Notes About The First Ten Days Of Your Life

To my Little Lion,

I wanted to share some observations about the condition of your world at the time of and shortly after your birth, just ten days ago. It may interest you to look back on this some day, and it will be of benefit to me and your mother to remind ourselves of our good fortune, and yours.

You were born during the Winter Solstice last year (it’s New Year’s Day today, so I can already say “last year”, as if you’ve been around so long… we’re already shocked when we realize you have not been around even a month) and what’s more, you were born during a rain storm, the rarest of rare weather conditions where we currently live. Your mother and I are not superstitious people and we don’t believe there is any cosmic agency behind the concurrence of these events, I just find them remarkable because of their natural beauty, much like the nearly perfect weather conditions this morning when I finally took our dog for a walk– cool, breezy, clear, sunny, good visibility all the way off the coast to the island, fresh smelling air after another night’s rainfall.

You were born at home, as planned. The Wolf and I planned for months for that moment, as you were slowly growing inside of her belly, because we thought it gave the most advantages to you and to us. All of our friends who have had children describe the happiest part of the birth of their children as the moment they were released from the hospital and able to come home. We figured, why not just start at home and skip a few steps? We valued the privacy of it, as well. Your mother could labor anywhere she felt comfortable doing so, in an environment she knew well, with only your father and the three birth attendants (the midwife, the midwife-in-training and the doula to comfort your mother) nearby. We looked at your birth as a natural, healthy process and we were concerned that bringing you into the world in a hospital would encourage everyone around you to try to notice what might be wrong with you and your health, rather than what is right. It’s not that we’re anti-hospitals, and we appreciate that we live nearby one in case we needed extra help in bringing you into the world, we just try to live our lives simply and it seemed like we could do without. Your mother took great care to eat well, exercise, think happy thoughts, read a lot about you and how you were growing and how you’d be when you arrived, and so it seemed with such low risks to keep it that way by having you at home.

What did not go as planned was the specific day you decided to arrive! We were expecting you a few weeks from the day you were born. The Wolf and I were methodically going through our preparation checklists each day and week as your expected due date got closer. The day you were born, I was supposed to run to the market and start stocking up on supplies to feed your mother and the birth team. I didn’t get there in time! Your mother started laboring early in the morning and had pushed you out (without any drugs or medical intervention) by the afternoon! We didn’t even get the birth tub here in time for your water birth, she had you right on the bed you sleep in with us at night. The midwife was very kind and let me “catch” you as you came out. It was an exhilarating experience to grab your wet, slippery, bony, hot little body for the first time and lift you up and place you on your mother’s chest. We didn’t know what you’d be — a little boy or a little girl, though your mother says she secretly suspected you were a boy, and every passerby on our daily walks thought for sure you were a boy from the way your mother was carrying you, which is more superstition — but we were excited that you were what you were, if that makes any sense!

The birth team was so great with your mother. The doula arrived first and comforted your mother. Even though you couldn’t LEGALLY be delivered in our own bath tub (well, your bath tub, in your room), which I will tell you more about such silliness when you’re older, your mother labored in there with the doula while we waited for the midwife and her assistant to arrive. Everyone encouraged your mother and gave her the confidence and support she needed to bring you out, even though your father didn’t have any food or drink for anyone!

Your Grandma and Grandpa Lion came over to visit that first night and brought your mother and I some much needed food. They were so excited to see you! Your Grandma Wolf came a few days later, she lives a few thousand miles away and had to quickly change her plane tickets to be able to see you. She’s with us now and will be for the next few weeks. She is a big help for your mother and father, helping with sweeping, cleaning up dishes (your father is rediscovering his penchant for cooking these past few weeks), caring for your dog, doing laundry and even spending time with you which is really her greatest reward. She does all the hard work without complaint, with a smile on her face, getting to spend time with you for even a moment seems to make it all worthwhile to her. Even when you poop and pee on her, the chair, the floor and your dog during your “air time”. (Oh, and your Grandma Wolf is super obsessed with you staying warm, she is always chiding me about it.)

Your Auntie Lionesses came by and pitched in, too. They helped change bed sheets, sweep floors and they gave your mother and father an awesome early Christmas gift– six nights of meals that we packaged and put in the freezer to make more time available for me and your mother to spend with you. You’ve had a few visitors already, mostly your mother’s friends and some of Grandma and Grandpa Lion’s friends. They’ve bought food, gifts and good wishes. We didn’t have a name for you at first. Well, we did, but we hadn’t settled on it. So the first five days of your life created an obsessive mystery for many of the people who care about you. We “revealed” your name on Christmas Day while visiting at Grandma and Grandpa Lion’s house and everyone was overjoyed. Your Grandpa Wolf doesn’t get to meet you, but he gets to enjoy being part of your namesake, which we hope you will be able to appreciate some day.

As I said before, it is hard for your mother and I to believe you’ve only been with us for ten days now. All you know of the world is our bedroom, our living room, our kitchen, the view of the sky on the way to the local bakery and back, the ceiling of your mother’s car, and a few rooms of Grandma and Grandpa Lion’s house. The only people you know about are the few people who have come to see you so far, and most of them looked like funny blurs to you that you couldn’t focus on. You might imagine there are three animals in the whole world, your dog and your grandma and grandpa’s two dogs. We try to keep remembering that everything is new to you right now and everything will be new to you for years to come– you will need patience and your own space to learn and explore the vast diversity of the world and to make sense of it all.

We spend time holding you, but we also give you time on your back — on the bed, on the couch, not yet on the floor but eventually — to look around and move your body on your own. Your movements are jittery and random, but they have great meaning and importance to you. You are working on developing yourself, even when you’re moving around in your sleep, trying to become the person you will be. We don’t ever want to forget that, or try to hurry it, or expect anything of you but that. We resist as much as we can the temptation to “pattern-fit” your behavior right now, especially when people ask silly but well-intentioned questions like “How is he sleeping?”, “How is he eating?” etc. The answer is always, just as you are supposed to, whatever that is each day and night, it’s always changing because you’re always changing, getting a little older and a little bit further along your own plan each moment.

There’s so much more I could say, but this is what I want to focus on for now. Raising you is indeed a challenge, but it’s a challenge we chose and it’s a challenge we love (even aside from all the help we’ve gotten so far). We look forward to each day with you!

The Thousand-Year Reich Fallacy

Nothing is more permanent than “temporary” arrangements, deficits, truces, and relationships; and nothing is more temporary than “permanent” ones.

~Nassim Taleb

The Nazi regime in Germany, which was early on referred to as the “Third Reich”, was also popularly referred to as the “Thousand-Year Reich”, the implication being that it was a regime which would stand the test of time and last over a period of many multiple generations.

An intellectual problem I’ve always had with this is that the seemingly ever-lasting circumstance has an explicit, definite end point. In the case of the Thousand-Year Reich, that end point is 1,000 years from the time it was established– and then what? More importantly, why only 1,000 years? If the Thousand-Year Reich represents some kind of political ideal, how would it be possible for the society underneath it to transcend these arrangements over any conceivable period of time? And what changes in circumstance would lead them to do so?

As an observer of financial markets and business cycles for going on a decade, I see the “Thousand-Year Reich Fallacy” with some frequency. For example, a market prognostication might be made in the following form: “Earnings growth is strong and sustainable, rather than seeing the S&P 500 tail off from current levels, I believe it will continue to rise and will be ten or fifteen years before we see a correction.”

Ignoring even the problematic metaphor of a “correction” in this context, I always find myself thinking in these circumstances– and then what? And what is it, 10 or 15 years from now, that finally precipitates this change in price?

The most obvious example of the Thousand-Year Reich Fallacy (which is really just a variant of the hot hand fallacy) lately is the specious reasoning we hear about about Zero-Interest Rate Policy (ZIRP), its longevity and the “new normal” economic paradigm it engenders. Many people, simpleton and sophisticate alike, have reasoned that central banks have painted themselves into a corner with their ZIRP attempts and having arrived at this corner, there is no way out that will not impose enormous social costs to exit, which they are beyond reluctant to effect as a result. The implication is that interest rates will not rise because they can not rise without grave disruption to economic activity.

The incentives of ZIRP and even NIRP (Negative-) are intuitively perverse. Under ZIRP, borrowers pay no costs and lenders earn no return for parting with their money, meaning lenders have become indifferent from the standpoint of time preference, preferring a dollar today equally to a dollar tomorrow. Under NIRP, borrowers are rewarded for borrowing and lenders are glad to pay them for their privilege, meaning that lenders prefer a fraction of their dollar tomorrow to their whole dollar today. Anyone who listens to this realizes that this is not a sustainable arrangement, ceteris paribus, and that studied in isolation they would not willingly behave that way as a lender.

So, the Thousand-Year Reich must come to an end. But when? And why? Here is where the fallacy rears its ugly head, as people will project an arbitrary time frame which seems sufficiently long to hedge against immediate uncertainty, ie, 20 years, 30 years, but they will not then reason about what changes must occur 20 years or 30 years from now that bring ZIRP/NIRP to an end.

For ZIRP/NIRP to truly be the “new normal”, there can not be any end point to it. But it is not anticipated to be the new normal, but only a Twenty-Year Reich. But what then? And why will it remain stable along the way?

The funny thing about the Thousand-Year Reich fallacy is how short of the initial timeline events end up, and how violently the trend unravels. In the case of Nazi Germany, a regime slated to last 1,000 years in fact lasted 12 years, from 1933 to 1945. Of course, it was a horrible 12 years, punctuated by a ghastly death toll, gross destruction of capital and property in Germany and abroad, and enormous political ramifications that reverberated outward from Berlin and into the present day. All the martial glory, all the eternal recognition and all the national greatness imagined at its inception was dashed to the rocks in just over a decade which, for those experiencing it, must’ve seemed like 1,000 plus forever years.

The ZIRP/NIRP paradigm is a similarly crowded trade from a social expectations standpoint. Anecdotally, I have seen that it is believed from shady, proletarian used car lot operators in Appalachian Tennessee, to educated, middle-aged professional bankers on the West Coast. Everyone knows it can’t go on forever, but they can’t see how it will end in the next five, ten or even fifteen years and certainly no one wants to try to imagine what it might be like. It will be truly unprecedented. But it will end, because it must end, and since it will end it’s worth thinking about what it is that will deliver the finishing blow, and why it could be a much shorter Reich than one could anticipate right this very moment.

Sorry, The Economy Is Officially Closed

One way to describe what I do for a living is “capital allocation.” Really, I am like an internal strategic consultant to a family business (a family of which I am a part) so there is more to it than that, but thinking about where to put our capital is one of the primary functions I serve.

One interesting problem to have when one owns things of value is receiving bids on those things from people interested in buying them when you’re not sure you want to sell. The further above your own estimate of “fair value” their bid goes, the stronger the temptation to take advantage and sell your asset. It seems like a pretty straight forward problem to solve.

The only problem is the market context of the potential sale. Generally, if you’re in a position to get more than fair value for what you’re selling, you’re going to have a hard time finding another asset to buy where the seller isn’t facing the same dynamic. In other words, you can potentially sell one asset at an inflated price and buy another at an inflated price– you’re probably better off just holding on to what you have because there’s no arbitrage in that and it could very well cost you money in terms of frictional costs like brokerage commissions and taxes on imaginary capital gains.

One thing you could do is sell your asset at an inflated value and sit and wait in cash for a better buying opportunity. The problem with that is that cash is, currently, a seemingly barren asset. If you stuff your haul into T-Bills, you’re lucky to earn a few basis points every 90 days– it might as well be zero, and when you factor in the effect of inflation and those damned capital gains taxes once again, it probably is. You could go further out on the yield curve and buy some 10YR Treasury notes, but then you’re exposing yourself to substantial interest rate risk with yields flirting with historic lows.

Meanwhile, most asset owners are earning strong internal returns on their invested capital right now. Say you’re earning 20% a year on your investments, why would you sell them to collect 1.5% over the next 10 years while taking enormous interest rate risk? Or to collect zero for some unknown amount of time sitting in T-bills or cash in a savings account? Every year you stay invested, you get ahead by almost 20% more. Could the value of your investment really drop by that much?

The business cycle is an inevitable fact of owning and operating a business in a modern economy. The question is not could it, but when will it drop by that much, or more? For many business owners and investors, the waiting is the hardest part. Giving up 20% a year for some period of time and avoiding the risk of a 50-60% or greater decline in asset values just isn’t attractive. It isn’t even attractive when thinking about the fact that buying back those same assets at half price could potentially double your return on invested capital during the next boom, an interesting strategy for shortening the compounding time necessary to achieve legendary riches.

For many, this inevitable decline in asset prices is inconceivable. It’s embedded deeply in the fear of selling and going to cash. The implication of this premise is that the economy is officially closed to additional investment. Those who invested earlier in the cycle can stay inside and watch a magnificent show as they earn outstanding returns on their capital while the boom goes on. But for everyone who sold too early, or never bought in, they have to wait outside, indefinitely, and wonder what it’s like– the cost of admission is just too high.

What makes this a stable equilibrium? By what logic has a competitive market economy become permanently closed to new investment, or a change in asset values, or a change in ownership of assets? Under what set of premises could this condition last for a meaningful amount of time and leave people who sell now out in the cold, starving and bitter for returns on capital, forever, or for so long that they would be losing in real terms over time in making such a decision?

To me, this “new normal” is absurd. It is juvenile to believe that the economy is closed and no one else is getting in. It’s silly to think that the people willing to pay those astronomical prices for admission are making a good decision, that they’re going to have a comfy seat and years of entertainment, rather than paying more than full price for a show that’s about to come to an abrupt end. It’s a topsy-turvy world in which the reckless and courageous high-bidders are the ones who get rich. If paying too much for things was the path to riches, we’d all be there by now. I think when everyone’s perception of reality and value skews toward a logical extreme like this, we’re closer to the show being over than the show must go on.

In the meantime, sorry, the economy is officially closed.

Quotes – The Economization Of Expectations

Expect nothing. Live frugally on surprise.

~Alice Walker

Experiencing Pregnancy As A Man

People ask me a lot lately how the Wolf is doing with her pregnancy. It’s kind of like the new “How’s the weather?” or “What’s up?” because I have similarly unexciting information to share in response. The truth is that she just hasn’t had many challenges with the pregnancy so far. Aside from a quick bout of nausea while making dinner one night during the first trimester she’s been pretty peachy– cheerful disposition (enhanced by the confidence of knowing she is caring for a new life growing inside of her), eating healthily and with a normal appetite, maintaining relationships with friends by continuing to exercise and getting together for meals outside the home. She definitely is more tired than usual, she is slower on our evening dog walks around the neighborhood and takes frequent naps throughout the day and often likes to go to bed early.

But no wild changes in personality or emotions or other kinds of physical, mental or emotional instability.

I think that’s what I am having a hard time wrapping my head around. If pregnancy ever comes up in the plotline of a TV show or movie, there is usually a “Pregzilla” moment where the newly sassy, demanding and impossible-to-please woman shovels ice cream and other junk food into her mouth, emasculates the man by ordering him around town and the house on silly errands (which he hops to to prove his love and loyalty to mother and child) and generally just storms around the world raising hell and acting like your typical idea of a bitch. It falls nicely into that other man-woman stereotype where the two people enjoy nothing more than relating to sympathetic listeners of the same sex how knowingly horrible marriage and their spouses are, but, ah, the things we do for love!

I guess shame on me for thinking corrupt Hollywood ethics and bizarre leftist social agendas would make for accurate depictions of real human biology and sociology in media. We just aren’t experiencing that. For me, her pregnancy has been essentially “painless” so far, and I think I can say without being a jackass here that, all things considered, it’s been relatively painless for her, too. We’ve heard so many horror stories from others and none of it has happened.

Although we did have a chuckle the other day when we were watching something together and there was a “Pregzilla” moment on screen and I said, “How come you aren’t all hormonal and crazy like that woman?” and she looked at me and said, “Oh, I did some random crying right before you got home!”

I’m not sure if it’s diet, exercise, self-control, lifestyle or just luck but so far her pregnancy has been a civilized experience for both of us.

(For the Wolf’s perspective, check out Experiencing Pregnancy as a Woman)

Why Do We Travel?

Why do we travel?

Meeting other travelers, it’s often the first thing you ask, and are asked in return.

In many cases, travel fulfills that common desire to investigate whether the grass is greener, what some term “wanderlust” but which is really no more glorious than being convinced despite the evidence that if you just search a bit further and farther you’ll eventually find a place that is significantly better for you than where you are, if it isn’t perfection itself.

For others it is to gain a new perspective on people, places, history or culture. What is the food like and why do people make it like that? How are people dressed and what makes that customary or comfortable? How do people behave toward one another in their community and why? How do they get around and where do they go? Sometimes these become notches on the travel belt– “Oh I’ve been there, here and over there… I’m very worldly and can appreciate others in a way you’d only dream of if that was the kind of thing you yearned for for some reason.” The really psychotic ones almost make it like a race, “I’ve been traveling for X months and I’ve seen Y places, I’m way ahead of you on the quest to see it all and make myself comparatively more enlightened.”

We’ve only been at this for a few days on this trip but already we’ve been asked several times, and we’ve asked several times as well. This would include ourselves, I’ve been wondering, why are we traveling, and to these places in particular?

One gentleman we met on tour yesterday has been traveling, on his own, throughout southeast Asia for the better part of a year and change. He’s middle aged and a friendly fellow but the fact that he is alone and doing this relatively late in life makes you wonder if he’s looking for something, or simply lost. Why did he come here?

On our second tour last night we met several more travelers, all younger, female and apparently traveling on their own. They were each on an itinerary similar to ours– several weeks to a month total, visiting major developed economy cities, college educated (world travel doesn’t seem to be for the uneducated these days, which seems strange) and each seemed to have some personal heritage, identity or family connection to the region. But again, in the short time we met I couldn’t tell, why were they here?

It isn’t enough to simply ask the question. It is too philosophical and most people will reply with something shallow and obnoxious “to eat the food” or “to learn more about history”.

So, why do we travel? And why did we travel here?

I’m still formulating my thoughts on this, but I will attempt a response in the near future.

In the meantime, here is a picture of a handmade candle we found at a local designer mall. The young saleswoman told me it was called the “melting baby head”. I almost bought one but I think a picture will suffice and I didn’t feel like lugging it around the rest of the trip.

Why We Travel

The Wolf and I were kicking around a few links via e-mail the other day as we (she) put the finishing touches on our South America excursion. We were reading something from one of Tim Ferriss’s guest writers about “how to travel”. The guy was a little sanctimonious in the beginning but ultimately offered some tips I found valuable for getting the most out of my upcoming travels.

I say it was a little sanctimonious as if I am displeased. But as a sanctimonious person myself, I mostly took interest. What the guest author was on about was “good” and “bad” reasons to travel. As I read it, I have to say I couldn’t figure out how anyone could have a “good” reason… it all seemed to boil down to restlessness borne of subtle, unaddressed displeasure with one’s usual circumstances.

I thought about why I like to travel. I noticed a lot of my reasons boiled down to this nagging insecurity and unhappiness thing. I haven’t found a way to rationalize my way out of that bag (and maybe I never will), so in the meantime I thought I’d “invert, always invert” (erroneously attributed by naive financial market philosophes to Charlie Munger) and pose it this way:

Why wouldn’t you want to travel?

I came up with a short, condescending list, in no particular order:

• You’re completely unaware there is a world of other people and experiences outside the narrow confines of your everyday life
• You can’t afford it (ultimately because you don’t prioritize the experience highly enough to take the steps necessary to produce enough for others in exchange to pay the cost)
• You’re a racist
• You’re intimidated by foreign languages and awkward some-English interpersonal encounters
• You don’t like the food
• You realize churches and temples are bizarre no matter where they are in the world and, seeing as how most travelers eventually wind-up staring at a place of foreign worship at some moment or another in their trip, you decide to skip it and stay home
• You are a Zen-like being of perfect self-knowledge and self-control and there is no felt uneasiness you feel the need to relieve yourself of by journeying beyond your present place and state; in fact, you are so consumed by your enlightened presence that you don’t even travel into the kitchen for a snack… ultimately you stay right where you are until you sublimate into supreme nothingness (aka, you die and leave a smelly mess for the neighbors to find)

I think when you put it this way, it’s pretty clear why we travel and it’s really hard to come up with a reason why you wouldn’t live life exactly as we are (take THAT, Zen master!)

More Banking Confusion: Liquidity Versus Solvency

Here is a choice quote from the recent EconTalk podcast with Anat Admati of Stanford University:

Well, they have fancy ways to talk about banks, and we try to unpack those. They talk about maturity transformation, liquidity transformation. What that means is really that the depositor, the people who lend to the banks, often time want their money quickly, especially demand deposits. But when they invest it, they kind of invest it longer term and in less liquid things. So there is a sort of imbalance between the money that they use to fund and their investment in the sense of the length of time until something has to happen and also the speed with which they have to pay versus get paid. And so that mismatch creates fragility by itself, which also means for example if all of us run to the bank at the same time then the bank may not be able to cover all of that. Even if it technically would be solvent, it has everything, that’s kind of an inefficient run that you could have, in principle. So basically the banks tend to run a little bit more than other people into liquidity problems. You could say that, just, I have the money but I didn’t go to the ATM kind of thing–I can pay you back but we’re going to have to find a liquidity solution, sort of a rolling back my debt. Their funding is kind of fragile almost by definition because of the way it comes and the way people can come back for their money on short notice or any time they want. So that’s part of the funding. And the investments are not as liquid or longer term than that. (emphasis added)

This is an utter confusion. This is not a “liquidity problem”, it’s a solvency problem.

Money-in-an-ATM is not the same economic good as money-in-my-hand. That is, money-five-minutes-from-now is not the same as money-right-now.

They are separate economic goods due to the time value of money. What Admati has done is create an arbitrary distinction between a future money good and a present money good, by projecting her preference/judgment onto an exchange involving two other parties of which she is not one.

If party A demanding “liquidity” from the bank B truly saw no difference between money-right-now and money-a-few-days-from-now, for example, then a bank run would never happen and these items would trade at the same price, which they do not.

This is a fundamental error of economic reasoning. I expect a professor of finance and economics to understand something like this and as a result I find myself disappointed to see that she does not.

Economists and politicians only let banks get away with this. If anyone else were to be so arbitrary and haughty toward contracts they’d be thrown in prison, but for banks insolvency never comes so long as you can contort logic to the point that you convince yourself that all that’s missing is a bit of liquidity.

This is more free lunch thinking.

Observations On Expectations

A story of expectations met and unmet, in two parts.

Part the first. I spoke in front of a group of students at a local continuation high school this morning. The original topic was my career (what do I do? what do I like/dislike about it? etc.) and my career path (what’s my background? education? how’d I get to where I am?) but I never quite got there. I mostly ended up talking about economics as I was speaking to an economics class, nominally, and the program coordinator kept prompting me on that subject.

I introduced two economic concepts to the assembled: TNSTAAFL/opportunity cost, and subjective value theory. I tried to apply them to “real life” to make them tangible and interesting to the audience. I talked about how everyone got suckered into the Housing Bubble, which cost a lot of people their homes, their personal finances, their jobs and sometimes more. I suggested that a person who understood that TNSTAAFL wouldn’t have gotten suckered in because he would’ve recognized the bubble for what it was and played it safe as he could. Subjective value theory I used to explain why we have an economy and why people work jobs, to serve each other’s subjective needs. I encouraged the class to think about their own values and to pursue them, and recognize that when people tell them what to do they’re simply telling them they should follow subjective values other than their own. I tried to highlight the role opportunity cost plays in pursuing subjective values, for example, people often get into traps such as pursuing money to provide for their families in such a way that they don’t get to spend time with their families. This opportunity cost is forgotten or ignored.

I also covered time value of money and the function of credit during a brief tangent, prompted by the program coordinator emphasizing the importance of personal finance principles.

The instructor goaded the students into applauding me before I had even spoke, as some kind of polite welcome for someone who had taken the time to stand before them and pontificate on a subject they cared little about. I said, “We’ll see if you still feel like applauding me at the end” and then began my talk. At the end of it, as the students rose to leave at the sound of the Pavlovian bell, one of the young men closest to me in the front of the room turned to his classmate and said in a quite intentionally audible way, “Thank GOD that is over!”

The morning’s events completely met my expectations and as a result, I was satisfied with myself when I myself left. I had entered a prison, whose inmates were being held against their will, by force of law, who had been assembled before me because they had no other choice save punishment and who had little to no interest in the subjects I had been invited to speak about before them. You certainly can’t blame a person in such circumstances for being disengaged, melodramatic and at times downright hostile.

If you put me in a cage I’d be uncomfortable and not in a friendly mood, either.

I didn’t expect to touch anyone, change a life or spark a fire or interest in anyone for the subjects I spoke about (economics, careers, my career, me) and if I happened to do that despite my intentions, that’s fine. I expected to go in there, treat the poor beasts with respect and maybe a bit of sympathy, having once been caged in a similar manner myself, and deliver my thoughts as articulately and coherently as I could. I expected to get practice speaking before an audience and trying, not necessarily succeeding, at making a foreign subject engaging or relatable for them.

In this, I met my expectations and so I believe I succeeded and thus I felt satisfied.

Part the second. For some time now I have watched in despair as a previously favorite blog of mine has gone into seemingly terminal decline. What was once a source of original thinking, unique coverage and respectable ideological consistency has in time become a haven for hacks and simpletons, its content hollowed-out and refocused on a few topics I just don’t have much interest in. The purveyor of the site has taken numerous opportunities, on his blog and his new webcast radio show, to demonstrate qualities of his personality I’ve found surprising, disappointing and at times reprehensible.

My distress with this reached a fever pitch early this week when a long-awaited debate on the subject of “intellectual property” was joined by the purveyor and another popular blogger on the subject. While the purveyor’s behavior leading up to the discussion gave me no reason to believe it’d be an intelligent, objective attempt at sussing out the truth by the two parties, but rather much evidence that it would be a battle of wills and ego characterized by willful blindness of reason and savage emotional assaults on each respective victim, the final product was so shockingly extreme in terms of all the undesirable qualities I suspected it would contain that I almost couldn’t believe these two adults had allowed themselves to be recorded, their outrage to be shared in front of a public audience of strangers.

I found myself so disappointed with the whole thing. It was anti-intellectual and truly uncivilized, the kind of stuff blood feuds at made of (gusto about sacred honor and the like that can never be satiated by way of reasonable argument). I knew both men were capable of a bit of underhandedness, but at least in the past the underhandedness seemed to have some kind of productive point. This time, after I finished sitting through two and a half hours of two middle-aged men calling each other names and screaming at one another, waiting for a point, I realized too late that there was none beyond sharing pure hate and distrust.

Who was to blame for my dissatisfaction in this instance? Initially, I found myself disgusted with these two people for subjecting me to this idiocy. “How dare they!” Then I thought about it some more. They are who they are. Their current skills and capabilities with regards to interpersonal communication and intellectual reasoning are aspects of their identity that exist as they do, whether I find them appealing or satisfying or not. I expected them to work hard to please me in their debating efforts (despite, I should add, much evidence that they were capable of no such thing) and when they didn’t live up to my expectations, I was disappointed.

Not by them, but by myself. For expecting people to live to serve my intellectual and emotional needs.

In the first part, I participated in something that could easily be seen as a disastrous waste of everybody’s time. Yet, I walked away from it in a positive state of mind. In the second part, I witnessed a true social tragedy and felt depressed and upset. Both circumstances were undesirable, but my reaction was different each time because my expectations were different.

Expectations can glorify our existence or cast the light of our lives down a dark abyss. I hope to remind myself of this fact more often.

Video – Toby Carlisle, Q&A Notes at UC Davis Talk on Quantitative Value

Click here to watch the video (wear earphones and bring a magnifying glass)

UC Davis/Farnam Street Investments presents Toby Carlisle, founder and managing partner of Eyquem Investment Management and author of Quantitative Value, with Wes Gray.

Normally I’d embed a video but I can’t seem to do that with the UC Davis feed. Also, these are PARAPHRASED notes to the Q&A portion of Toby’s talk only. I ignored the “lecture” portion which preceded because I already think I get the gist of it from the book. I was mostly interested in covering his responses to the Q&A section.

The video is extremely poor quality, which is a shame because this is a great talk on a not-so-widely publicized idea. I wish there was a copy on YouTube with better audio and zoom, but no one put such a thing up, if it exists. I hope Toby does more interviews and talks in the future… hell, I’d help him put something together if it resulted in a better recording!

I had trouble hearing it and only thought to plug in some earbuds near the end. Prior to that I was contending with airplanes going overhead, refrigerator suddenly cycling into a loud cooling mode as well as my laptop’s maxed out tinny speakers contending with the cooling fans which randomly decided to cycle on and off at often the most critical moments. I often didn’t catch the question being asked, even when it wasn’t muffled, and chose to just focus on Toby’s response, assuming that the question would be obvious from that. That being said, I often conjoined questions and responses when there was overlap or similarity, or when it was easier for me to edit. This is NOT a verbatim transcript.

Finally, Toby recently created a beta forum for his book/website, at the Greenbackd Forum and I realize now in reviewing this talk that a lot of the questions I asked there, were covered here in my notes. I think he’s probably already given up on it, likely due to blockheads like me showing up and spamming him with simpleton questions he’s answered a million times for the Rubed Masses.

Major take-aways from the interview:

Q: Could we be in a “New Era” where the current market level is the “New Mean” and therefore there is nothing to revert to?

A: Well that’s really like saying stocks will revert down, not up. But how could you know? You could only look at historical data and go off of that, we have no way to predict ahead of time whether this “New Mean” is the case. I think this is why value investing continues to work, because at every juncture, people choose to believe that the old rules don’t apply. But the better bet has been that the world changes but the old rules continue to apply.

Q: So because the world is unknowable, do you compensate by fishing in the deep value ponds?

A: I like investing in really cheap stocks because when you get surprises, they’re good surprises. I find Buffett stocks terrifying because they have a big growth component in the valuation and any misstep and they get cut to pieces; whereas these cheap stocks are moribund for the most part so if you buy them and something good happens, they go up a lot.

Q: (muffled)

A: If you look at large cap stocks, the value effect is not as prevalent and the value premia is smaller. That’s because they’re a lot more efficient. There’s still only about 5% of AUM invested in value. But the big value guys portfolios look very similar; the value you have as a small investor is you don’t have to hold those stocks. So you can buy the smaller stuff where the value premia is larger. The institutional imperative is also very real. The idea of I’d like to buy 20 stocks, but I have to hold 45. That pushes you away from the optimal holdings for outperformance.

Q: (muffled)

A: The easiest way to stand out is to not run a lot of money. But no one wants to do that, everyone wants to run a lot of money.

Q: (muffled)

A: The model I follow is a bit more complicated than the Magic Formula. But there are two broad differences. I only buy value stocks, I only buy the cheapest decile and I don’t go outside of it, and then I buy quality within that decile. ROIC will work as a quality metric but only within the cheapest decile. ROIC is something Buffett talks about from a marketing perspective but I think in terms of raw performance it doesn’t make much sense. There’s definitely some persistence in ROIC, companies that have generated high returns on invested capital over long periods of time, tend to continue to do that.  If you have Warren Buffett’s genius and can avoid stepping on landmines, that can work. But if you don’t, you need to come up with another strategy.

Q: (muffled)

A: Intuition is important and it’s important when you’re deciding which strategy to use, but it’s not important when you’re selecting individual stocks. We can be overconfident in our assessment of a stock. I wonder whether all the information investors gather adds to their accuracy or to their confidence about their accuracy.

Q: (muffled)

A: All strategies have those periods when they don’t work. If you imagined you ran 4 different strategies in your portfolio, one is MF, one is cheap stocks, one of them is Buffett growth and one is special situations, and you just put a fixed amount of capital into each one [fixed proportion?] so that when one is performing well, you take the [excess?] capital out of it and put it into the one that is performing poorly, then you always have this natural rebalancing and it works the same way as equal-weighted stocks. And I think it’d lead to outperformance. It makes sense to have different strategies in the fund.

Q: (muffled)

A: QV says you are better off following an indexing strategy, but which market you index to is important. The S&P500 is one index you can follow, and there are simple steps you can follow to randomize the errors and outperform. But if you’re going to take those simple steps why not follow them to their logical conclusion and use value investing, which will allow you to outperform over a long period of time.

Q: (muffled)

A: Not everyone can beat the market. Mutual funds/big investors ARE the market, so their returns will be the market minus their fees. Value guys are 5% of AUM, can 5% outperform? Probably, by employing unusual strategies. Wes Gray has this thought experiment where he says if we return 20% a year, how long before we own the entire market? And it’s not that long. So there are constraints and all the big value investors find that once they get out there they all have the same portfolios so their outperformance isn’t so great. There’s a natural cap on value and it probably gets exceeded right before a bust. After a bust is then fertile ground for investment and that’s why you see all the good returns come right after the bust and then it trickles up for a period of time before there’s another collapse.

Q: (muffled)

A: I think the market is not going to generate great returns in the US, and I am not sure how value will do within that. That’s why my strategy is global. There are cheaper markets in other parts of the world. The US is actually one of the most expensive markets. The cheapest market in the developed world is Greece.

Q: Did you guys ever try to add a timing component to the formula? That might help you decide how to weight cash?

A: Yes, it doesn’t work. Well, we couldn’t get it to work. However, if you look at the yield, the yield of the strategy is always really fat, especially compared to the other instruments you could invest the cash in, so logically, you’d want to capture that yield and be fully invested. I think you should be close to fully invested.

Q: What about position sizing?

A: I equal weight. An argument can be made for sizing your cheaper positions bigger. I run 50 positions in the portfolio. In the backtest I found that was the best risk-adjusted risk-reward. That’s using Sortino and Sharpe ratios, which I don’t really believe in, but what else are you going to use? If you sized to 10 positions, you get better performance but it’s not better risk-adjusted performance. If you sized to 20 positions, you get slightly worse performance but better risk-adjusted performance. So you could make an argument for making a portfolio where your 5 best ideas were slightly bigger than your next 10 best, and so on, but I think it’s a nightmare for rebalancing. The stocks I look at act a little bit like options. They’re dead money until something happens and then they pop; so I want as much exposure to those as I can. I invest globally so the accounting regimes locally are a nightmare. IFRS, GAAP to me is foreign. You have to adjust the inputs to your screen for each country as a result of different accounting standards.

Q: digression

A: Japan is an interesting market. Everyone looks at Japan and sees the slump and says it’s terrifying investing in Japan but if you look at value in Japan, value has been performing really well for a really long time. So, if the US is in this position where it’s got a lot of govt debt and it’s going to follow a similar trajectory, you could look at Japan as a proxy and feel pretty good about value.

Q: (muffled)

A: I’ll take hot money, I am not in a position to turn down anyone right now. It’s a hard strategy [QV] to sell.

Q: (muffled)

A: Special situation investing is often a situation where you can’t find it in a screen, something is being spun out, you have to read a 10-K or 10-Q and understand what’s going to happen and then take a position that you wouldn’t be able to figure out from following a simple price ratio. It’s a good place to start out because it’s something you can understand and you can get an advantage by doing more work than everyone else. It’s not really correlated to the market. I don’t know whether it outperforms over a full cycle, but people don’t care because it performs well in a bad market like this.

Q: What kind of data do you use for your backtests?

A: Compustat, CRISP (Center for Research Into Securities Prices), Excel spreadsheets. You need expensive databases that have adjusted for when earnings announcements are made, that include adjustments that are made, that include companies that went bankrupt. Those kinds are expensive. They’re all filled with errors, that’s the toughest thing.