Jun

15

Kaizen, from Jim Sogi

June 15, 2008 |

J SogiKaizen is a Japanese concept which means continuous incremental improvement. This is a process in contrast to and in disproof of the idea that outliers alone form history. It is the tortoise and hare issue. Incremental and thus compounded gains allowed Toyota to become the largest car maker in the world. This kind of steady gains over time arguably has been responsible for more and greater changes than the discontinuities. In markets it is the idea that it is hard to beat a buy and hold over the centuries. The slow advance of human records over years is another example of incremental improvement. For traders a steady improvements in skills, new and changing techniques to adapt to ever changing market cycles and a steady return is a good alternative to a boom bust methodology.

The larger brokers such as Lehman use up to 25-35x leverage. Banks are leveraged up to 20x with less than 5% capital. The common historical variance in any particular market should lead to some big swings in equity. The real estate market would similarly be leveraged at least 5-10x or more with a 10-20% down. This level is like the "Mexican option". The levels seem to be coming down now. This is affecting market action.

Scott Brooks dissents:

Scott BOutliers may not "form" history, but they do lead it. The outliers in history are the ones that led the way to new and innovative change. Whether you look at outliers like Alexander the Great, Hitler, Churchill, Washington, Charlemagne, or Ford, Rockefeller, Edison, Morgan, or Shakespeare, Van Gogh, Picasso, Beethoven, The Beatles. It's the great ones that lead the direction or show the way. Society as a whole makes a decision, in the form of many individual decisions, to follow the lead of those that are paving the way.

There is no question that society as a whole benefits and moves forward in a buy and hold methodology. But the great ones lead the way and change the course of mankind….whether on purpose, or by accident.

Are the moves of these great leaders a mere function of chance? Yes and no. Greatness is predictable, it's just not known where it will come from or the impact it will have. Just as one can't predict the outcome of a horse race of a coin flip with 100% accuracy, we do know that the coin will land with some result, and that some horse will win the race. These horses are the one's that shape history and direction, just as the great (or infamous) leader have over time….which has lead to the incremental progress of the human race. But the fact that some men have greatness is less a function of chance and more a function of an ongoing decision process. They each, literally, decide to be/do something and work towards that goal. There is no chance in a pursuit of greatness or a goal. There is no greatness in a winning a lottery, only chance. Achievement of greatness is not about the result achieved, it's about the process one followed to achieve that greatness.

I believe the same is true from trading. We all can make progress if we're willing to work towards that goal and learn from our past experiences and build on those experiences as well as the experiences of others that we learn from. Greatness comes from process we learn over time and in the falsification of beliefs that we hold to move towards a higher truth.

Average and ordinary people don't want to believe in something new. They want to continue to believe that the earth is flat or the that universe revolves around the sun. It takes a great man to falsify those beliefs, and move the whole of mankind in the direction of greater enlightenment.

Riz Din concludes:

The interplay of outliers and incremental change over the long course of history seems like a very natural process, although sometimes I pray for the outlier to arrive quickly and disrupt the state of affairs because incremental change has led to bloatware, bloated institutions, etc. that are riddled with inefficiencies. When the incremental path is followed, things get embedded in such a way that there is no way of overhauling the system and it takes a competitor to do what is necessary and start over from scratch.

Here is an interesting Economist article from my archives on the topic, it is from the excellent, Millenium edition (Dec, 1999), and discusses living standards over the past thousand years in the context outliers leading the way, incremental change, and our benefiting of compound return of growth/living standards.

Take a look at the chart.

In our life-times we see steady year on year growth and improvements in conditions and view this as normal. However, the author of the article notes, "material prosperity has risen more in the past 250 years than in the previous 10,000. And so conditioned to growth have people become that most westerners now expect their standard of living to improve automatically year by year; if it does not, something is wrong. This taking for granted what would once have seemed miraculous is the measure of the change."

Jim Sogi tries to get the last word in:

The Economist article Riz cites falls for the recency effect, that recent events are more important. Not so. The invention of language, the wheel, fire, tools, iron, writing, and printing presses probably surpass recent inventions in creating better prosperity advances and change. 


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1 Comment so far

  1. Bob Johnson on June 15, 2008 2:08 pm

    There is clear evidence of deleveraging in the correlation of asset prices data. Negative correlations have broken down, when analyzing most recent ten days data. With the glaring exceptions of the dollar index and energy, most major asset-class prices have declined, pointing at significant fund liquidation. Perhaps news of a highly distressed entity will soon be seen.

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