Germany along with the other countries in Eastern Europe had a war that they did not pay for even as they were fighting it. German tax collections between 1914 and 1918 were 23 million marks; during that same time the government wrote checks and paid cash totaling 164 million marks.

It makes one marvel yet again at the wonders of the gold standard as a fundamental restraint on collective insanities. Until July 31 1914 every mark spent had been redeemable by the recipient in gold. The market — the decisions of self-interested people — had foretold what would happen through the simple act of asking for gold instead of paper — so much so that, before the war's extravagances had even begun, the German currency had to default.

On this subject the wikipedia article on WW I Reparations also deserves a reading. The standard Anglo-Saxon academic explanation for the events of the 1920s and 1930s is the one taken from Keynes - i.e. the allies' reparations demands were impossible for Germany to pay and this led to the hyperinflation, which, together with the misbegotten belief in the gold standard, doomed Europe to financial collapse. As usual with Keynes, his predictions about the facts of the future were extraordinarily confident and mostly wrong. What is remarkable is how thoroughly the U.S. and Britain accepted his thesis. Raymond Poincare had the good sense to point out that France had paid a larger reparation (as a % of their economy) after the Franco-Prussian War than the one Germany was actually expected to pay. He also pointed out that France had undergone turmoil equal to what Germany had endured in the years immediately following 1918 yet it had not gone bankrupt or had the franc collapse as an international currency. But, of course, what would a - a mere Prime Minister and a French one at that know about political economy? It is appalling but not surprising, given what one discovers about the prejudices of the time, (Poincare was guilty not only of being French but also of being a good Catholic), that by 1924 the British Prime Minister was making public statements implying that the war itself had been the fault of "French" militarism.

Richard Owen writes:

Great scholarship as ever. As a quick question, as i have not yet tucked in to the homework assignment: France paid larger than the Germans requirement to pay (relative to the economy)? The amount Germany was expected to pay was impossible, so how could France pay larger than an impossible amount?

Stefan Jovanovich replies: 

Richard identifies the key issue - what were the Germans expected to pay. The usual number offered is 132 billion gold marks; but that includes the "C" bonds that were, in effect, non-recourse. The actual "debt" secured by Germany's industrial and agricultural production, was 50 billion. They paid 40% of that amount; what is truly amazing is that, through the Dawes plan, they were able to borrow most of the 20 billion that they actually paid; and that 20 billion was, in turn, used to "pay" the debt the British and, to a lesser extent, the French owed the U.S. (FWVLIW, I remain bewildered by the reasoning behind the decisions of the higher minds at the Federal Reserve in the 1910s and 1920s. How exactly did they think it was in the interest of the U.S. to allow European nations to run up a tab that makes quantitative easing seem like fiscal prudence?) Back to the question of reparations - 50 billion was not an impossible sum, especially since it was to be paid out of decades. Germany's "Federal" government had spent more than that amount on the war in a single year.

Richard Owen writes: 

Very interesting. Keynes' numbers were something like $40bn treaty reparations owed and that Germany's max capacity to pay was $10bn. This is against an economy with c.$2.5bn exports. So the treaty reparations were c.16x exports. Even at peak estimate, Greece's modern debts were something like 5x exports pre restructuring. And I guess you could wonder the correct way to think about 'capacity' — a lot of Keynes' complaint was the deflationairy mistake of even going close to theoretical capacity. Which seemed to bear out.

Stefan Jovanovich responds: 

The difficulty is that Keynes used the numbers that the Germans offered, not the ones that experience proved out. For example, his estimates of coal production were only 2/3rds of what the Ruhr and Saar produced. The central fact is the one that no one in Britain or America liked; when the claimant took possession, the debtor paid. What defeated Poincare is the decision of the French communists to oppose the occupation of the Ruhr because the Comintern had decided that the Soviet Union's best interests lay in closer relations with Germany. Perhaps we can agree that these questions are those of political economy, not economic science. what remains unanswered is why the Fed thought countries that had defaulted could still set their currencies' specie prices independent of what money changers on the street corners thought the paper was worth. The best explanation for the blowoff of the U.S. stock AND bond markets after 1925 is the willingness of the Fed to pretend that Germany was materially broke yet somehow stable enough for the mark to be accepted at the administered exchange price.



 Some time ago Mr. Jovanovich posted an anecdote about old man Mellon to the effect that his kids never let him pay for a bill at a restaurant because the old man felt that prices should be the same as they were when he was a young man and that they were too high today. This is a common thing one runs into in certain people of age. They are accustomed to the old p/e, the average of the last 10 years, on those rare occasions in the 1930s when Ben Graham wasn't chasing the skirts, when you could buy companies at below their liquid cash, assuming incorrectly as he did that any shares were available and they weren't losing so much that the previous balance sheets were meaningless.

Galton had a way of dealing with such things, and he was the most revered man of his age, commanding universal respect, and heading all the leading scientific and geographic societies. "Let the bygones be bygones". Don't fret about bad things that happened, or look to take back the things that you could have done that would have made you so much better off. The woman you didn't marry. The stock you didn't pick. The limit order that wasn't filled.

I recently ran into this in a business meeting where I was trying to sell a company. When negotiations started the earnings of the company were half what they were when the negotiations resumed. The buyer was stuck on the old price and old earnings. The buyer consequently missed an opportunity to make a tremendous profit, of about 10 times his investment of millions in several years.

One often makes this mistake in the market. You try to catch a falling star and you miss it. And then it goes in the direction you had hoped. But you never come in again because you are trying to catch it at the bygone price. Anatoly once mentioned that he was trained in checkers by the KGB to learn to be an amnesiac so he wouldn't regret moves that he should have made on the board, and would look to the future.

In chess, the good players always say forget about the prices that have been taken and concentrate on the pieces that are on the board. I believe this is a common mistake in life and markets, and would be interested in the scientific and empirical and life and market lessons that you all have learned from similar ruminations.

Richard Owen adds: 

 Ted Turner believes a large component of his success is attributable to the fact he readily accommodated and cared not much about what had past. The Buddhist concept of acceptance and Kabbalahist idea of cause and effect are similar.

Compare Germany and Silicon Valley. In Silicon Valley ones past mistakes accrue as experience. In Germany there have been many internet start ups but also inevitably failures. Speaking to German friends, a failure there is carried like a deadweight around ones neck.

Society is destablising somewhat as the record of evidence of one's past peccadiloes becomes more extensive. Nobody can get into office or past congressional approval unless they lived a prude life of Cromwellian perfection. And its not clear one is best led by a Cromwellian prude.

Ralph Vince comments: 

There's two ways we learn things, the easy way, and the hard way.

If we learn things the hard way the FIRST time we climb up off of the pavement — that is the definition of a windfall.

Learning things the easy way is to accept facts like an obedient database. The only payoff to learning things the easy way happens when our perspective on the matter at hand altered such that we see it in its proper light and thus actually understand it, rather than merely as data.

To convey ideas to other human beings, we must amend their perspective, their point of reference on the matter, to see it anew from an entry point that they will understand it. To spare them the inevitable beatings of otherwise learning it the hard way is such a gift.

Stefan Jovanovich comments: 

In our misbegotten adventures in L.A. we had minor and almost all indirect dealings with the mouth of the South. Mr. Turner was so acutely aware of his father's defeat and death that even in casual dealings outsiders learned how determined he was to avenge/outpace/overcome his family legacy. He also was notorious, even in Hollywood, for accumulating personal grudges.

A great deal of individual success in Silicon Valley has come from the fact that the U.S. income tax code allows the tax-free pyramiding of gains through (1) buying and selling of principal residences and (2) exchanges of corporate interests. When you add the glories of carried interest, the result is a society of the well-connected in which there are very, very few failures who haven't held on to at least a respectable amount of the OPM. From the little I know of the German tax code, none of these opportunities to do a heads I win/tails you lose coin toss has ever existed in that country.

 Cromwell was many things, some of them awful; but he was never a prude. He and Elizabeth Bourchier had 9 children; and he and his wife were both, by religion, Independents. That meant they were those rarest of people who believed that Jews and (from the point of view of their Anglican, Presbyterian and Puritan contemporaries, even worse) Catholics were entitled to political and religious liberty.

What Richard may have meant is that Cromwell, as a military commander, was as piously single-minded as Joan of Arc. Like hers, his army never lost a battle once they had received proper inspiration; and each soldier literally believed in him and "the cause" for which they had a clear catechism. This was not ever going to be good news for anyone (Catholic Irish; Scots Presbyterian) who opposed him just as the Hussites (as dissidents from the true Catholic faith) would not have much mercy from St. Joan.

P.S. I find the history of Cromwell's catechism fascinating. If one were to ever come up for auction, the 1643 edition might be priced at a figure that even lovers of Bacon (the recently mentioned artist, not the writer) would respect.

For the American sequel to the story, check out The American Tract Society.

Victor Niederhoffer adds: 

One notes the Chinese proverb on a similar theme: "don't carry your hatreds into the new year" or the English variant, "you can't run a mill with water that's past". All languages seem to have a proverb similar to "let the bygones be bygones". The Jewish custom of asking forgiveness at the new year for all the harms that you have inflicted on other in the past year, and sharing a torte and tea is from a similar vein. 

Jeff Watson adds: 

One of my proverbs is to take the hit, forget about it, and move on. But then again I don't mind small losses as they are just part of my business, and I take many small losses of a couple of cents when I smell that the trade is going to be wrong. Just like surfing, where there will always be another good wave, in trading, there will always be another good trade.

Alan Millhone writes in: 

Dear Chair,

A grudge is a difficult thing to dismiss.

My Mother used to say, " I can forgive — perhaps not forget "



Gyve Bones writes: 

Oliver Cromwell was an unmitigated bastard and I find no evidence he believed that Catholics were entitled to religious liberty. To the contrary, his raping and pillaging and wholesale theft of Ireland, which was clinging tenaciously to the Catholic faith, and the Penal Laws enacted for the suppression of the faith and Gaelic language starting then and continuing for a couple of hundred years was an attempt, largely successful at cultural and racial genocide.

His puritanism certainly enforced a prudery on England. Within 50 years of Shakespeare's death, his plays could not be performed. And prudery is not the same thing as having a fruitful but chaste (no roaming to other bedsteads) relationship with one's wife.

— G.B.

Show me a Puritan, and I'll show you a son-of-a-bitch. -H.L. Mencken

The President of the Old Speculator's Club writes: 

 Though Dailyspec seems to be a great repository of Mencken fans, there were a few voices which, although agreeing with him on many items, diverged on others. One such notable was G.K Chesterton. The two quotes which follow immediately demonstrate some common ground.

"The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary." —H. L. Mencken

"We are perpetually being told that what is wanted is a strong man who will do things. What is really wanted is a strong man who will undo things; and that will be the real test of strength." —G.K. Chesterton

On the issues of science and religion, however, Chesterton suggested that Mencken was equally skeptical:

I have already noted that, if there is such a thing as religious mania, there is also such a thing as irreligious mania. Just recently, perhaps, it has been the commoner of the two. But a very interesting study of the matter comes from a country in which we may say, without injustice, that both are fairly common. I had occasion to remark recently, in this place, that an American paper had accused me of being an anti-American writer; and I commented on the curious irony that the American paper was itself an anti-American paper. But, though I may be permitted thus to parry a purely personal charge, and a highly preposterous one, I should not like anyone to suppose that I do not both enjoy and value the magazine in question.

I am quite well aware that Mr. Mencken, the editor of the American Mercury, is really doing his duty as an American citizen in being an anti-American critic. I myself have been regarded often enough as an Anti-English critic, when I regarded myself as a patriot. In short, there are immense internal evils for Mr. Mencken to attack, and he is perfectly right to attack them. All is well so long as the good citizen abuses his own city. The trouble begins when the foreigner abuses it—or, almost as often, when the foreigner admires it. But, anyhow, the chief efforts of the American Mercury have to be directed towards this howling wilderness of sectarian sensationalism.

The popular science, that rages in the American Press and local government, is simply a dance of lunacy more ghastly than a dance of death. And an exceedingly valuable and important protest against it can be found in the same number of the Mercury from which I have picked the examples of theological hysteria. The protest is all the better because it is not the sort of protest that I should write, or that any person of my beliefs would write. The critic is writing entirely in the interests of Science, and is perfectly indifferent to the interests of Religion. And he enters a virile and telling protest against that science, which is his only religion, being dragged through the mire as a degrading superstition.

From a great article: "Religion in American History: I
Hate Methodism; and G. K. Chesterton vs. H. L. Mencken: Battle of the
Monogrammed Dudes. Surprising or Otherwise Interesting Primary Sources,
Pt IV"

Richard Owen writes: 

This is fascinating stuff. The modern day argo in British English of referring to something as Cromwellian is along the lines Gibbons indicates, although at one step removed perhaps.

Cromwell instilled the Protestant Work Ethic in puritanical fashion. That still pervades much of British psyche today, and is captured in popular imagination, for example, in the writings of the Daily Mail and the books of Tom Bower, Britain's foremost hatchet biographer of businessmen (I say this with great respect; his books are well written and I suspect Mr. Bower would be glad to acknowledge his genre bias).

Thus the Protestant Ethic mentality is to be rich and industrious. But with the emphasis on the latter. As Martin Sosnoff said of his Dad, something like: *"he never thought he'd earn an easy dollar, and he never did".*

The one thing that really irritates the Cromwellian mentality is to find out, after slogging ones guts up to Vice President and exiting to early retirement with a Carriage Clock and blue chip pension, is to find out the reason for corporate downsizing was because a kid from the JFS, assorted Anglo Norman public school boys, or an Asian immigrant rustled up a grub stake into Forbes Four Hundredism. And possibly even had some good sex, bad drugs, and hella fun in the process.

Not to make light. These are complex neuroses and threaded reasonable sense given each parties bias.

Craig Mee writes: 

Victor, the point can also be made that although a potential lost opportunity arises and there are fewer pieces on the board, the situation is then more clear. Although you may not establish the solid position you initially hoped for, many more tighter risk reward opportunities now present themselves, sometimes allowing you a defiant win on the move all the same. However, this outcome may be related to your initial and ongoing foresight about what's unfolding.



 I found this article very interesting. Yet few of the investment greats have PhDs or CFAs. QED? Albeit that PhDs are overweighted vs, their population weight.

"What a Difference a PhD Makes: More Than 3 Little Letters"


Several hundred individuals who hold a Ph.D. in economics, finance, or others fields work for institutional money management companies. The gross performance of domestic equity investment products managed by individuals with a Ph.D. (Ph.D. products) is superior to the performance of non-Ph.D. products matched by objective, size, and past performance for one-year returns, Sharpe Ratios, alphas, information ratios, and the manipulation-proof measure MPPM. Fees for Ph.D. products are lower than those for non-Ph.D. products. Investment flows to Ph.D. products substantially exceed the flows to the matched non-Ph.D. products. Ph.D.s' publications in leading economics and finance journals further enhance the performance gap.

S. James writes: 

I struggle to find anything less important than the letters after one's name when assessing investment managers.

Ralph Vince writes: 

I would certainly argue that more education is preferable to less, in any field, provided such education doesn't impede someone's ability to reason things through for themselves.

Whether it facilitates thinking this way or not is not something I (nor one who does posses those credentials) can determine from our own experience.



 Eike Batista is clearly one of the most exceptional businessmen in history. His achievements are incredible. Next to him we are all minnows. Sadly it appears he has lost 99% or 100% of his c.$35bn fortune (depending on reports). Courtesy of Forbes, below are the English translation of his ten business rules. They seem quite piquant in light of his struggle. It must surely be a reminder that we must all diversify to some extent away from our own self.

1. "Nobody is happy alone. To share experiences is always a good thing."

2. "You grown as a person when you face your own challenges, or stressful moments, as I like to say. A good entrepreneur must be prepared to evolve in adversity."

3. "The good seller is the one who is also a good listener."

4."Believe in yourself. If you doubt yourself, you won't be able to face your co-workers. Or the market, for that matter."

5. "Don't quit at the first adversity. Believe in your intuition, but try to be down to earth as well, paying attention to research and polls."

6. "Don't think you are unstoppable or foolproof. Don't think that the only way your business will work is through perfection. Don't aim for perfection. Aim for success."

7. "To have a dream is one step closer to achieving something in life. The difference between the dreamer and the maker, though, is that the latter actually makes it happen."

8. "Look forward; focus on what people don't see at first sight."

9. "Look at a business in all its depth and think of every detail with maximum accuracy and minimum risk."

10. "Luck is important, as it is part of any project. But luck will only be present when the project is well designed."



The Jan-October return of the SP500 index for the period just ended was +23%. This 10 month return is 4th highest since 1971 (4th out of 42 years).

Over this period, for Jan-Oct returns over +10%, the following two month returns were up (2-month return of the next Nov+Dec), an average of 4.9% with 16/18 positive:

Date Jan-Oct nxt Nov-Dec
10/1/1975 0.299 0.013
10/2/1995 0.266 0.059
10/1/1997 0.235 0.061
10/2/1989 0.226 0.038
10/1/2003 0.194 0.058
10/1/1991 0.188 0.063
10/1/1980 0.181 0.065
10/3/1983 0.163 0.008
10/1/1986 0.155 -0.007
10/1/2009 0.147 0.076
10/1/1996 0.145 0.050
10/1/1976 0.141 0.044
10/1/1985 0.135 0.113
10/1/1998 0.132 0.119
10/3/1988 0.129 -0.004
10/1/2012 0.123 0.010
10/1/1999 0.109 0.078
10/2/2006 0.104 0.029

Richard Owen writes:

Great work! If you dial it back a day or two and bolt on 87, I wonder what it looks like as an average.



Collateral plays a big role in the system at large. If the banks can survive only through overnight funding at either the repo, MRO/LTRO, or Fed discount window, acceptable collateral is as important as rates. To ease the Fed can ignore rates and just say one day they will except IBM or Apple debt or commercial paper as collateral in exchange for loans. Conversely they could slip in some language about raising "haircuts" on notes or bills to have a tightening effect. While all are focused on the level of bond buying, there are many other tricks they can pull from the sleeves.

Richard Owen writes: 

They say the securitisation markets died.

Not so. It is just the banks began wrapping to repo rather than sell.

The ECB gave it a pill by agreeing to accept any AAA collateral. Standard practice is to wrap your doo doo, top slice it, and fund the AAA at ECB.



Buffett buys Heinz with 3G, brings in Burger King's (3G owned) ex-CEO, and McDonalds throws a strop and drops Heinz from the menu.

Does anyone know any of the politics behind this?



 Okay, I'm ignorant, and don't know anything about the outdoors or subject of survival although all my kids regularly go to such place as the Grand Canyon where you can't leave Anything!!!!! inside the canyon. But I know that Tom Wiswell was very sagacious and he prepared proverbs for us that he felt was the best book he ever wrote. When he'd be playing, about once every five games, he'd shake his head and frown "I'm in over my head, I have to simplify". He didn't lose a game for 25 years. And then he'd say at the end "take care of the draws and the wins will take care of themselves".

The most important business lesson I've ever learned is "Never get in over your head". Oh my goodness, I've lost so many hundreds of millions by not following that. How could you quantify it. You might always have a reserve of at least 1 times the amount that is required to support a position. For example, if you have 10 of liquid capital, never put up more than 5 of it. Whenever anyone offers to provide liquidity for you when you are about to be tapped out, that's the time when you should have been adding.

Richard Owen comments: 

Kipling's story with his son and the Great War is an example of people simply not knowing what they were getting themselves into. They should have listened to Kitchener.

That's a general trading and survival point: Do you know what you're getting yourself into?



 The Value of Debt by Thomas Anderson is a good book for any individuals to read. It makes the point that most individuals don't have enough debt. The average for companies is 50 % of assets. No companies amortize their debt but all pay interest only. The ideal debt ratio changes as one ages, but a rule of 25 % of debt to assets is recommended. Anderson points out that debt has many advantages in providing liquidity, insulating from crises, and capturing the spread between cost and return, and availability for one time purposes including helping kids out on the path to life. He recommends that everyone set up an asset based loan facility. He recommends 50 % of assets as a good ratio. It's a good book for parents to discuss with their kids. The book is written for the layman but the author bases many of his discussions on Ross, Westerfield, and Jaffe's Corporate Finance which seems to have good academic distillations of many of the topics covered in the book.

Richard Owen writes: 

It sounds like a good book. I believe the thesis is probably correct… except for the practicalities.

I am not aware of any providers to the consumer at a bulk level of either secured or unsecured long term revolving credit facilities of either fixed or floating form.

Of course, there is the mortgage facility in the USA, but most people have substantial debt in this regard already.

Also, as a consumer it is hard to ring fence one pocket of borrowing, unlike for a corporation. In the USA, walking away from your mortgage affects everything else in terms of credit score. In the UK everything is recourse to your mortgage.

The Offset mortgage in the UK is marketed like a personal revolver but the small print makes it entirely unusable in such a manner due to stated repayment channels and penalty fees and so forth.

The problem also is that an individual can typically only possess capital markets assets or a small private business stake. Borrowing facilities for equities tend to be low quality and borrowing for small businesses or stakes therein quite expensive.

I was at an NHS hospital the other day and chatting with the student whilst the doctor disappeared. He was American and funded from the US system. His five year course was funded at USD 65k per annum at an 8% interest rate with federal loans. That sounds horrendous to me.



 The consilience of the Nobel to Shiller and IBM reporting earnings and IBM dropping 7 points from the close reminds one of how careful you have to be in developing systems based on past data.

How many things are wrong with Shiller's data. For one, they didn't report earnings in many of the time periods he uses. For another, they reported them 4 months late. For another, the earnings series are adjusted many years later. For another he's using average of 10 year earnings and 10 year prices, to come up with his p/e. Okay, it doesn't take account of expected earnings the next period. It doesn't take account of the movement up from the end of the year when reported earnings are better than expected and the move down when reported earnings are less than expected thereby giving a 100% change that the low p/e will show superior performance but certainly not feasible to implement. And of course the best estimate of the p/e is the current level not the level 10 years ago. Yes. Earnings and prices are a random walk in changes not levels. And yes, the use of averaging introduces spurious serial correlation as working pointed out. But yes, even for those who know that when the stock price has a tendency to go up in the period before the report, and it's statistically significant, you can't use it or make money with it. Because yet, like IBM, when the earnings are bad, they often report it earlier than the due date. So you're waiting for the report date, knowing that prices are going up, but then they report early, (perhaps the flexions acted), and you get caught with the down 20% price move even though the move up to the estimated reporting date shows positive correlation with the forward. I.e. you can't make a profit with it even though there's a extraordinary regularity in the past data.

It makes one wonder why the Nobel was given to a chronic bear when the reason the Nobel prize is so high is they put much of their endowment in the triumphal trios' drift upward in equities from 1$ in 1899 when they started to 30,000 today, etc. 

Richard Owen comments: 

Only the Chair could pack so many statistical anomalies into a handful of sentences!

Perhaps I have misunderstood the use of Shiller PE, but the traumas you describe apply to reasonably mediumish timeframes, whereas Shiller's work is typically discussed in the context of long range endowment allocations of Yale type money to broad indexes. Whether it is even then a useful tool is a different question. But hasn't a very low shiller PE typically coincided good prospective long range returns? But the issue being one would sometimes have to wait half a career or so to be proven right.

Ben Graham did similar work but discarded it as a means of allocating capital as the Baconian issue caught up to it. Grahams issue was the other side of it: exiting on a high shiller PE with a decade of bull market to go.



 Shiller got the Nobel Prize? I haven't read his scholarly papers, but from what I have read he seems prone to making blatant errors in his statistical thinking.

A common theme of his errors was to take N heavily overlapping intervals and sort of pretend that they were all independent observations. In one case he took annual stock market levels for ~30 years ("x") and compared them with the retrospectively known "present value of future earnings" ("y") summed over the following ~50 years. He then claimed that the market was irrational because there was a lot more variability among the "x" numbers than among the "y". He failed to appreciate that really the "N" for his "y" values was approximately one.

The other supposedly big insight that he had was to smooth the S&P earnings over a 10-year period to come up with a valuation metric that's averaged over the economic cycle. That's fine, but Nobel-worthy? Probably Larry Williams has come up with dozens of indicators of that sort.

Victor Niederhoffer writes: 

He also concluded that the stock market is much more variable than dividends and is therefore irrational. I guess they had to give one irrational person a Nobel and another rational person a Nobel. The terrible thing is as Tyler Cowen pointed out vis a vis the choice between the two frond runners for the Chair, one is worse than the other. As Sholem Aleichem would say, a plague on… 

Richard Owen adds: 

Mr. Shiller's work is used all over the world. It is quoted by near every stock picker fund manager and used by many in their allocations.

People state Shiller's work was "obvious". Similarly perhaps Kahneman. All this, whilst understandable, seems a bit rum. Their insights came at a time when they were heterodox to the consensus. And if his data was limited by reality, he still slugged out a conclusion. Surely that is a good thing?

If Shiller's work was easy, then good for us all that an economic Nobel is on the shelf for all of us to claim should we wish. But perhaps it only looks easy in hindsight?

I should imagine felt somewhat of a buzz that he could out-think the Nobels, and made a fortune from it. Professor Shiller got worldwide acclaim and academic pedigree. Both seem satiated. Perhaps Mr. Seykota is in fact correct that everyone gets what they want out of the market?

Stefan Jovanovich writes: 

Do the site readers who have Charles, Kim and the Chair's understanding of statistics have any thoughts about the fact that "earnings" changed their definition after 1913? Before that date they were, for all practical purposes, actual cash dividends because corporations did not have income tax returns. In the late 19th century it would not have been enough for the S&P's dividends to be comparable to bond yields; they would have had to be nearly double for equity securities to be seen as sound. To those of us in the bleachers still suffering from the Pirates' defeat, it seems fairly clear that neither "dividends" nor "earnings" can meet Professor Shiller's test of rationality for the entire period for which he collected data since the game changed from rounders to baseball after the 3rd inning.

It also occurs to those of us crying into our popcorn that the influences of "book value" only become important after the IRS becomes a stakeholder in the earnings of corporations. If you as an owner/promoter find yourself unable to maintain the payouts that were once "normal", the logical and rational move is to persuade the buyers of your securities that they are not just buying earnings and dividends but also assets. The Morgan Bank were meticulous about identifying the physical security for railroad debt - the deeds, trackage, mineral rights, etc. - but they made no assessments of the "value" of those assets. "Net book value" is not a term you will find in their accounts. Yet, magically, by the 1920s the term begins to appear and by the 1950s the Oregano and others have made it a metric to be engraved on the tablets of sacred financial wisdom.

Richard Owen writes: 

This is a great explanation of the money system. But the labeling of it as fraud seems quite a leap. To take just one point: the idea the fed has private shareholders. Sure, when the fed was originally set up, it was a concession granted to the participants of good value. But so was the nuclear and broadcast industries and oil rights and so many other things.

The UK bought out the boe shareholders post war. The USA they remain. However, I believe the fed has a profit sweep to the treasury so the balance sheet expansion is of low incremental profit value. Indeed the shareholders might even get a fixed coupon on par value thus it is not much more exciting or nefarious at this point than holding an 8pc government bond? But I am not sure.

The reason why the fed shareholders have never been published line by line (if this is correct)? I am not sure, but it probably is just a bunch of major banks and the 8pc on their stock is a tiny fraction of total profits. And holding the stock is perhaps is admin quirk for being a dealer or something?

As to the idea of a world without fractional reserve banking. It is possible, but a totally different economy. General Electric can either hold its working capital as subordinated creditor to a bank or cut out the banks and hold the mortgages the bank holds instead. Each has different merits, but currently not many engineering firms will accept a pile of New England mortgage certificates as down payment for a jet engine.

Stefan, is it like that? Or is there misunderstanding here?

Stefan Jovanovich writes: 

Richard raises the central question that had Americans literally at arms with one another long before slavery was a political issue of any greater importance than the Grand Bank's fishery. What is money and what is credit? What is the ultimate payment unit of account for those who want to be Keynesian traitors to the greater good by just holding cash? The Constitution offered the answer but most Republican-Democrats and a good number of Whigs quickly found that they did not like the answer. They still don't.



The Prisoner's Dilemma is very well analyzed in the highly recommended very technical book, Evolutionary Dynamics by Martin Nowak.

The two by two payoff matrix:

                         Remain Silent       Confess

Remain Silent          -1                      -10

Confess                     0                       -7

shows payoffs to you if you and your colleague have committed a crime. The D. A says that if you confess and your colleague doesn't, you go free. But if you don't confess and he confesses you get 10 years in jail. But if you both confess you both get 7 years in jail. But if you both are silent, you both get just 1 year in jail because they can't prove anything.

 The problem is that you do better by being disloyal to your partner. And so does he.

Rapaport has a very good solution to this problem if you play the game repeatedly. It has many applications to trading. If you are a flexion and you have inside information, perhaps from being one of the hundred people receiving economic releases in advance on a need to know basis, and your conspirator is a trend follower, or someone you are revealing the news to, as so often happens, you do better if you act but your colleague doesn't. Same for him. But if you both act, you'll move the market and the opportunity will be lost.

What other situations in markets can be modeled by the prisoners dilemma, and how do the solutions that Nowak and Wiki discuss illumine our trading, and enlighten us as to the disadvantages we face.

Tyler McClellan adds: 

Freeman Dyson published a short paper in the last year or so that supposedly showed a very unintuitive and until then unknown solution to this game.

"Iterated Prisoner's Dilemma Contains Strategies the Dominate and Evolutionary Opponent"

Stefan Jovanovich writes: 

The speculations about the Prisoner's dilemma too often omit the fact that the criminals both belong to the same tribe. The criminals' choices of rat/don't rat are bounded not only by the lesser/greater punishments by the prosecutors but also by the rewards/punishments offered by the gang/group. When the group's incentives are included in the calculations, the conspirators will, as wise guys, follow the logic of silence. That is why successful Federal prosecutions of organized crime that depend on informers have to offer the additional incentive of bribery. An offer of lesser punishment is not enough.

Pitt T. Maner III comments: 

And the game rules and risk/reward payouts in open systems would seem even more variable and subject to interpretation/enforcement depending on the players involved.

This article
has two viewpoints on some recent data: "it's suggestive" vs. "overwhelming"

"Does a burst of ETF trading in the same millisecond of the Federal Reserve's policy statement raise an eyebrow? Sure. Is it indicative of a leak or insider trading? Not necessarily. For that, you'd need something besides numbers on a chart."

And this is one of the latest papers on the subject which might be of interest:

"Penn Biologists Show that Generosity Leads to Evolutionary Success"

"Last year William Press and I proposed the 'extortion strategy' in the game of Prisoner's Dilemma, enabling one player to maintain a dominant position over the other," said Dyson, who is retired as a professor of physics at the Institute for Advanced Studies in Princeton, N.J. "One year later, Stewart and Plotkin turned our strategy upside down and showed that it enables one player to coax the other gently toward collaboration. They understood our strategy better than we did. They reached by rigorous mathematics the happy conclusion that, in a game between ruthless antagonists, generosity wins." '

Richard Owen writes:

It always seems to be that the merits of a mathematical discovery aren't enough by themselves. The closed system needs to be extrapolated to the wide world. Thus a specific proof about a mathematical game is assumed to show that "it pays to be generous in life." As if, without the mathematical imprimatur, this might be held in some doubt. That particular habit of taking results proved in a closed system and extrapolating them to the wide world is probably particularly relevant to the investment field.

Jim Sogi adds: 

I definitely like this author's approach to game theory using a spreadsheet to tally levels of factors similar to a plus minus decision list. The approach can definitely be used to quantify market information and decisions. It breaks down multi factored complex decisions into manageable quantifiable choices which are tallied to arrive at the big decision.



 Charles Dow used to counsel that no individual should ever be promoted if they hadn't made a large error at some point. Phil Fisher used to insist only in investing in those stocks that had management teams willing to make big mistakes. If they didn't make mistakes, they wouldn't also take the risks required for success. Is this the essence of success? How does a corporate management team, upon the fruition of such errors, survive being "stopped out" of their positions in today's hair twitch paradigm? Is being expropriated from your career rather than your capital not the bigger risk today? And thus can it only be stocks with founder, family or veto shareholdings that make for truly great growth stocks today? Should not Tim Cook undertake an LBO with the Qataris?

anonymous writes:

Does modern risk management preclude financial Darwinism?

Steve Ellison writes: 

Having worked in the technology industry, it has long seemed to me that many companies are never again the same when founders are replaced by "hired gun" CEOs. My best guess on why this might be is that hired managers don't fully understand non-financial aspects of the founders' visions that prove to be critical to success. As I posted in 2010, this study found that founder-led companies outperform others:

"Eleven percent of the largest public U.S. firms are headed by the CEO who founded the firm. Founder-CEO firms differ systematically from successor-CEO firms with respect to firm valuation, investment behavior, and stock market performance. Founder-CEO firms invest more in R&D, have higher capital expenditures, and make more focused mergers and acquisitions. An equal-weighted investment strategy that had invested in founder-CEO firms from 1993{2002 would have earned a benchmark- adjusted return of 8.3% annually. The excess return is robust; after controlling for a wide variety of firm characteristics, CEO characteristics, and industry affiliation, the abnormal return is still 4.4% annually. The implications of the investment behavior and stock market performance of founder-CEO led firms are discussed."



Ron Howard was on the Andrew Marr show commenting on Hollywood financing. He stated that every decision that a Hollywood executive makes now places his career on the line. And thus there is a significantly reduced level of risk taking and a focus on ever greater budgets to absorb the available capital (thus raising the stakes for any error made; a vicious circle). Hollywood has coalesced around star studded blockbusters. But this is a pool with diminishing returns available to the capital employed. This is a "big problem" he feels. Does this seem similar to any other industries and their method of capital allocation?



 "Follow your bliss" was a philosophy that resonated deeply with the American public—both religious and secular. During his later years, when some students took him to be encouraging hedonism, Joseph Campbell is reported to have grumbled, "I should have said, 'Follow your blisters.'"

If you follow your bliss, you put yourself on a kind of track that has been there all the while, waiting for you, and the life that you ought to be living is the one you are living. Wherever you are—if you are following your bliss, you are enjoying that refreshment, that life within you, all the time.

A quote about Campbell from George Lucas:

I came to the conclusion after American Graffiti that what's valuable for me is to set standards, not to show people the world the way it is…around the period of this realization…it came to me that there really was no modern use of mythology…The Western was possibly the last generically American fairy tale, telling us about our values. And once the Western disappeared, nothing has ever taken its place. In literature we were going off into science fiction…so that's when I started doing more strenuous research on fairy tales, folklore, and mythology, and I started reading Joe's books. Before that I hadn't read any of Joe's books…It was very eerie because in reading The Hero with a Thousand Faces I began to realize that my first draft of Star Wars was following classic motifs…so I modified my next draft [of Star Wars] according to what I'd been learning about classical motifs and made it a little bit more consistent…I went on to read 'The Masks of God' and many other books.



 Is anyone familiar with writings they would recommend on casino risk management?

You rarely hear of a casino going bust, unlike traders, brokers, etc.

Some of this may be because they are as much a market maker as principal (although NYSE specialists go bust). And there is always zero risk core cash flow from slots, poker tournaments, etc.

But I was wondering if casino's use things like hard stops for the P&L etc. irrespective of statistical distribution expectations? And if they dynamically size their risk relative to house capital by opening and closing down tables as suits? And do they have per player stops too? You get kicked out regardless if your winnings exceed a hard stop?

On a different bent: Phil Ivey, who shook down the Punto Banco desk at Crockfords still hasn't been paid.

Is the below correct that a casino will withhold existing winnings if they suspect you only of card counting (as distinct from refusing to play further with you)? Do the rules or small print somewhere allow them to disbar you from certain 'mental strategies' as distinct from cheating?

"The Curious Case of Poker Pro Phil Ivey's Punto Banco Rake"

Whether what Ivey did was illegal isn't what's being decided. It doesn't need to be illegal for a casino to consider it a violation of its own rules. Counting cards in blackjack, a practice that isn't anything like "edge sorting" but is similarly frowned upon by casinos for giving players an advantage over the house, isn't illegal either. However, a casino can withhold winnings and bar players for counting cards if they want.



 "Bank of America Intern Moritz Erhardt Found Dead After Working Long Hours"

Investment bank intern, 21, on £45,000 worked 'until 6am for three nights in a row' before he was found dead in his London flat.

What a culture. I believe the 100 hour work week became a self-fulfilling prophecy in city culture. It started as an exaggeration in one generation, but was interpreted as gospel by the next.

If senior dealmakers were made to be the last men out the office, you would suddenly find a large percentage of deal work rendered superfluous.

This is probably the most extreme (and sad) example of the Balassa-Samuelson effect that bringing productivity efficiencies to service businesses is much harder than non-service. Because it is hard to measure. Therefore everyone BSs and it become a war of rhetoric as to who works the hardest.



"The Many Lives of David Geffen: Billions of dollars and decades of hits later,
L.A.'s impresario of cool is reinventing the role of the Hollywood

Cool required no specialized knowledge. Cool could be bought (though, one hoped, not for cheap). Cool was hip plus market demographics. Instead of a tastemaker like Ertegun, companies now had a "coolhunter," a kind of market researcher who went looking for the adolescent styles in the streets and then passed them along to the suits. Geffen, easily bored, petulant, insecure, unburdened by history, and blessed with the plastic enthusiasms of the fifteen-year-old impulse buyer, was attuned to this new market-oriented spirit in a way that the erudite Ertegun could never be.



 Performance artist Marina Abrambovic's checklist below intersects somewhat with the investment communities.

"What is Performance Art" from the Marina Abramovic Institute

What are some of the frequent concerns of Performance Art?

· De-objectification of art

· Relationships between performer/audience and time
· Relationships between performer and audience

· Relationships between performer and him or herself

· Relationships between performer/audience and environment

· Relationships between performer/audience and art medium

· Relationships between performer/audience and the body

· Limits of bodily endurance/experience

· Slowing down, speeding up, or repetition of physical movement

· Incorporation of chance events

· Execution of highly staged and dramatic events

· Execution of self-imposed instructions

· Voluntary abandonment of free will

· Juxtaposition of media or phenomena that do not normally coincide

· Publication of private experience

· Privatization of public experience

· Personal and social implications of voyeurism

· Personal and social implications of art as commodity

· The nature of subjective experience

· The nature of universal experience

· Social, political, and existential concerns such as racism, sexism, politics, history, mass media, economics, poverty, philosophy, spirituality, mortality, interpersonal relationships, empathy, the human condition, and more

· Explorations of artist as art-object or art medium



 I found this article by Rory Sutherland quite on point.

"Why I'm Hiring Graduates with Thirds This Year":

It's hard to tell the difference between a university and a business school nowadays. Where are all the hippies, the potheads and the commies? And why is everyone so intently serious and sober all the time? "Oh, it's simple," a friend explained. "If you don't get a 2:1 or a first nowadays, employers won't look at your CV."

So, as a keen game-theorist, I struck on an idea. Recruiting next year's graduate intake for Ogilvy would be easy. We could simply place ads in student newspapers: 'Headed for a 2:2 or a third? Finish your joint and come and work for us.'

Let me explain. I have asked around, and nobody has any evidence to suggest that, for any given university, recruits with first-class degrees turn into better employees than those with thirds (if anything the correlation operates in reverse). There are some specialised fields which may demand spectacular mathematical ability, say, but these are relatively few.

So my game theoretic instincts suggest that if we confine our recruitment efforts to people in the lower half of the degree ladder we shall have an exclusive appeal to a large body of people no less valuable than anyone else. And such people will be far more loyal hires, since we won't be competing for their attention with deep-pocketed pimps in investment banking.

The logic is inarguable: the best people to hire (or date) are those undervalued by the market. (An expat friend of mine always dated Brooklyn girls for this reason: their accent seemed exotically alluring to him but was repellent to most New Yorkers.)



 Any thoughts on this futuristic contention in this short video "Why Did Einstein Say 'God Doesn't Play Dice'" that in the levels above the sub atomic level, given enough information, we can be always right in our prediction of events? Market implications?

Richard Owen writes:

Stephen Hawking wrote a good article on the evolution of dice thought since Einstein: "Does God Play Dice?"

In Einstein's non science writings he would talk about the comfort he took when things were going badly for him from the idea of a deterministic world.

Can you imagine how bad insider trading is going to get once a time machine is acquired.



 The Mrs and I are at Twickenham to see Rihanna with two no show tickets to sell.

What is the correct algorithm for touts (a.k.a scalpers in the US)?

First ask to buy then use that as a reference for an offer?

What is market standard discount an hour before start?

And what average vig does a tout make?

Here is my fast hand analysis of the market made by ticket touts.

Touts are generally criticised as parasitical, like many financial market participants. However, they provide a valuable service. Since concertgoers know there will be a market made, they are willing to show up for events without tickets. Last minute spare tickets that would otherwise be worthless to punters are therefore saleable.

For a £60 Rihanna ticket at Twickenham as the base of calculation we can note the following:

- Initial instinct in selling a ticket before the event to a tout might be to accept a discount to face value.

- The touts take advantage of this by using anchoring. Different touts rapidly quote heavily reduced prices of £5 or £10. This is accompanied by pained faces and "there's no punters around love" despite a stream of people walking by.

- Conversely, reverse anchoring is recommended: ask the tout "how much to buy a ticket?", then when they quote their price say, "ah, that's good, I have one to sell". And vice versa.

- In fact, the touts carry inventory, some of which they must have purchased before the event. This indicates that they expect to trade out their inventory for par or above, in order to avoid capital losses.

- Since the market is disorderly (although there may be unspoken 'exchange rules'), a punter could in theory join them and front run the next bid.

- All this suggests that tickets should never need to be sold for less than face value, despite this being the typical deal struck by punters looking to sell. This is especially true for ticket pairs.

- The tout's inventory drops to zero value at the time of the event. However, with Twickenham as our example, there are plenty of pubs and clubs nearby, one assumes that the last minute backup plan is to prowl the pubs offering the tickets to couples at knockdown prices. If offered a £60 ticket for £10, the price of a few drinks, one assumes it is easy to trade out of the inventory to locals at the last minute.

- As a finger in the air, one feels a buyer looking for a ticket before the event would pay ~£150 (and this is without factoring in any 'hotness' of the tickets in the weeks before the event thanks to EBay, etc.).

- Thus, for sake of calculation, if you assume (wrongly) for each tout a 50% chance of having to sell each ticket held in a forced sale just before the event at £10 and a 50% chance of getting it bid at £150, it suggests an average liquidation value of £80.

- If tickets are on average bought at ~£20 and sold/liquidated on average for £80, for a £60 ticket that's £60 or 100% roundtrip vig. For pre-purchased inventory, that's £20 roundtrip profit or 33% vig.

- So if 80% of inventory is pre-purchased and 20% bought in the market, that's an average vig of £28 or ~50%.

- For a ~50k seater concert, £3m of ticket inventory exists. So for every basis point traded (5 tickets) that's £300 face value.

- So for each basis point traded (5 tickets) that's £140 profit to the touts.

- It's hard to guess the actual number of basis points traded without empirical data. If you guessed 25bps, that would be £3500 profit to the touts.

- Since taxi drivers double up as the stereotypical tout, and they typically make ~£12/hr, for three hours work (£36), that would suggest an equivalent hourly income for ~100 taxis drivers (ignoring a fee for "return on risk capital").

- The above suggests either (i) very thin trading <<25bps of face value, (ii) my vig estimate is way off, or (iii) this is a way to make supernormal profits by taxi drivers. I eyeballed about 5 touts in total at our gate, so generously say 25 total.

Jeff Watson writes: 

 My dad used to scalp tickets when he was a kid. He financed me to scalp the Rolling Stones 1971 concerts, and I had to pay kids to sit in line to get the tics. Typical of my dad, I did all the work and he got his 60%. Still, it was a good learning experience, I made a couple grand (which was a lot of money in 1971), and that money was the seed money for my first excursion into soybeans and commodities in general. Had I never scalped the Stones concert, I would probably be a drone in a lab somewhere with a much different career path. Funny how the most minor things in life can affect the biggest changes. Heck, the most minor things in the market can do the same thing.

Richard Owen responds: 

That reminds me of a story told to me by a friend acquainted with one of London's most successful touts. He is known at "Gary One-Point-Eight". Why? Because he bought a house in Chigwell worth £1.8m with the proceeds.



I watched this short documentary Mike Tyson presents The Heavyweights last night: pretty captivating. Mike Tyson has a reputation for being a bit of a mad man, but on his specialized topic, you can see a real depth of knowledge and intelligence.



 Popovich likes to yell at his players, possibly manhandling them the way he possibly did at the Air Force Academy. He reminds one of McNamara and the whiz kid when they toured the Ford factory in 1944 to install modern management methods there. In order to show the whiz kids how tough they were, Bennet, Ford's assistant in charge of security, manhandled all the operatives on the factory floor pushing them around and berating them for this and that infraction. Of course the whiz kids were astonished as they used cuddly management in the armed forces to embrace their soldiers to provide good morale. One wonders whether Popovich's yelling at his players caused them to slack off in the last 28 seconds and that's why they lost the game. Also, whether rough management in companies, firing willy nilly, and providing no benefits, a la Welch (assuming you couldn't talk sexy to him on Saturday mornings before golf), leads to inferior performance.

Richard Owen writes:

Branson's maxim is a company should be for employees first, then customers, then shareholders. That will create the best spirit, thus the best product, thus the best return. There seems to be a bifurcation of high performers: at one extreme are the psychopathic cultures that rule by fear, at the other, those that resemble religious/positive thinking inculcation.



 "Infinite Potential: The Life and Times of David Bohm": 

Faced with explaining gyroscopic motion, most physics students learn the various formulae, involving conservation of angular momentum, and produce an explanation in a relatively mechanical and formulaic fashion; but Bohm needed a direct perception of the inner nature of this motion. Once he was walking in the country, he imagined himself as a gyroscope, and through some form of muscular interiorization, he was able to understand the nature of its motion. In this way he worked out, within his own body, the behaviour of gyroscopes. The formulae and the mathematics would come later, as a formal way of explaining his insight.

From very early on in his scientific career, Bohm trusted this interior, intuitive display as a more reliable way of arriving at solutions. Later, when he met Einstein, he learned that he too experienced subtle, internal muscular sensations that appeared to lie much deeper than ordinary rational and discursive thought.

Without explictly knowing it at the time, Bohm had returned to that ancient maxim "as above, so below", the medieval teaching that each individual is the microcosm of the macrocosm. Bohm himself strongly believed himself part of the universe and that, by giving attention to his own feelings and sensations, he should be able to arrive at a deeper understanding of the nature of the universe

This particular skill remained with Bohm throughout his professional life. His colleague at Birckbeck College, Basil Hiley, once remarked, "Dave always arrives at the right conclusions, but his mathematics is terrible. I take it home and find all sorts of errors and then have to spend the night trying to develop the correct proof. But in the end, the result is always exactly the same as the one Dave saw directly".

Pitt T. Maner III adds: 

I found this excellent interview with the gentleman in which he presents his views on perception and the necessity of incorporating many viewpoints in order to gain greater understanding.  



Gerry Lopez, might not be the best surfer ever, but his style approaches sublime. No other surfer, ever, had the natural style of Lopez. I wonder whose style in the world of speculation is similar to his. 

It's his flow, the way he glides along the face, always on the best part of the wave, gets tubed, and casually stands up fully erect, shakes some water out of his hair, little smile on his face, then kicks out of the wave and starts over again. He is totally relaxed, zen-like, despite the conditions being really hairy.

What you never see with Lopez is the horrible wipeouts that he took as the cost of doing business. He was brutalized by the reefs under the waves, yet he always kept riding. Lopez's style is something a trader would want to emulate but on a different plane.

Richard Owen writes:

 An equivalent investor would be Crispin Odey.

The only man in town with enough style, accrued wealth, and know how to swing a book that actually looks like a hedge fund of old.

Able to turn gracefully on a wave before it engulfs him. Who pulls out the longboard, the quad, etc. dependent upon conditions. And who is likely as fascinating off the water as on.



Ten Moments Of Market History That Are Completely False

1. A posthumous memo distributed by Steve Jobs to Apple stating "focus only upon on a recap" was accidentally addressed to the R&D department rather than Finance.

2. Ben Bernanke carries a full beard because he and the boys went too far with a drunken jape involving an Illuminati tattoo.

3. Bunker Hunt later regretted a spot of Bazaar shopping whilst on holiday in Egypt when, upon his return, he left a housekeeping note to his secretary stating "ensure market silver is moved into corner."

4. Bernard Madoff was framed by exchange executives for running a legit fund that implemented an early version of a high frequency trading strategy.

5. Ben Graham originally began his career as an options market maker and wrote a less successful book around the concept of investing based on Marginal Safety.

6. Andrew Mellon - a culinary enthusiast - later regretted a diary mix-up in which he believed himself to be giving the quote "liquidate stock" to Wisconsin Soup & Broth Enthusiast.

7. Mark Carney is a Manchurian Candidate sent to the UK by the Quebecois secret service to settle colonial wrongdoings.

8. Warren Buffett had originally bought the Washington Post with the intention of introducing Page 3 girls but was vetoed by Katherine Graham.

9. The Denise Rich song "We Walked Away From A Love Affair" is an allegory about OPEC and the spot oil market.

10. The Paris Peace Accord was deliberately botched by Henry Kissinger because he was running a large short swap spread with his broker and saw another twenty points in bonds.



 The Rothschild dynasty famously got one of its big breaks following Wellington's victory at Waterloo. With an information network, backed by his four brothers spread across the Continent, Nathan Meyer was able to receive news of the victory twenty-four hours ahead of everyone else. He then either (i) bought the British bond market, (ii) bear raided it and then bought it, or (iii) was really short (as the tale is untrue) and lost money, depending upon which version of history you want to believe. To finance the trade, Nathan Meyer utilised OPM. He had been elected fiduciary of Prince William's fortune. This should have been invested in gilts, but instead was used to back the Rothschilds' speculation.

But the Rothschilds were far from the only banking family to sprout up in the era. Constant European conflict provided repeated demand for sovereign capital. For example, 1715 and 1745 (eerily familiar dates) saw domestic invasion of Britain by the Old Pretender and Bonnie Prince Charlie.

Some useful lessons can be learned from the Goldsmid banking family. Led by Benjamin and Abraham Goldsmid, they were essentially on the other side of the Rothschilds' famous trade.

According to historian Derek Taylor, the Goldsmids got their start as London bill brokers to provincial banks. They moved into forex and loan raising, and eventually received an appointment as the Government's preferred banker alongside Baring Brothers. The Goldsmids were granted British preference by breaking a City cartel. The Government had historically raised funds on the back of gold reserves, but towards the end of the 1700s reserves had dwindled and brokers were demanding high discounts on underwritings. By fully extending their resources and forgoing substantial discounts, the Goldsmids broke the cartel.

Leadership of domestic financing led the Goldsmids to capital raisings for British supported activities in Russia, Prussia, Austria, and Hanover. The Goldsmids, not wanting to loose their preferred status, continued to back operations to the hilt.

 Sadly, the strain from it all led to the suicide of Benjamin Goldsmid inv1808. Abraham Goldsmid continued operations, but in 1810 was caught with £800,000 of an unsaleable new issue, at which point the bond market dropped heavily in value. Abraham continued to back the deteriorating position, to great cost. He eventually committed suicide as well. The tragedy came only a few years from the nadir of the bond market and the Rothschilds' huge coup.

We might draw some useful lessons from the comparison:

1. If you accrue a fortune by repeatedly backing an attractive risk, at some point, stop doing that and diversify.

2. If you're leveraged in a position that's breaking down and could take you under, get out no matter what the emotional or reputational cost.

3. Make sure you have sufficient reserves to survive the nadir of the market in order to prospect in the rebound.

4. If it all blows up, dust yourself off and try again. People hated you for your success on the way up and hated themselves for their schadenfreude on the way down. Either way, suicide is not the answer!

John Tierney, the President of the Old Speculator's Club, writes in:

It seems there are several other useful lessons here. First, bankers with "skin in the game" will tend to be far more scrupulous in their lending practices than those utilizing other people's savings and backed by government deposit insurance. Second, shame and disgrace, once as fundamental to business as honesty and integrity, has been supplanted by bailouts and reinstatement.

Richard Owen replies: 

I dig that people want to see bank CEOs disgraced, so these are great points.

I away wonder though, given there is a banking crisis approximately every decade, and without central bank support, e.g., in the 19th century, thousands of banks went poof every crisis, the only logical conclusion would be that no rational individual should become the CEO of a massively leveraged carry trade, as is will automatically lead to disgrace at some point. Nature is pretty smart for solving solvable problems by iteration, it has failed to do so for banking so far. Which gives pause for thought. [*Pulls out narrow banking manual*]. The only banks that seems to survive century to century are places like Moses Mocatta, which don't run a real balance sheet.



 An article displaying many interesting price psychologies towards an asset of no intrinsic value is "Why Do People Still Buy Personalized Number Plates?".

And it's a successful £2bn seigniorage raised for the UK government.

Notice the classic auction room behaviours of those interviewed.

Not a single person overpaid (they declare).



I've found a British version of the Chair's recommended "Letters from a Self-Made Merchant to his Son". It is "Letters to his Son" by the Earl of Chesterfield on "the Fine Art of becoming a Man of the World and a Gentleman."



"More jobs for graduates than the unqualified in UK - study"

A very sad development, restrictive of freedom and upward mobility. The educational oligarchy must be broken. Did the Left ever imagine egalitarian policies would burden their constituents with a choice between permanent career Apartheid or back breaking debt?



 One queries whether Passover, Yom Kipper, or Rasha Shauna is bearish for stocks and will say a prayer of atonement and share a torte if it turns out not so.

Anatoly Veltman writes: 

You mean Sell Rosha Shana Buy Yomkippur did out-perform Buy&Hold?

Ralph Vince queries: 

But what about Passover? What about the full moon and a shorting a (very) quiet market?

Jeff Watson writes: 

Back in the pit days, during a quiet market, locals would start selling the market down to where it would trade and order flow would start coming in.

Anatoly Veltman writes: 

Can this be a way of creating "real world" demand?

Jeff Watson adds: 

Sure, the grain companies use this same concept in the reverse to bid up the front month to get farmers to kick out some of their stored grain into the market. Right now look at may corn/wheat spread. It is treacherous and the big grain companies are slugging it out with that spread. I'm avoiding it like the plague, just like I avoided that gold/platinum inversion 1.5 years ago that went out to $150. Too rich for my blood. Very rarely does corn trade premium to wheat. Vic even asked me about doing the trade when corn was 2 cents premium to wheat(where wheat usually commands a 50% premium to corn). I told him I wouldn't touch that trade with a 10 foot pole. In my case, fundamentals and gut instinct kept me from stepping on that land mine. It's been fighting for a week, and I just prefer to be long a little May wheat and have some other months and exchanges spread. I hate risk, and also hate gambling unless I'm the house.

Anatoly Veltman writes: 

The gold-platinum, of course, was entirely different as no Gold is ever consumed. It went out to at least $225 (we should ask Rocky if he knows the high tick, and how long the price was available). To my recollection, the spread double-topped in unusually brisk manner, i.e. the record prints didn't last more than overnight.

Richard Owen adds: 

What is it about spread trades that make them so treacherous? Gold/plat, corn/wheat, the Volkswagen stub, etc.

Is it because the mis-pricing is so "obvious" that people get greedy? Because it's a matched trade, they allow too much for a positive hedging effect? And because they want to trade the spread, they focus too much on maintaining the relative basis, rather than using risk-management appropriate to a gapping short, even if it screws up the net position?

Rocky Humbert writes: 

IMHO the reason the spread trades are dangerous can be attributed to several phenomena:

1) Price Anchoring and false assumption bias. People believe that just because the spread between X and Y has been bounded previously means that this is a law. In the case of stocks, in the fullness of time, it's a good bet that every stock must eventually either merge, get taken over, divest or go backrupt. Otherwise, one stock would take over the world. This means that if you are long GM and short Ford (because it always traded within X bucks), you will eventually blowup. And because GM/F is a mean reversion trade, it has the typical person adding as it goes against you. Can you trade around it and get out at a profit? Sure. But that is intellectually dishonest versus the original motivation. I suspect trading around the position is, in reality, what most profitable spread traders do. They don't put it on, add to it and wait for total reversion. In the case of commodities, there are short-term supply and delivery issues, so even if you are conceptually right, if the convergence doesn't occur before the contract expires, you will incur a permanent loss since the mis pricing doesn't exist in the next contract. That's the case with C / Wheat right now. Corn is at a premium to Wheat in May. But at a discount in all of the other months. So you need to get the price and the timing right. Or you will lose money.

2) Difference versus percentage. I find that people look at the spread as X minus Y. They often ignore X / Y. As prices rise and decline sharply, the ratio becomes more important. But it's not how most people's minds work. For example, a 2 cent mispricing when corn is at 250 is quite different from a 2 cent mispricing when corn is at 736. Oops make that 695 (limit down)

3) False Volatility Assumptions. Assume the price of X0 and the price of Y™ and you are trading X versus Y. And assume that the spread moves up and down $1. People mistakenly think in terms of $1 on 100 … and that's not a big move. In reality, you are trading the spread of $1 and so when it moves to $2 , that's a 100% change — no different from Apple going from $444 to $888 . Don't laugh. I can't tell you how many people fall into this intellectual trap.

4) Butterfly traders. Before interest rates were pegged, I used to chuckle at the 2/5/10 butterfly traders in the bond market — who would do the trade in MASSIVE size. And they'd talk about how the 2 was cheap to the 5. Or the 5 was cheap to the 10. Deconstructing the butterfly trade revealed that (almost all of the time) the P&L of this popular duration neutral curve trade moved with the direction of the 5 year. So it really was a bet on the 5 year rising and falling. And everything was dwarfed by that.

When I was worked with Kovner, he always hated spreads. He would say that it's hard enough to get one trade right. Why add to the aggravation and try to get two or three trades right?



As usual the reports of employment with all the adjustments to the economic numbers, coming from the government employees at the department chaired by the leader who likes her kids to sing the iron anthem, are designed to increase the importance of the department of the interior and redistribution and vote buying as Nock and Tollison and the public choice people said. First, the revised number from last month (which are 100,000 or so lower than previously reported) + the current number are very poor. And the total is about in line with the past dismal figures. (when will all these revisions be taken into account so that there is not such a big opportunity for the public to do the wrong thing).

The decrease in the unemployment rate comes from all the people who are not looking for jobs because they are on disability or given up hope. Third, the numbers are designed to show that when the rate goes up, they can attribute it to the fact that the survey was taken before sequestration (the economics chair has said this and important pro spending leaders of all sexes have it in her or his talking points already), so that when they report worse numbers in the future they can say it was because of the dreaded effect of reducing gov expenditures over 10 years by 800 billion rather than the fact that the numbers themselves are random.

Kim Zussman writes: 

"What is then the connection between these numbers and the market?"

1. If unemployment and GDP numbers continue to improve, Oval Occupier takes credit and proving that higher taxes are pro-growth
2. If it worsens, it can only be due to House Republicans protecting the rich
3. If unemployment and GDP numbers continue to improve in a world without investment alternatives, stocks go up
4. If it worsens, time for more QE - which is now well known to be extremely bullish for stocks

Paving Wall St for Hillary (sorry Ross).

Richard Owen adds: 

Always get long a fraud short you think is going to print above consensus. Men with gold filings and lucky silver dollars like their trading sardines.

Also, the disenfranchised pipe welder is the new fifties housewife. Instead of the little woman adding her own egg to the betty crocker brownie mix, the oxy acetelene operator adds his own self pity to a bottle of Jack Daniels. Growth in the fifties was still pretty good.

When Kruschev met Nixon and fulminated that Russia would outpace the US inside of seven years, it is easy to look back and laugh. At the time, much harder to be sure Russia wouldn't win out.



One of the dangers of having a rookie on your team is that the rookies like to find regularities based on looking at every interval, every magnitude, every market, every combination thereof of x variables, and every time period. It's truly a search of implicitly hundreds of thousands of possibilities to come up with a regularity, fifteen on say 40 observations that has about a 5% chance of consistency with randomness assuming it was the only 1 selected. The problem is that they seem so good in isolation before you realize it was the fruit of a tremendous number of look backs, complexities, and multiple comparisons. I strive to tell them "Simplicity." Read Zellner. Another good thing to do is see all the biases from using cart or regressions trees of automatic interaction detector, and all the safeguards built into those methods, —- and of course they overfit, and multiple classify and are only recommended as preliminary by the authors. But …. but…. how destructive it is to receive one of these regularities during the middle of the day… especially when you have a position on the opposite side from the rookies. Proffer. What lessons can we derive from coaches that treat the rookies with grave skepticism like Woodson who calls Shumpert "Rook" and all the players that haze the rooks endlessly to prevent them from interfering with the natural order of things.

Jeff Watson adds: 

I have a rookie close to me and he tends to over-think things and makes grandiose predictions. I keep sending him back to the drawing board because he's not scientific and usually wrong. I love when he says if A is happening then B must happen down the road…..but then again it's not his capital at risk. Rookies, if they are lucky, are taught rational thinking, but sadly aren't taught that the world and the markets are very irrational. I think in the future that every assistant I hire in the future will list "Phone Clerk for a bookie" on his resume.

Richard Owen writes:

I found this article very applicable. 

PLOS Medicine: Why Most Published Research Findings Are False 



 Baron Black was Chairman of Leyland Motors. Leyland was one of the UK's great domestic car manufacturers and eventually evolved into Rover Group.

Rover was subject to one of the great "almost happened" deals of British Private equity when, in 2000, Jon Moulton's Alchemy Partners bid to take it over. The deal failed and Rover was taken by the "Phoenix Consortium" - a transaction subject to much comment and controversy when Rover subsequently failed and its assets were sold to Nanjing Auto. The Alchemy deal became an "if only" daydream via which Britain's domestic car industry could have been saved rather than quietly parceling it out to Asia.

But back to Baron Black. Born in Barrow-in-Furness, Cumbria, the good Baron moved from humble beginnings to peer of the realm. Solid business principles no doubt helped him along the way, three of which (via Jim Slater) were:

- Be firm in decision and considerate in execution

So for example, if he had to deal with an executive who had illness, family problems, or was struggling with his job, Black would be firm in insisting upon a solution, but considerate in the way he went about it. Could extra training be given? A transfer? If a move to a new job was required, plenty of time should be given to find a more suitable role, and upon departure, compensation should be generous.

- Back or sack

Baron Black would rarely fail to put his weight behind an executive, and if he did so, it would be to the fullest degree.

- No misunderstandings with friends

In doing business with friends, Baron Black would ensure there was never confusion. He would tell the tale of how a coal merchant in Barrow gave him some advice when he was about to leave his home town. The merchant said "Bill, because I am your friend, I sell you your coal at nineteen shillings a ton, which is a shilling less than to anyone else. Also, because you are my friend, when we deliver to your house, my man only gives you nineteen hundredweight to the ton."

Not bad for a boy from Barrow Technical College.



 If folks would be so kind: could they name their favorite examples of intelligent and rapid economic development of poor countries (but with reasonable educated workforces, so you're not starting with e.g., Afghanistan)?

Famous examples are: Singapore, HK (although these have a unique entrepot status, and therefore wider learnings are not so great?). And then South Korea was impressive.

And of course China, but this was so big and diverse that its hard to reapply. I am looking for more "turnkey" type stories.

Those few examples went totally against the "Washington consensus" for many of their policies, much to their benefit.

Any further case studies people would recommend?

Many thanks.

Gary Rogan writes: 

Chile and the Chicago Boys come to mind.

Jan-Peter Janssen writes: 

I recommend looking at Estonia. It's a tiny Baltic state which is remarkably advanced in IT . Skype was invented in Estonia. Programming is taught at school from age seven. The government aims to reduce bureaucracy through a so-called eGovernment. It is linguistically and culturally close to Finland (where Nokia is from) and together these two nations should have the critical mass of talents needed to create a high tech industry.

Estonia is ranked the world's 13th freest by Heritage Foundation.

Richard Owen writes: 

Ok, here is a consolidated list of suggestions. Thanks to all.

Tysons Corner, VA
Reston, VA
Japan WWII
Poland (Mazowiecki)
Latvia in 90s
Drexel Burnham under Mike Milken
Jaimaica vs. Singapore



 Queen's Lady Gaga was a huge hit globally. It was beloved in the UK. It was Queen's major seller before their "live aid" moment which spurred them on to their greatest album and peak success.

I recently read, however, that it was a dud in the USA. Queen had been on the ascendant there. Thereafter, their name in the US was on a downward spiral. Which was aberrational as Queen were major sellers in pretty much every major western country.

Why? Apparently the comedic video, featuring the band all dressed up as women, left Americans with a funny feeling in their gut.

I guess to politics, religion and honeys one needs to add humour?

The market equivalent would be Blackstone (i) buying Celanese in Germany, (ii) fussing around and doing some jazz hands in the interim, and then (iii) reselling the same company in the USA for twice the price.



 While most of you don't play racketball, I believe the hobo's history of racketball on site was very educational for those with kids who wish to play it or anyone who plays any racket sport. The torque and the backswings on the backhand and the bends in the pictures are most enlightening. One notes that there have been 4 champions who ruled the racketball world for about 5 years each, winning almost every tournament. I noted the same thing in squash, and tennis isn't too far away in that area also.

One wonders if a similar phenomenon relates to markets. e.g. is there one stock that can outclass all the others in performance for a certain number of years, like Hogan, Swan, and Kane. Eventually those champions receded due to age, competition, or injury. Is there a predictable turning point?

Alston Mabry writes: 

Obviously, AAPL is the current version of this. And looking at AAPL, one sees an example of a company that stumbles as it fails to effectively deploy the very capital it accumulates due to its success. 

A commenter writes: 

This is the measure of how good a CEO Jobs was. He may have been a great innovator and manager, but he may not have been that strong of a CEO. A good CEO assures succession, and it isn't clear that Jobs was successful in this regard. The same was true of RCA and David Sarnoff, By comparison, Alfred P. Sloan accomplished this task for GM, Adolph Ochs for the NY Times, Hershey with Hershey Foods, and the Mars family with the Mars candy business. That hasn't been the case with Apple, at least not yet. Any guesses on how long the Board waits until Cook is replaced?

David Lillienfeld writes: 

There will always be outliers.

There are also companies at the other tail with managements performing more for "enjoyment" (like me athletically–I suck at racketball but I very much enjoy playing it and when I've had access to a court, done so for 3+ hours a week). Are there stocks in which management is in it for fun rather than shareholder value "enhancement"? Sure. It isn't hard to identify underperforming companies.

As for a predictable turning point, there should to be tells in each industry, but that doesn't address your question about one sentinel stock. I don't think there is a sentinel today the way GM was in the 1950s and 1960s. (Some might argue that Johns-Manville was a better sentinel. Either way, there was a single stock.) You've got a globalized market and no one company occupies a dominant position in a sentinel industry (such as autos in the 1950s and 1960s). Of course, implicit in this uninformed comment is that a connection exists between stock performance and corporate performance.

Or have I misunderstood your question?

Alston Mabry writes: 

Just to do a little bit of counting, here are the 48 non-financial US-based cos with cash of $5B or more, with LT investments added in. The amounts are in billions of dollars, and the list is sorted by the Total column.

total cash: 729.4
total LT inv: 337.7
cash + LTinv: 1067.1


AAPL   39.8  97.3  137.1
MSFT   68.1  9.8  77.9
GOOG   48.1  1.5  49.6
CSCO   45.0  3.7  48.7

XOM   13.1  35.1  48.2
CVX   21.6  26.5  48.1

GM   31.9  14.4  46.3
WLP   20.6  22.1  42.7
PFE   23.0  13.4  36.4
ORCL   33.7  0.0  33.7
QCOM   13.3  15.1  28.4
KO   18.1  10.2  28.2
IBM   11.1  15.8  26.9
F   24.1  2.7  26.8
AMGN   24.1  0.0  24.1
MRK   18.1  5.6  23.7
INTC   18.2  4.4  22.6
HPQ   11.3  10.6  21.9
JNJ   19.8  0.0  19.8
BA   13.6  5.2  18.8
CMCSA   10.3  6.0  16.3
DELL   11.3  4.3  15.5
UNH   11.4  2.6  14.1
NWSA   7.8  5.2  13.0
EBAY   9.4  3.0  12.5
LLY   6.9  5.2  12.1
ABT   11.5  0.4  11.9
AMZN   11.4  0.0  11.4

GLW   6.1  5.2  11.3
EMC   6.2  5.1  11.3

HUM   9.3  1.0  10.3
FB   9.6  0.0  9.6
UPS   9.0  0.3  9.3
WMT   8.6  0.0  8.6
SLB   6.3  1.7  8.0
DVN   7.5  0.0  7.5
S   6.3  1.1  7.5
PEP   5.7  1.6  7.3

PG   7.0  0.0  7.0
UAL   6.7  0.0  6.7

HON   5.3  1.3  6.5
DISH   6.4  0.1  6.5
RIG   6.0  0.0  6.0
ACN   5.7  0.0  5.7

COST   5.6  0.0  5.6
NTAP   5.6  0.0  5.6

DE   5.0  0.2  5.2

Richard Owen adds: 

This is a brilliant list with many lessons.

- 80/20 rule: $2tr of surplus cash is bandied about as the figure for US corporations. Here are 50 covering over half of that sum.

- The 1% have an internal dissonance. Here is their accumulated share of National Product, all stored up and failed to be reinvested. The 1% neither wish to reinvest their cash, to reduce their share of Product, nor to have GDP decline, nor to run deficits. This is in aggregate impossible.

- By giving you will receive. By being cowardly, you will realise your fear. Tim Cook is hoarding his cash out of fear. Nobody has EVER put that kind of cash to work successfully. Not even Warren Buffett could do it on his best day. If Apple attempts to do so, they will end up hanging themselves. David Einhorn is so on the point with his analysis. And for once an activist is helping make management's jobs more secure, not less. They just need to listen. Take some options, recap the stock, make yourself heroes. Don't think you can use that cash to buy another magic wand. You will end up buying a pup. The most recent example of what might happen to Tim Cook if he doesn't see the light is the CEO of Man Group. They totally feared that AHL would stop working. They grasped at their cash looking for any credible diversification. They bought GLG at totally the wrong multiple. And then it all fell apart. All totally well intended, all well thought through. But if they had just recapped the stock - "coulda been heroes". Get out of your own way.

Steve Ellison writes: 

A couple of theories:

The crossover point from innovator to mature company occurs when revenue from continuing product lines becomes large enough that it dwarfs revenue that could realistically be expected from starting up a new product line in a new niche, was the theory in the innovation class I took in business school. Let's say that a company might develop a completely new line of business. If it were successful, it would be doing very well to get to $1 billion per year of sales of the new line within 5 years. If the company already had $20 billion per year in revenue, management would probably devote more attention to nurturing and further developing the cash cows that bring in the $20 billion than to a risky venture that might, if all goes well, add 5% to existing revenue. One might test this proposition by setting an arbitrary sales per year threshold and checking stock price movements of companies after they move past this level.

Adoption of new technologies follows an S curve pattern, driven by a small number of early adopters followed by more cautious but herdlike technology managers at large businesses, was the theory advanced by Geoffrey Moore in Crossing the Chasm. One might test this theory by looking for companies whose sales growth decelerated to less than 20% of the maximum growth rate of the past 5 years.



The professor once performed a beautiful study to see if all the turning points that one could retrospectively select

to be short and long a la birinyi who shows almost 5 times the market drift by getting in and out of the bear and bull markets with 20% being a fuzzy base line , —– and he found it completely consistent with randomness. It was a model of what a good study should be. Perhaps he will share it with us again, or at least tell us the drift. 

Richard Owen writes: 

That would be great to see. It is definitely one of the most mumbocentrically diverse areas of asset analysis and a firm and incestuous friend of the buy and hold debate. The more important corollary to the depressing corollary would therefore be that successful investing is almost entirely about the quality of your liabilities? Would a Japanese salaryman wealth manager with the Professor's report in hand have been able to maintain a career? If not, would he have been right to get a copy of Taleb out to console himself?

Charles "the professor" Pennington writes: 

I have kind of forgotten how that went, but I will see if I can find it.

There was a study of something kind of along those lines from Big Al and/or Kim Zussman not so long ago that was very compelling, covering dozens of possible trading strategies, but only one or two could thread the needle and do better than random.

Russ Sears writes: 

Not as rigorous as the Professor's, but I did a back of envelope study of the Dow from 1900 to 12/31/2012. Not including dividends, just the index.

There were 20 beginning of the years where the Dow was less than it began 10 years (of course these have overlapping decades).

What do do if you retrospectively find yourself in a "Secular Bear Market"?

The next year change in the dow average +14.35% min - 23.5% max 59.6% stdev of 21.1%. Whereas the overall was 4.7% and stdev of 20.9%.

Likewise the next ten years change based on roughly 20% steps of prior 10 years (again overlap) This only covered 1910 to year end 2012 since I needed 10 year periods before and after. There were 2 years 2008 and 2009 that the decade prior was negative, both had positive next years. But we do not know what it will be in 2018 and 2019 so they were not included. Here the overlap does matter since the next 10 year periods are not independent. 

Count  group avg Range for Group    Next 10 years  Range for group 

19     -16.8%     -49.7%       1.4%     108.5%      -3.6%     271.7%
19      16.9%       2.0%      33.0%      82.0%     -39.0%     238.8%
19      60.2%      35.4%      98.1%      95.8%     -15.1%     240.1%
19     137.9%      98.5%     169.4%      75.2%     -39.8%     323.4%
18     240.9%     172.7%     323.4%      96.8%     -49.7%     317.6%

Richard Owen writes: 

Very kind and thoughtful work! Apologies to be very dumb: what periods do the five groupings of 19 counts represent? And group avg [col 2] (I would have thought trailing? But the premise is those periods were negative?) The "excluding divs" heuristic so common for stock analysis is, I guess, one reason why we need King Dimson so badly.

Russ Sears writes: 

The period in the five groupings in the next decade. Hence, may double, triple or more count some years. It takes some time for the "past decade" to move into another grouping.

A Warning that Engendered the Discussion from Victor Niederhoffer: 

Please don't write more as you have threatened about "secular bull markets" or "secular bear markets" that can only be described in retrospect and have no predictive significance, and are mumbo jumbo and depend on random selected starting and ending points and would only lead our fine readers to wallow in absurd, unhelpful charlatanism.



As the S&P 500 futures hover around the 1500 mark I am reminded of the "Cleared for the option" which gives a pilot the option to do a full stop landing, stop and go, touch and go or low approach or missed approach…

From the handbook:

1. The "Cleared for the Option" procedure will permit an instructor pilot/flight examiner/pilot the option to make a touch-and-go, low approach, missed approach, stop- and-go, or full stop landing. This procedure will only be used at those locations with an operational control tower and will be subject to ATC approval.

Richard Owen writes: 

Let us say a small prayer for the hungry equity broker who's volumes were down 30% last year on an already tough year and wish him much whipsaw, turnabout and retracement around the top. His commissions will be deserved sustenance and emboldening for 2013.



 Upon waking up, the verse from Trial by Jury:

"one cannot eat breakfast all day/ nor is it the act of a sinner/ when breakfast is taken away/ to turn his attention to dinner. And it's not in the range of belief/ to look upon him as a glutton who, when he is tired of beef determines to tackle the mutton"

One can't decide or figure out whether this post was prompted by Mr. Grain's good fortune in marriage, or a Niederhoffer alert memorializing my inordinate tendency to be a contrarian sent to me by Miss Perfect. 

Yes, I am a contrarian above 1500 S&P with all that implies about the euro and fixed income. It seems to me like the flexionists and other sinners determine to tackle the mutton after many rounds of breakfast. 

Richard Owen writes: 

It's always interesting to see how the anointed enjoy their lunch and dinners. On a recent visit to Hammersmith, one enjoyed a visit to the beautiful Church cafe — with discounted coffee — and spent an ultra-civilised half hour with button down marmish nannies and housewives. This was prior to an appointment with rare books at St Paul's Girls School, wherein one is greeted by a forest's worth of antiqued Edwardian wood paneling and transported back into a Mary Poppins netherworld. Walking back down the high street, there are plentiful and lavishly staffed cult cafes, ethical butchers, and second hand bookshops to visit.

It seems that with the squeezing out of standardised efficiencies; the disassembling of workforce collective power; the ravaging of the idyll to a barren landscape of unemployed, disenfranchised waitresses, butchers and bookshop owners, that the equity have collected their bounteous share thereof and reconstructed what they disassembled on their doorsteps. Drink down your Starbucks, else who will buy the cottage industrialist's cream teas?

Victor Niederhoffer replies: 

One would inquire of Mr Owen whether any of the button downed nannies and housewives seemed to be of the kind that would administer spankings to the Royal Stock Exchange Members who frequented such clubs in the old days when the President was greeted on the floor with a standing ovation when he was outed for patronizing one.



 Meet Mark Landis, One of the Most Prolific Art Forgers in U.S. History:

The Avante/Garde Diaries recently released these two brief clips of an interview with master art forger Mark Landis who for the last 20 years created dozens if not hundreds of convincing art forgeries including works by Picasso which he then donated to institutions around the United States including over 50 art museums. Landis would often arrive at the museums dressed as a jesuit priest with elaborate stories of how he had acquired the artworks he subsequently donated. Incredibly, after a 2007 investigation it was determined that Landis may not have actually broken any laws. He never once tried to profit from the fake artworks but instead seemed to gain enough satisfaction from fooling curatorial staff members at various institutions. While the interviews above by the Avante/Garde Diaries are not a comprehensive documentary, they are a fascinating glimpse into the world of this rather bizarre man.



 The ease with which Lance was able to maintain his hoax, and the difficulty that others had in breaking it, and the penalties they had to bear, and the great emoluments that were made from it by Lance and his crew should be generalized. What other hoaxes and conspiracies are there in the world? What is the dead weight and direct cost? I have been the victim of several such frauds and conspiracies but was smart enough in the last ones not to take legal action as I knew that my legal and opportunity costs would be many times greater than the possible recovery. I believe several on the list have also been so victimized. How prevalent is it? And how can they be defeated and fought against?

Anatoly Veltman writes:

Not a direct answer by any means, but the first time I heard Carl Lewis respond to a question on how good Ben Johnson was (question was posed way before Ben Johnson got publicly "discovered") — I was quite stunned by Carl's stern reaction. It was like you asked him if he could outrun a Martian in his prime. One might either conclude sour grapes from hints like that, or suspect that there is no smoke without fire. In any case, maybe one of the best ideas is to ask a competitor?

The question raised here, by the way, may be the most important question of the couple of decades. Every single one of you places your livelihood on the line daily in the system which is totally rigged against you in the worst way.

Jim Lackey writes:

I'll guess the opportunity cost of the lengthy background, due diligence to N^th, and flat out distrust of people, most of whom are benevolent and kind, would be something like the a 1,000,000% drift stocks give us per century. I'll flat out call it that being a skeptical, safe person is costly.

If it is too good to be true, it is, and we are not idiots. We all have some street smarts here. A well oiled con? I'll fall for it every time and I usually get the joke. To hell with them. To catch a thief one must be one or a good officer of the law.

David Hillman writes:

Some of the answers we know.

1] always get it in writing, 2] pigs get fat, hogs get slaughtered, 3] know thyself and resist your weaknesses, 4] invest in what you KNOW, 5] there's some business we just don't write, 6] most of us will make more money investing one's self than in someone else, 7] in the Shakespearian spirit…."neither a borrower or lender be", gifts are OK, but don't expect a return, 8] give at the office, 9] don't invest what you aren't willing to lose, 10] don't buy meat off the back of a truck, and 11] never buy anything with "Magic" in the name.

I have almost always found it best to be the "initiator" of an investment, an idea, etc. than to be "initiated upon". Also, when one is in the mud, it's usually better to hint at legal action, then settle rather than sue (The con often has the same legal and opportunity cost as you, at least the same amount of risk of losing and possibly more dire consequences.)

Even if one is optimistic and has faith in humanity, something I share with Lack and the chair, one of the best ways to avoid cons, scams, etc. is just to say "No, thank you" and go on about one's business. Except, of course, when the high school girls soccer team shows up at your door step in short uniform shorts and t-shirts, smiles all around, selling $1 candy bars to raise money. You say, "Sorry, ladies, I don't eat candy, but here…..", then you give them $20 and go on about your business.

Jim Lackey replies: 


First never let little ones have a coke out of kitchen or touch your computer. One of mine must have spilled soda in my key board.

Next I must differentiate a scam from a good con. A scam, as in Fla scams or any mumbo we see on buy it now sites, well, burn me once and the 2nd time I am a fool and we get that joke.

A well oiled Con, do not even try. Do not worry about it. These are men of genius and spend their lives dedicated to stealing. Cops are so silly. It takes the after the fact to catch most cons. Only a genius officer of the law with 100 years experience will catch these guys in the act.

If you ever read or see some of the cons these men come up with… yeah, I guess it's easy to see after the fact, yet I am amazed at the work, the genius the art and science, James Bond movie types.

They seem to prey on our weakness of love and benevolence. Give that up and ………….. well just don't.

I can see why a Mr or others are concerned. We try to warm family for their future. I guess that is what lawyers and trusts are for, to protect the pot.

Trying to prevent the next con is to me like attempting to predict the next tech innovation. We all saw the music deal and the Ipod, but we dissed or didn't get the Iphone's change of the world and laughed at a zillion Ipads later. Now my friends are trying to buy aapl on a pullback at 500. Umm it was 15 or 30 or 50 many baggers ago. Move along.

Anatoly Veltman writes: 

Jim, yours is very good advice on relationships. My grandpa taught me exactly that. But when it comes to today's electronic financial markets, there are a number of caveats. And since you brought up drift again, let me try this: what if today's world heads have no interest in perpetuating the traditional drift? What if we're moving toward a reset, after which today's investors will not regain purchasing power in a generation or so? What statistics can you rely on, if the US has not conducted ZERP in many preceding decades? Nor has it ever experienced the current rate of deficit growth.

Gary Rogan writes: 

To know about a large financial conspiracy for sure you either have to be present during its planning or see overwhelming and pervasive accounting irregularities. How can one ever be confident that some group has conspired for some wide-spread reset? Whose evidence can you trust? If any particular highly-placed person is saying "yes" or "no", or if someone is writing that it should be clear based on this or that, how can you be sure that any of this is a result of a conspiracy and not otherwise-originated processes or actions? 

Anatoly Veltman clarifies: 

 I'm not saying there is conspiracy already in place as defined. There are certainly unusual goings-on:

1. The Fed has never entered the long-term market to this extent before.
2. The banks have never had access to zero-cost funds for this long before.
3. The employment data has never been groomed in particular fashion for this long before.
4. The US deficit has never been in this shape before.
5. The European experiment has not been really tested yet.

There will come a point, when only unprecedented last-moment multi-national "co-operation" will save the humanity. Figure out in which way, and you are golden.

Richard Owen adds: 

I was recently thinking about just this topic and was considering penning something along the lines of "Conspiracy and the Scientific Method" — even if just to try and settle what I think.

My sequence of thoughts about the helicrash in London had made me think of the essays by actuaries about 9/11. How your correct statistical assumption for 9/11 upon first impact was a terror event. One of Goldman prop's guys in London protected his book with Eurodollar to good profit.

Like all complex topics, it is complex. On the one hand, conspiracy or, more often, functionally equivalent structures, are very important in business. On the other hand, I think for the most part "there is no they".

To precis one thought: I think Lance is a good case study: it wasn't an 'illuminati conspiracy': he was widely known to be doping in the right circles. A public charade was maintained by many parties involved. The message was packaged and diluted appropriately for the media. That sort of "widening circles" structure is what differentiates it from the nutty "illuminati" type conspiracy concept.

For a very interesting case study, see Richard Heckmann and China Water. If Heckmann can be taken for a fraud, after huge ground work to avoid so being, so can all of us lesser mortals.

Gary Rogan comments: 

To quote Victor, "Market is pricing in inflation of 1 or 2% a year for the next 10 or 30 years. Yet every repub and every free market person predicts a catastrophic rise in inflation and interest rates. Who knows better?"

I can't agree that all will end well, but my theory of the market is that it doesn't really price what it has no idea about, so they just haven't figured it out. Under such circumstances, for anyone in particular, other than the guys planning it (paging Dr. Palindrome) plus some Free Masons and the Illuminati, it seems like figuring out how and if the unprecedented last-moment multi-national "co-operation" will save the humanity is too computationally intensive.

Jim Lackey writes:

Perhaps Mr. Stefan can overrule me as to when, but one doubts there was ever a time when the elite class wanted to perpetuate anything but the certainty of their own. Unless the rules in the USA go above and beynd the restictions of the EU, China and all, I can't see how anything but good can come out of our future. Less good or not as good as ones past or beliefs is relative. Yet I grew up in the 80s and saw the worst of it all for the good working men. Now we see the recession and depression of finance and perhaps the medical. Let's get the joke no way can the govie medical and finance command such a slice of the economy. It will be shared fairly by free market forces in new buisiness and growth. Construction is back and even oil refineries are being expanded again and never ending job at BP in Whiting IN.

I'll note the huge growth and investment now In Tulsa OK out to Nashville and building plants and things right here in US of A as even the advantage of current energy costs is enough to over come the rise in tax or any other threat. If you do not believe it, the Nordic EU venture boys are in deep buying all they can in Tulsa and kids are running Hass Machines out of their garage as start ups. The innovation is not in Silicon valley and instagram or new social…it's building real for the fracking that may or may not go global.

Tommy Ryan shot me an email back and once I figure out how deep this fracking can go global we shall have better answers to your questions. The DC boys are so far behind the kids. They are busy trying to regulate the white show firms that are already old line banks. From what I can tell, the kids already left for Singapore or some island to trade. I'll never leave the US, but if my kids were not in grade school I'd be Larry's neighbor.

Stefan Jovanovich writes:

There is only one reason to be optimistic about the future of the United States. It is that the country keeps redefining who the 'elites" are. It infuriated Henry Adams that a man with only a technical education could become the 19th century's most popular President. What was even worse was that a jumped up railroad lawyer's son could become the voice of all that Republican hard money. The Zinnistas, who never bother to do any counting, love the idea of the ruling class because that crude parody of Darwin's theory is as wonderfully tautological as the notion that a species' fitness determines its survival. The present Mandarin rule by believers in the pump theory of money spending is truly awful, but it hardly qualifies as a uniquely disastrous deficit ZIRP episode. One can argue that the country's entire history from the 1830s through the Civil War was comparably awful. We are not taught to see it that way because the extravagance, waste and fraud occurred not at the Federal level but among the states, not on Wall Street but among the country banks and state treasuries; but the country's government and official lenders were just as skint as they are now. All of this is now safely forgotten because of the explosion of wealth creation that occurred even in the defeated South in the last third of the 19th century; but no one visiting the U.S. in 1840 or 1850 or 1860 was writing home to tell everyone how marvelous it was. Dicken's sour descriptions were accurate, and Tocqueville's rosy forecasts were already an anachronism by the time they were published. No one was predicting that the Democrats' spoils system would do anything but continue. Yet within 2 decades the dollar had become an international currency and the marvels on display at Philadelphia were putting the Crystal Palace show to shame. We shall simply have to wait and see; the only certainty is that the Times (assuming they can get Mr. Slim to give them the money to survive) will be against whatever the future brings.

Gary Rogan adds:

 This is an interesting case of a hoax that refused to die even when exposed, it's illustrative of how no amount of denial will destroy a hoax that is sufficiently implanted prior to the denial.

The Indian rope trick is stage magic said to have been performed in and around India during the 19th century. Sometimes described as "the world’s greatest illusion", it reputedly involved a magician, a length of rope, and one or more boy assistants.

The trick, considered by western magicians as a hoax, was perpetrated in 1890 by John Elbert Wilkie of the Chicago Tribune newspaper. There are no known references to the trick predating 1890, and later stage magic performances of the trick were inspired by Wilkie's account.




 Eccentricity/degree of crazy is class based. If you are rich and like to chase dogs down the street while naked, you're considered to be eccentric, but if you are poor and do the same thing, you're crazy.

Gary Rogan writes: 

Eccentricity at the top is also somewhat cyclical as people often want the opposite characteristics to the last package that didn't work or simply became boring. You could argue that Hollande is far less eccentric than Sarkozy, that Putin, Yeltzin, and Gorbachev were/are significantly more eccentric than anyone between Khrushchev and them, and that the highly non-eccentric Bush Sr. led to a string of Presidents that were each differently eccentric, to coin a concept, with the last one being more non-orthodox in a number of parameters than eccentric.

That same principle works on Wall St. It's seems highly predictable (in retrospect, of course) that the dot com crash would result in a reversion to the mean in the investment bankers' wardrobes. Animal spirits that clearly go back and forth between extremes work the same way, as revulsion with past failures is probably one of the strongest forces in investment trends. The Depression and the subdued consumer spending in the US lead to the consumerist paradise which itself reversed to a kind of malaise, with a few more minor cycles that followed.

Eccentricity is in many ways like the periods of fast mutation in evolution, which themselves tend to revert to the mean. And speaking of Churchill the reversal he suffered after being thrown out of office after the war had a profound influence on him, and likely his health and was used as an example of being extremely powerful and then suddenly not, and the effects of such changes, in the book I'm currently reading. Nothing is forever, and I'm sure eccentricity will return to the British political scene in due time.

Richard Owen writes: 

Winston Churchill would sit starkers in his bathtub and dispense to his secretary notes and instructions for the Great Offices of State. Soak complete, he would towel off, don a Chinese floral silk dressing gown with matching fez hat and take bedside visits from his Cabinet. Part of the game was to leave the odd setting and peculiar garb unmentioned. Out for duty, he would don a custom made Siren Suit - a glorified boiler suit - and set forth to whichever geopolitical circus he had budgeted his day to. Sartorial fruitiness featured throughout.

What does one look for in a great leader, thinker or doer? An ability to act independently? Think differently? To consider the facts of the matter and take provocative, even painful action?

Siegmund Warburg - perhaps the only individual in the modern era to create a full service European investment bank from scratch and entirely within his own lifetime - upon his death bequeathed a large library of fine literature and other books. Within sat a unique folio of pornography, surgically extracted, before handing over to St. Paul's School for Girls for posterity. Some of Siegmund's business rules included: good manners; consideration of others, particularly juniors; ignore the fashionable; non-conformism as a right, not a duty. This does not feel familiar in today's Wall Street.

To be branded an eccentric these days can be terminal. Particularly in the American paradigm. Instead of independence, determination, or contrary thinking, it is a signal of unreliability and cause for suspicion Some of the driving factors are positive: the British eccentric has class-based roots. The public schoolboy, assured his place in the firmament, could afford to transport his playground hijinks into the world of work. Just as investment bankers re-donned their suits after the dotcom crash, so did the pressures of openness and assessment mute some of the rakish public school excess. But a paradigm can swing too far.

Who do we have leading the Labour left in the UK? Mr. Edward Miliband, an impressive man whipped into a strait jacket of conformity. He arrived by Faustian deal with the trade unions; everything he utters is calculated for short term gain. Even the passion moments - the big conference set-piece speeches - feel badly scripted with an insipid instinct for popular policy.

The batty leaked clip of Miliband repeating the exact same soundbite answer to every question thrown his way at a media scrum - whether it made an iota of sense or not - gave the impression of a malfunctioning replicant whose circuitry had badly fused. The semi-autistic response mechanism was a guerrilla tactic to cope with today's minefield 24-hour news loop.

The irony is that Miliband's constituency - the unions - have backed a man who's supposed state educated, humble upbringing, disguises a militant intellectual father, likely private tuition, and all the other bells and whistles of hidden cultural advantage. The socialistic Labour left's distaste for the British grammar school has hamstrung a generation of intelligent working class and closed off their main vein of progress to the upper-echelons. Eccentric this is not.

And the Conservative coalition? Headed by David Cameron, every inch the PR man. A better looking, more charming and affable version of Miliband? Perhaps. But we need not repeat the basic assessment - they are both ultra-Blairs. But without the Blairite flair within.

Blair himself was most definitely an eccentric. He was willing to throw his whole reputation onto the pyre for a self-styled humanitarian war in Iraq. You can assess the merits, but at least it showed spine. Blair was so effective that he construed the ensuing hate into three back-to-back election victories.

Blair, however, left a messy intellectual endowment: the idea that, today, politics doesn't matter and one just acts as intelligent administrator. And just at the very turning point where hard choices, real budgeting, became essential.

What isn't obvious from the public record is that underneath the "call me Tony" demeanour was a burning intellect. A man who insisted on rising early to pen his own speeches. An intentionality. His followers have adopted the outer shell, but are missing the flavoursome crab meat inside.

When discussing interesting investment outcomes on Wall Street, we refer to eccentric or non-systematic returns. Bespectacled, absent minded Leon Levy could thread profitable eccentricity back-to-back. Just don't ask him which subway stop he meant to get off at, next year's EPS to one decimal, or the date of his anniversary.

Wall Street now wants conformism pretending to be eccentricity. Actuaries demand excess return without deviating from the crowd. And yet we're surprised at the aggressive behaviour created.

Ace Greenberg, penning Chairman's memos to his staff would channel the advice of Haimchinkel Malintz Anaynikal, an imaginary and often hilarious business philosopher; a figment of Ace's minds eye. If Jamie Dimon tried that today, he would be carted off the premises and branded a loon. Perhaps private partnership allowed better for private eccentricities. But something deeper, more cultural, is at work.

 To quote British banker John Studzinski: "after the dotcom crash, investment bankers were put through the meat grinder and came out robots." Warburg was so listened to by clients because he actually had something useful to say. His eclectic, eccentric outlook gave him a differentiated, potent opinion. Instead today's bankers collect endless, vapid powerpoint slides rather than bequeathable collections of fine literature. And they have opinions to match. Produce views and analysis like clockwork. But Warburg knew that producing was for the farmyard and generated opinions like manure. Quoth Siegmund: "One general reservation which I feel about some of the US investment banking houses is that they put too much emphasis on measuring, almost from month to month, what a specific partner produces. I don't even like the way they pronounce the word - not produce, but 'prodooce'. All this emphasis on producing - that is all right for a cow, but not for a human being."

Keynes, the great economist, trader, bon vivant, and political adviser was as likely to be found of an evening cottaging with the local bishop as penning a treatise on the National Product. Disraeli, a spectacular Prime Minister, was also a former bankrupt, mining entrepreneur and spiv. Try shoehorning such vitae into a political career today.

What do we have instead in British national life? Andrew Mitchell and the Plebgate inquiry, staffed by thirty full-time police offers, all straining to determine whether a politician muttered the word "pleb" to himself when heading past some cops at Westminster's gates. It's not so much fiddling whilst Rome burns as actively brainstorming more and better fuel supply lines.

Thatcher, every bit the eccentric, would have known what to do. Colleagues stung in the press by petty scandal would be grabbed by the arm and marched through Westminster's lobby. A show of support from the top; a smothering of the flame before it became entrenched in the press.

Straight-laced individuals, politicians, businessmen, forget their independence, their room for originality. Horrific, black swan events demand attention; perhaps a gun review is sensible post Sandy Hook. But don't forget the didactic nature of the Oval; exactly how FDR sucked billions of deposits back into the banks, or a gamely Reagan re-invigorated a whole nation. The lowest cost, highest impact fix would surely be a fireside chat on the benefits of sitting down for dinner daily with the family; taking an interest in your children.

On complex issues, one can't clear one's throat. The free-thinking intellect and the prejudiced have an intersection: the former will at least try on the latter's opinion to see how it fits. But don't dare be caught by the media as such.

Even the thesaurus is gripped by the modern will - it serves up for eccentric: aberrant, abnormal, flaky, crazy. Perhaps all those things. But also: essential.



 OK, it's $90 a copy but it still has to be required reading for any of us SpecLististas who want to continue babbling about history — War, Strategy and Military Effectiveness by Williamson Murray, Oxford UP.






 I was reading about entrepreneur Bill Liao to keep myself entertained on New Years. He is very impressive and went from high school dropout to wealthy magnate.

It doesn't take long, when researching him, to come across a handful of Irish articles trying to brand him a cultist for his participation in the Landmark seminars. Landmark is quirky, but just a self-motivational system. And clearly quite an effective one for Bill.

I find it interesting that such approaches to life are easily branded as "cults" or otherwise disparaged. Similar labels are found for Transcendental Meditation and Tony Robbins' work. Robbins' fire-walk seminar recently had a few participants out of thousands receive a burn (and even this may have been exaggerated) - much schadenfreude ensued.

However, if you study impressive men, you will so often find they had some toolset like this to help them during inevitable tough times: Bill Clinton and Paul Tudor Jones both are big Tony Robbins fans; Ray Dalio a Transcendental fan; Bill Liao a Landmark graduate; Warren Buffett a convert of Dale Carnegie.

The classic instance is Clinton calling Marianne Williamson, Tony Robbins and Stephen Covey to Camp David for a supercharge. Say what you like about Clinton, but you can't much question the resilience or achievement.

This is a common response to anyone who follows a belief set outside of the mainstream. I wonder why instinct is to be disparaging? Perhaps the strong leveling instinct in humans? Or the risk that wide adoption might crowd out the more stationary outlook of mainstream belief systems?

Tangentially, witness Mark Zuckerberg, pre-IPO, being subject to leaks of IMs he made as a youngster, quipping about the safety of subscribers data. Or any well known investor going through a tough time; suddenly all their prior victories are forgotten.

Are jealousy and self-motivation two sides of the same coin. Thus the evolutionary benefit of the latter necessitates the former?



 The opening of a Berlin airport has been delayed a 4th time, till at least 2014.

This captures an interesting phenomenon: How can one make large greenfield projects attractive to commercial capital? It seems to go one of two ways: Cost Plus / guaranteed minimum return: a free bonanza. Or equity discount rates that turn out to be totally wrong followed by massive overruns and investors taking a huge bath.

If you go back and look at Eurotunnel, Eurodisney, etc. all ran their costs over by a multiple. One can ask if Buffett is being chintzy about the Wright Brothers, but what is the right (Wright?) alternative?

The other huge problem with Private Finance Initiatives is the major agency issue of negotiating contracts to a deadline: public vs. private players. This one is never mentioned, however. Maybe because it is insoluble.

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