My Recent Trip To The ER

Three days ago I critically reflected on the idea of preventative medicine in a post where I talked about a troublesome health condition that I had developed and my experience of having it examined at a local doctor’s office. Today, I went to the ER for that same condition.

What happened?

Between Tuesday, when I first noticed discomfort in my leg, and Wednesday, when I decided to go get a doctor’s opinion before spending some family time out of town, the swelling and redness increased, but I did not develop any other symptoms. On Thursday, the swelling and redness had encircled my entire lower leg, down to my ankle (but strangely not affecting my foot) and up to my knee joint, but not beyond. On Friday, no one who had a look (and there were many prying family eyes beside mine) could tell a difference between Friday’s swelling and Thursday’s– it didn’t seem better, but it also wasn’t clear it was worse. On Saturday morning (today) we packed up and made for home, and the swelling seemed unchanged.

Some family members tried to look up bug bite sites to help guess at what caused my reaction. Others just expressed shock and concern that I wasn’t doing something, anything, to address the obvious symptoms. Suggestions were made that I visit the ER in town at our vacation spot, or at least do it when I got back.

Here is how I was thinking about this decision: the fact that the swelling wasn’t getting obviously worse seemed like a good sign, the way the body fights its fight against invaders and injuries is going on below the surface, and without some kind of evidence (increased pain, swelling, etc.) that it is slowly losing the fight, I assume it is winning it. The discoloration was more extreme and enveloping, but no increase in pain with it seemed less than frightening. I did not develop any other symptoms which suggested a spread of the condition to other vital organs– no dizziness, nausea, vomiting, confusion, etc. And as ever, I am an otherwise healthy individual who rarely experiences illnesses and generally makes speedy, fully recoveries on my own. I felt like I had a lot on my side in terms of weighing the wait.

When we got to town, I had lunch with a friend from high school who was in the area visiting relatives. His father is a doctor, and he mentioned my leg to him, to which his response was the predictable “He should get it checked out.” His dad is a good doctor and a thoughtful person in general, so I asked if he’d take a look at it to see if it was at all obvious from a visual inspection what was going on. He agreed and was surprised that I did not have tenderness or problems moving my toes up toward my shins, indicators for possible blood clot. Still, my leg looked “nasty” in his very medical opinion and he suggested I go to the ER and have them take a look. It could be a blood clot or cellulitis, an under the skin infection, both of which generally require medical intervention to treat.

The blood clot thing did concern me. I was exhibiting some of the symptoms (swelling, redness, soreness) but not all of them, and based upon my diet and exercise I assumed it’d have to be freak luck or a weird immunological response (say, to a bite?) to develop a blood clot in my leg. It seemed a really low probability, but the way to diagnose it is an ultrasound, which I’d rather not do if I don’t have to, but I don’t see as a health disaster for me for attempting.

A trip to the ER brings with it some risks– contracting an infection you didn’t come in with, incompetence in conducting routine medical exam techniques (blood draw, IV), “intervention spiral” where the medical professionals push you to treatments for diseases you don’t even have that just make your health worse, false positives. So I don’t want to go to the ER if I can avoid it. And I still think I could’ve avoided it. Aside from the swelling and redness, nothing else about my condition seemed to be getting worse and I wasn’t exhibiting any other symptoms, it seemed like it was worth taking a punt.

I decided to go to the ER based on the following:

• second opinion of a non-specialist MD was that my reaction/condition was not “normal” and may be symptomatic of conditions that are potentially tissue-damaging or fatal
• family was getting worried and doesn’t have the same mental and emotional framework for thinking about this as I do, so they’re going to increasingly see my approach as needlessly risky and stubbornly defiant over what could admittedly be a long self-recovery period
• so far, no one including myself is able to diagnose what’s likely going on with any certainty
• because I believe I am an otherwise healthy individual with a strong immune system, I think the specific risks of being exposed to an ER are pretty low for me, so I am willing to trade the potential cost of exposure to risks for gaining more certainty about my condition; my suspicion is that my condition is nothing to be worried about, but I am not prepared to take a gamble on it as we near the delivery date for our first child (best part about this, my wife was pretty skeptical and kept sending sarcastic texts to me as I explained what was going on along the lines of “What did you expect at an ER?”)

Getting admitted was even easier than going to the GP’s office on Wednesday! I filled out a half sheet of paper with my name, birth date, phone number and reason for coming to the ER. It was raining today and there were all of 2 people in the waiting room when I arrived, I got pre-screened in about 3 minutes and then walked to my private room in another 2 minutes and was seen by a nurse attendant in another couple of minutes. The doctor came in and talked to me while a scribe annotated the conversation about 5 minutes later. In total, I was at the ER from about 3pm to 6:30pm.

Before I go further, I want to make something clear: I don’t see myself as anti-Western medicine or anti-medicine in a general sense, and my observations are not supposed to be read as some unbridled skepticism or lowbrow guffawing at the “scam” of the system. I felt I was treated with concern and respect by everyone who I interacted with at the ER, and whoever is the equivalent of the General Manager of that operation is doing a great job because it runs smoothly and its clear customer service is something they’re trying to deliver. This ER is in the hospital I was born in, and which we may have to turn to in the event of a complication with our home birth plans in the coming weeks. I don’t think it’s necessary or reasonable to try to scandalize the people or the process. I simply want to illustrate my thinking about the interventionist mindset and how I experienced it at the ER.

And I knew exactly what kind of a jungle I was walking into. I made the decision when I went to the ER to also go along with (but question first) any routine intervention they’d attempt to administer unless I could get them to talk themselves out of it, or I seriously feared it posed an undue risk to my health. I’ll provide more explanation about this in a bit, but for example, they put me on an antibiotic IV– that wipes out my carefully cultivated gut bacteria and potentially exposes me to direct bacterial infection through intravenous contact, but I believe my full immunity and health profile make it statistically unlikely I will be unduly harmed by this specific intervention.

With that out of the way, I will say this: life is an uncertain enterprise.

Perfect knowledge and omniscience is not something any individual can obtain, nor need they try. We are always grasping at a little bit more illumination in our lives, more clarity when there was less focus, more understanding when before there was ignorance, and this goes for the practice of medicine as well. The contributions to the improvement of human life on this planet by innovations in medicine and physics over the last 200 years are truly astounding, so astounding that some people have concluded that we know most of what we can know about these subjects or that, at least, we need not question their conclusions. I just don’t share this conviction. I look at all actions in life as being about tradeoffs, and I see these tradeoffs being motivated by perception of uncertainty and a desire to gain more certainty. So I look at medicine as offering many answers, but not everything, and certainly not any answers that shouldn’t be questioned. Everything should be questioned, if you’ve stopped asking questions you’ve probably started to experience the knowledge dishonestly.

I went to the ER to try to relieve some uncertainty.

The nurse informed me that they planned to run a blood panel on me, which meant they needed to draw some blood. The reason for the blood panel was to see if there was any distress markers in my blood, particularly an indication of acute infection. The two theories that the doctor who saw me had were that I either had a blood clot, or an infection. Because they were going to put an IV into me to draw the blood, they decided they’d just hit me with an antibiotic drip right away as well. This was puzzling to me, because they planned to do this before confirming the results of the blood panel. The response I got from the doctor was (summarized) as follows:

MD: It’s better to be safe than sorry, don’t you think?
ME: Let’s say I have an infection, what are the chances my body could fight this on its own?
MD: (pauses for a few seconds) …mmm, 50/50. But if your wrong, and your body loses, you could lose your leg. I don’t want to scare you, but I’ve seen these things go fast, like if that’s what it is, you could be fine and then an hour later you’ve lost and it’s too late.
ME: I generally try to avoid antibiotics.
MD: Me too! I never give my kids antibiotics. Like, I won’t give them antibiotics unless they’re dying. Trust me, I wouldn’t suggest this unless I thought it was absolutely necessary, okay?

Of course, if I don’t have an infection, but a blood clot, then what good were the antibiotics? And if I have neither, what good are the antibiotics?

The nurse also informed me I’d get an ultrasound of my leg done to check for the possibility of blood clots. The doctor and the nurse worked together with a doppler to check my pulse in my legs and feet, which they were able to confirm, but their concerns about the heat emanating from my swollen leg led them to the “safe vs. sorry” compromise of ordering another test.

As the nurse walked me through the test regime I was about to run, I asked, “Any idea what this will cost me?” Of course he didn’t know, and up to this point, no one bothered checking with me about the cost of services. It ended up being $250 for the co-pay and I don’t know yet what it was for the tests. I also don’t know if the IV antibiotics costs more than an oral treatment. I asked the nurse about this and he went into a rationalization about not taking chances, etc.

The nurse was very good at drawing my blood. The injection was almost undetectable. The ultrasound technician was also efficient. We talked about her automobile purchase history and she had me all checked out in about 15 minutes. An orderly wheeled me around from room to room in my gurney bed, which enhanced my feeling that something was really wrong with me and at any moment I could crater. I noticed passing through the hall that the other patients at the ER were all males, either very elderly males probably near the end of the road who had had a fall, or gotten sick, or very young males who had just made a very poor judgment call and were now paying the price.

I couldn’t help but thinking, “What is wrong with this picture?” as my seemingly-healthy, 30-year-old trim frame was being shuttled from room to room. Two ideas came to mind: either nothing was wrong with me, and that’s why I shouldn’t be in the ER with these people, or something was REALLY wrong with me, and that is why I was suddenly in the ER with these people.

I waited another 45 minutes by myself on my bed gurney before learning of the test results. A financial admin came in and out to run my insurance and have me initial some boilerplate. I started initialing without reading it and got halfway down the list and saw something saying I agreed to have my medical history inserted in a state database. “Do I need to do this?” “No. I know, next thing you know you’re going to be getting called by a telemarketer…” (not really what I was worried about on that one). So I didn’t initial it, went back over the ones I did, finished the others and wondered what law or series of events had conspired to have a financial admin highlight for initialing the sharing of private medical data in a public database without comment or concern?

Ultrasound: no blood clot found.
Blood panel: no acute infection indicated, blood work looked very good including liver and kidney function (I made sure to ask my nurse for a copy of my blood panel so I could interpret it more fully later, since a blood panel costs $$$ and I planned to do one eventually anyway, this helped me recoup some of the cost on this unnecessary intervention visit)

So, what was wrong with me? The doctor admitted she really didn’t know. Her suspicion was that I was bit by something and it either had some bacteria on its fangs, or it triggered a strange reaction. She told me she wanted me on an antibiotic regimen “just to be sure”, and to come back immediately if my leg felt tingly or numb. She said I could take some Benadryl to try to treat the inflammation as well.

I asked the nurse to help me interpret my blood panel. How did it look? “It looks great, really good panel, no indication of acute infection…” “So then why am I being administered an oral regimen of antibiotics if there is no infection indicated?” “Well, the body is funny, it COULD be infected and it just hasn’t shown yet in the panel, but anyway, we’ve seen a lot of crazy stuff, better safe than sorry right? I mean it can’t do any harm to get the antibiotics, it can only make it better.”

He grabbed my checkout paperwork and had me look over it and sign. The paperwork says that I acknowledge the diagnosis and the treatment being recommended. The nurse says, “We don’t know what you have, but we’re calling it ‘cellulitis’.”

I gained some additional certainty that I don’t have a life-threatening blood clot and that I am not at risk, as of this very moment, of losing my leg to a bad infection as one doesn’t seem to exist. My experience led me to conclude that allergy and immunology medicine are perhaps younger, frontier sciences within the practice of medicine with higher levels of uncertainty than the practice itself. Everyone’s still uncertain about what actually happened to my leg!

The Greatest Time To Build A Fortune Is Now

From Is Value Investing Broken? by Geoff Gannon:

There’s a tendency for people – people of any time – to see the time they live in as unique, dangerous, different, unlike any other age. In some ways, they are always right. Some things really are different this time from all other times. But, mostly, they’re wrong. And what they are wrong about is reading a golden age of stability into the past. I was talking with a value investor once and this value investor said that sure Ben Graham’s ideas worked in Ben Graham’s times. But Ben Graham invested in simpler times.

Here are the times Ben Graham invested in: the 1910s through the 1950s. He invested during Two World Wars, the start of the Cold War, the atomic bombings of Nagasaki and Hiroshima by the U.S. and then the testing of nuclear weapons by other countries, The Great Depression, a big explosion (reportedly a terrorist bombing) on Wall Street, and the longest shut down of trading in Wall Street history that I can remember at least (right as World War One started). People talk about political risk today. Political risk in Ben Graham’s time meant Marxists and Fascists. Investors saw hyperinflation in Germany after the war and then they saw deflation after the 1929 crash. These were not simple times. If you go back and read the newspapers from the time – you can see how not simple they were.

Now, yes, they were different from today in some ways. Much of the period investors and economists in the U.S. study were more regulated than today. So, you either had the Gold Standard or Bretton Woods. You had much greater belief in planned and insular economies in a lot of countries. With the benefit of hindsight – and seeing the entire sweep of history – many of these decades seem simple to us. They rarely were. Try to find a decade without too much inflation, too much deflation, too much war, the mania of some bubble, or the bursting of that bubble. At any point in that past, people could have believed value investing was dead. And yet, buy and hold investors – business owners and the like – have been compounding fortunes in the U.S. from the 1800s through today. If there are companies that can make founders and their families billionaires – there are companies that can make shareholders very rich if they buy and hold.

The Fed Grasps At Straws

Here is a really stupid headline and story summary from the WSJ, which I believe is worth saving for posterity as it is indicative of the times in so many ways:

Federal Officials Say No Thanks to Negative Rates
Fed officials don’t think negative rates are needed in the U.S. because the economy and job market are improving and they are hoping they will never have to use them in the future given their uncertainty about whether the policy works.

They claim they don’t “need” negative rates because things are improving, but they won’t raise rates, which is what typically happens when they’re done subsidizing with monetary policy.

But despite their present judgment, they’re simply “hoping” they wont have to use them in the future, which suggests they’re not confident about their present judgment.

Meanwhile, the reason they’re hoping they won’t have to use them is because they don’t know if they work. So, they’d be willing to try something that has some chance of making things worse, in order to see if it has a chance of making things better.

So this is the era we live in: the central bank refuses to return things to “normal” while insisting things are on the mend, is open to conducting monetary science experiments on the economy despite initial misgivings, and reporters write stories about this chicanery as if these are all serious and respectable ideas to entertain. Couldn’t a bunch of Fed chimpanzees at the trading consoles have a reasonably good chance at improving upon this model?

Review – Losing My Virginity

Losing My Virginity: How I Survived, Had Fun and Made a Fortune Doing Business My Way

by Richard Branson, published 2011

Spoiler alert– this book is choppy and inconsistent in the pacing and entertainment factor of its narrative. You really need to read between the lines a bit to get the most value out of it. That being said, it’s surprisingly literary for a dyslexic former publisher of a student magazine and I found Branson’s repeated reference to his high-altitude balloon voyage trials to be an outstanding metaphor for his life as a businessman and entrepreneur.

You see, in Branson’s ballon journeys, the key factors of any consistency were that: a.) Branson was knowingly and openly taking what he perceived to be a potentially life-threatening risk b.) Branson was almost always underprepared for it, or decided to go ahead with his attempt despite early warnings that something was amiss and c.) nonetheless, he somehow managed to survive one disaster after another, only to try something bigger and bolder the next time around.

And this is quite similar to the way he comported himself as an entrepreneur on so many occasions. Again and again, he’d make a daring foray into a business, market or industry he didn’t quite understand, the company would stumble after an early success leaving them all on the brink of failure and yet, each time they’d double down and somehow win.

In that sense, Branson is a perfect example of survivorship bias. On the other hand, having so many narrow misses that turn into massive accelerators of a person’s fortune start to make you wonder if isn’t mostly luck but rather mostly skill.

As an entrepreneurial profile, “Losing My Virginity” is full of all kinds of great successes and astounding failures. With regards to the failures, something I found of particular interest was the fact that Branson’s company were victims of some of the most common pitfalls of other businesses throughout its early history: taken for a ride by indomitable Japanese owners/partnerships in the 80s, repeated victim of the LBO-boom and the private/public buyout-cycle in the 80s and 90s. When you read these stories in the financial press it always seems to happen to the rubes of the business world, but Branson’s foibles help one to realize even rather sophisticated types can get taken in now and then.

The volatility in Branson’s fortunes do leave one with a major question though, namely, why did Branson’s company ultimately survive?

This isn’t a Harvard Business School case study so I don’t mean to pass this off as a qualified, intelligent answer to that question, but I will attempt a few observations and, in typical HBS fashion, some or all of them may be contradictory of one another and none will be provided with the precise proportional contribution they made to the end result:

• the group had a cultural commitment to change and dynamism; they were not so much their businesses, but a culture and group of people who did business a particular way, a true brand-over-merchandise, which allowed them to reinvent themselves numerous times
• the group strategically focused on being the low-cost provider in their industry, usually while simultaneously attempting to pursue the seemingly mutually exclusive goal as being seen as the highest quality offering as well
• the group focused on serving customers but equally saw treating its employees with concern as an important value
• the group consciously created a brand that could be applied to diverse businesses (see point #1)
• the group pursued businesses that seemed “interesting” or sensually appealing to it, which ensured that everyone involved was motivated to do well because they liked the work they had chosen

Another thing I noticed about Branson and the development of his company was the attention he paid to the composition of management and owners and his dedication to weeding out those who were not good fits in a charitable way. Channeling the “best owner” principle, Branson made a conscious effort to buy out early partners whose vision and tastes did not match the current or future vision of the group. In this way, the company maintained top-level focus and concentration on a shared strategic vision at all times, sparing itself the expense and distraction of infighting and wrangling over where to go next and why.

Another aspect of the company’s resilience had to do with its operational structure. Branson built a decentralized company whose debts and obligations were kept separate. In an environment where new ventures were constantly subject to total failure, this arrangement ensured that no one business failure would bring the entire group down.

The final lessons of the Branson bio were most instructive and had to do with the nature and value of forecasting.

The first lesson in forecasting has to do with the forecasts others make of us, or the world around us. For example, Richard Branson had no formal business training, he grew up with learning disabilities (dyslexia) and he was told very early on in his life by teachers and other adult and authority figures in his life that he’d amount to nothing and his juvenile delinquency would land him in prison. Somehow this worthless person contributed a great deal to society, through business and charity, and by most reasonable measures could be considered a success, making this forecast a failure. If one had taken a snapshot of the great Warren Buffett at a particular time in his adolescence, when the young boy was known to often take a “five-finger discount” from local department stores, it might have been easy to come up with a similar forecast about him.

I’m not sure how to succinctly sum up the concept there other than to say, “Things change.” Most forecasts that involve extrapolating the current trend unendingly out into the future will probably fail for this reason.

The second lesson in forecasting has to do with how we might attempt to forecast and plan our own lives. When we have 50, 60, 70 or more years of a person’s life to reflect on, it is easy to employ the hindsight bias and see how all the facts of a person’s life were connected and led them inexorably to the success (or infamy) they ultimately achieved. And certainly there are some people, again using Buffett as an example, who from an early age were driven to become a certain something or someone and so their ability to “predict their future selves” seemed quite strong.

But the reality is that for the great many of us, the well-known and the common alike, we really don’t have much of a clue of who we are and what we’ll ultimately become. The future is uncertain and, after all, that’s the great puzzle of life that we all spend our lives trying to unravel. Richard Branson was no different. He was not born a billionaire, in a financial, intellectual, personal or other sense. He had to learn how to be a businessman and how to create a billion dollar organization from scratch. Most of the time, he didn’t even know he was doing it. In other words, HE DID NOT KNOW AHEAD OF TIME that he would become fabulously wealthy, and while he was hard-working and driven, it doesn’t even appear he purposefully intended to become so.

Maybe we should all take a page from Branson’s book and spend less time trying to figure out what’s going to happen and more time just… happening. We could sit around all day trying to figure life out, or we could follow the Branson philosophy where he says, “As for me, I just pick up the phone and get on with it.”

Review – Panic: The Betrayal Of Capitalism By Wall Street And Washington

Sadly, Panic: The Betrayal Of Capitalism By Wall Street And Washington does not appear to be in print any longer. Luckily, I found a good used copy on Amazon and will cherish its now-secret message all the more.

As I read through this book several months ago, instead of summarizing my thoughts I just want to record a few key ideas and quotes for later reference.

“The Anti-Entrepreneurs”

In any modern state the government will always be the banks’ biggest client and therefore will always make most of the rules, even if it pretends not to.

The ideologues of modern finance offered to make any fool rich if only he renounced the first obligation of the capitalist, the burden of judgment.

This process of confronting uncertainty and successfully resolving it usually by dint of hard work, diligent analysis, and sound judgment is the only source of what many economists have called “entrepreneurial profit” or sometimes “true profit”.

Underpinning the ideology of modern finance is the notion that the insight, judgment and even diligence of the entrepreneur are irrelevant for investing in public securities markets. These markets, we are told, are special, too powerful and too perfect to allow any entrepreneur’s judgment to matter.

If the ideology of modern finance had a motto, it might be “thinking doesn’t work.”

Capitalism demands free markets because it needs free minds.

The bureaucrat of capital dreams of a world in which failure is impossible.

Crony capitalists on the right and socialists on the left united as always behind their most fundamental belief, that wealth is to be captured by power and pull rather than created in the minds of men.

“New Risks in Old Bottles”

The great mission of modern investment theory is to replace all idiosyncratic risk with systemic risk.

The primary skill for finance, under this theory, becomes diversification, which becomes an advanced statistical methodology for making sure a relatively small number of securities accurately represents a much larger class of securities.

If I know nothing, my need for diversification is infinite.

All investment is reduced to insurance.

Ignorance is the father of panic.

“The Misinformation Economy”

One way to think about panic is as a general, nonspecific response to a poorly understood particular and specific problem.

“To build a perfect model of the universe would require all the matter and energy in the universe, because the only perfect model, the only model that shed no information and made no compromises in order to achieve its object, would be the universe itself.”

The mortgage meltdown can be understood as an instance of model failure.

information is differentiation; information is what comes as a surprise against the background of knowledge already possessed.

If uncertainty and risk are nearly synonyms. then information and risk are nearly opposites.

It is not particularly unusual for all thirty stocks in the Dow to go up and down at the same time; that rarely happened when market participants were interested in the value of individual companies.

“The Reign of Risk”

Modern portfolio theory was a late bloom of the great eighteenth and nineteenth century impulse to explain human society by mechanical or “scientific” principles as regular as those of classical physics.

If economics were about entrepreneurship, it would not look like physics. It would look a little like philosophy. Mostly it would look like literature. [The Lion’s note: if you ascribe to the Austrian school, it does!]

To treat investment as a quantitative exercise relying on the efficiency of markets and advanced mathematics to eliminate the hazards of human judgment. [the ambition of investors under Modern Portfolio Theory]

MPT created a field for which PhDs could be granted and journal articles published. Before MPT, investment theory had been mere reflection upon experience, a wisdom literature dominated by amateurs like Benjamin Graham.

[MPT…] can be deeply attractive to those trying to support capitalist lifestyles with only bureaucratic talents.

The most important question any investor can ask: For what are investors paid? MPT’s answer: For accepting risk.

risk is not the foundation of profit but its most dreaded enemy.

The modern theory conceptually severed financial markets from the rest of the economy. [My note, ” Macro is to Micro as Financial is to Real”]

“The Romance of Risk”

Men and societies become richer precisely as they employ insight, skill and experience, effort and discipline to reduce risk.

Investors are paid for being right, not for the possibility of being wrong.

In life, men who make one good judgment tend to make more good judgments; men who make one bad judgment tend to make more bad ones.

the most important but the most difficult-to-identify ability in business management (or investment) is the ability to judge other men’s ability to judge. [meta-judgment]

“Zoom, Zoom, Zoom”

What modern capital markets do very well is raise large amounts of capital from a broad base of investors who are persuaded to give their money to perfect strangers with precious little idea of what those fortunate recipients are going to do with it. [And, I’d add, little control or legal right to have any say in such decisions; “crowd-sourcing”]

different markets make different trade-offs between liquidity and price discovery one one hand and confidence about value on the other.

Public equity investors demand liquidity in large part because they are unsure about value.

Humor is surprise

It is reasonable to call markets better or worse depending on how much surprise they can absorb before convulsing in dramatic disequilibrium

Lacking a more substantial basis on which to make decisions, financial markets set prices to an astonishing extent by watching– prices!

The most dramatic resolution of this conflict is to eliminate most of the shareholders altogether by taking public companies private

public companies have no owners

Companies, like most assets, do better with strong owners than weak owners.

“Strategic Ambiguity”

When New Dealers tried to set up a banking system immune to panic, their top priority was to remove Mom-and-Pop from their role as bank police.

“Insolvent Immunity”

Here is the quickest way to determine whether you are operating in an honest capitalist system or a corrupt imitation thereof: check the bankruptcy rates.

“Black September”

“Things are somewhat amiss when a country’s finance minister plays bond salesman for a supposedly privately owned company.”

By this time the government had: (a) intimated that deficits in the financial sector were so large and widespread that “anyone could be next” (b) terrified private investors from making investments that might preserve the solvency of deteriorating institutions (c) assumed unprecedented responsibility for investment banks outside the Federal Reserve system and then abandoned that responsibility and (d) made clear that its policy would change on an ad hoc basis. [on the US federal government’s initial response to the financial panic of 2008]

To assume that the buying and selling of shares amounts to managing the firm is the most extreme form of efficient market worship.

“Capitalism Without Capitalists”

The term for someone who rests his economic fate on unknowable future events is not “owner” or even “investor,” but “speculator.”

the government, the biggest player and the weakest owner of all. [criticizing the present ownership of major banks]

Another great review of this book was posted by “CP” at CreditBubbleStocks.com.

And after reading this book, I was inspired to purchase Frank Knight’s Risk, Uncertainty and Profit for my library for further study.

 

Human Action, Part I Summarized

Notes from Human Action, by Ludwig von Mises, published 1949 [PDF]

Introduction

Economics is a young science offering knowledge which did not fit into the existing disciplines of logic, mathematics, psychology or history. Its methodology is different, examining acting individuals and not historical events or social aggregates. It demonstrates social regularities or “laws” which can not be legislated out of existence or ignored, like gravity. The conclusions of economic science threaten many partisans and have led to the first debates about the validity and universality of logic itself in response. Despite the claims of critics, economic theory has achieved a lot of practical success, such as the liberalization that allowed for the “Industrial Revolution” to transform Western civilization. Knowledge of economic theory is directly intertwined with the flourishing of mankind anywhere.

Part One, HUMAN ACTION, I. Acting Man

Psychology examines WHY a man acts, praxeology studies, deductively, what we can know from the fact THAT a man acts. It views action as effective, or ineffective, never rational/irrational or “good”/“bad”. Human action requires knowledge of causal relationships and a belief in man’s ability to influence them. All human action seeks the removal of felt uneasiness.

II. Epistemological Problems of the Science of Human Action

Economics and history are the two main branches of praxeology. History is an arrangement and interpretation of data concerning human action in the past; it is not predictive but descriptive. Human action is a complex, multi-causal phenomenon and thus can not be studied according to the “empirical” methodologies of the natural sciences requiring a single variable amongst innumerate constants.

Economics demands methodological apriorism, or the acknowledgement that it is impossible for man to conceive of a reality in which the fundamental logical understanding of causality does not hold. All of his experience must be filtered through pre-existing logical (theoretical) categories, i.e., understanding money requires knowledge of the concept of money to make sense of data concerning money.

Methodological individualism asserts action can only be studied through the behavior of individuals. This is not violated by the fact that man puts meaning in collective entities and aims his actions in certain ways operating under these beliefs. Praxeology is also methodologically singular and causal-realist— it examines specific actions carried out by specific individuals at specific places and points in time. “A cathedral is something other than a heap of stones joined together. But the only procedure for constructing a cathedral is to lay one stone upon another.”

Historians can only achieve “verstehen”, or understanding, by selecting certain data as valuable and excluding other data as irrelevant to their inquiry. They must utilize the best theories of other intellectual disciplines (economics, physics, biology, etc.) to interpret the data and its significance. History is “open to interpretation” only when the underlying theories relied upon are still controversial and debated. There are no constants in the history of human action.

“The end of science is to know reality”, economic theory is developed to better understand practical economic problems men face, and this fact guides man’s inquiry into the discipline although it does not change its aprioristic character. Economics studies real acting man as he exists, not an ideal type, e.g., homo economicus.

 

III. Economics and the Revolt Against Reason

Socialist philosophers could not defeat the logical theories of early economists so they turned to the undermining of reason itself as a method of defending their ideas. Without any biological evidence, Marxian polylogism asserts that every class has a unique logic derived from its class consciousness. “Ideology” is any idea which deviates from pure proletarian logic but is nonetheless useful to the class espousing it. Polylogism can not explain why people of the same social class nonetheless arrive at different conclusions about the truth.

IV. A First Analysis of the Category of Action

Man refers to an internal, ordinal scale of values when acting. Action can be thought of as an exchange of one set of conditions for another, more satisfactory, set of conditions. Economics examines the meaning men give to things, as translated through their actions, not what various 3rd parties observing might think about such action in accordance with external value systems. Value is within men and therefore subjective, not within things, intrinsically, and therefore objective. Economics examines what man DOES (and DOES NOT, but could have…) do, not what he ought to do. Cost is best thought of as the value of the next best thing given up.

V. Time

Action is always aimed at the future. “The present” is a praxeological category and a conceptual ideal used to examine discrete, continuous actions. In physical reality, only the past and the future exist. The future is uncertain, implying we aren’t even sure in the moment how much of our action belongs to the present versus other time periods. Time must be economized like any other scarce resource. Actions can not happen synchronously, always either sooner or later. Man’s values can and do change over time, and with it, his actions.

VI. Uncertainty

Metaphysically, the world may in fact be deterministic; but man’s experience is one of choice. In matters of uncertainty, man faces class uncertainty (the qualities of the members of the class are known, but the character of a specific event which might take place within that class are unknown; e.g., dice roll) and case probability (some causal factors guiding the outcome are known but others are not and the case itself is unique compared to other events; e.g., presidential election). Human action falls under the rubric of case probability. Case probability can not be statistically quantified because it would involve summing items with no common denominator. Game theory is also an inappropriate means for studying human action within the market economy because it adopts the metaphor of combat when the competitive division of labor is cooperative and positive-sum. All praxeological prediction is based on “understanding”, not quantification.

VII. Action Within The World

Utility is how we describe those things which help remove felt uneasiness. Subjective utility is different than objective, or technological, utility. Man does not choose between total supplies of goods but only those discrete amounts of the supply useful to his specific end. He satisfies his most urgent wants before his less urgent wants and therefore values the means “at the margin” of what less urgent want he has to give up (Law of Diminishing Marginal Returns). Supply is a set of homogenous goods which could equally satisfy a given end. Technological recipes are not part of supply because they are inexhaustible once discovered. The Law of Returns identifies the fact that there is always a most efficient, or optimum, way to utilize scarce means to achieve a desired end; but this optimum can only be discovered through experience because of the uncertain nature of human action.  “Men do not economize labor in general, but the particular kinds of labor available.” The supply of labor available is conditioned upon genetics, social conditioning and innate human subjective preferences for labor vs. leisure. The potential supply of labor for each kind of work necessarily exceeds the demand in the long run because labor can be shifted and retrained to perform new tasks. Labor is always more scarce than the material factors of production (land, capital). The substitution of “labor saving” machinery for human labor does not render labor abundant so long as there are still more material productive factors available to combine with the freed up labor to pursue additional human well-being. Activities which provide immediate gratification are not labor nor work but consumption goods themselves, of the first order. Production is not a creative act but one of rearrangement of already existent phenomena. Man is creative only in thinking, not rearranging the world according to his thoughts. The material changes of man’s economy are due solely to the ideas he holds in his head about what is desirable. “Production is alteration of the given according to the designs of reason.”

Full notes:

Introduction

The introduction of the book is Mises’s explanation for why he wrote the book— to ground economics in the science of praxeology and to refute the various anti-economic philosophies. It seeks to answer the simple question, “Why did Mises write this book?”

1. Economics and Praxeology

Economics is a young science. It introduced new knowledge about human society that did not fit into the existing disciplines of logic, mathematics, psychology, history or biology. It stood in opposition to earlier methodologies for explaining social phenomena, such as historicism, which focused on social aggregates and metaphysical supernaturalism. Other social philosophers focused on practically changing society through forms of social engineering, believing any kind of regularity to social relationships was non-existent and thus not worth considering in their schemes. The discovery of social regularities contained within economic study proved an intellectual revolution. But the revolution was limited in scope until a general theory of human choice (praxeology) could be developed.

2. The Epistemological Problem of a General Theory of Human Action

Economic study suffered a serious early crisis during the “Methodenstreit” in which the epistemology of economics was argued between historicists (economic history), logical positivists (emulators of the natural sciences) and praxeologists (methodological individualists and deductive logic). These economic methodology debates quickly became radical in nature, leading to the first charges against rationalism in all of scientific debate which up to that point had accepted human logic as universal and immutable. Such criticisms bring into question ALL scientific findings, but they are really aimed only at economics specifically. Thus, Mises wants to ground economic theory in the general theory of human action to demonstrate it’s universality and defend it from polylogist and anti-rational criticisms.

3. Economic Theory and the Practice of Human Action

Economics receives criticism as being an imperfect science. All science is imperfect, and is subject to change and improvement over time. One major school of criticism comes from naturalist scientists who blame economics for not adopting their own methodology— they suffer from a narrow focus and can not see the virtue in doing things any way but their own. The other major school of criticism is that economics hasn’t solved all social problems, so it must be barren. This perfectionist fallacy ignores the great progress economic theory in action has achieved so far, such as the “Industrial Revolution”, which was directly enabled by progress in economic thought applied to the political realm which freed the energies of entrepreneurs and creators. The modern era is characterized by ignorance and hatred toward economic science, it is also an era of social disintegration, wars and mass social calamities. The fate of civilization’s progress and the progress of economic science are directly intertwined.

4. Resume

Mises wrote this book to situate economic theory within a wider body of human choice, known as praxeology. He did this to defend it from its critics, but also to expand the breadth and knowledge of the science to gain new insights on social phenomena. In that sense, Mises’s book is both reactionary, and revolutionary.

Part One, HUMAN ACTION, I. Acting Man

Human action is the study of means used to obtain certain ends. It does not study the ends themselves nor does it administer judgments about personal values. Human action is purposeful action, it is not animal action, instinct or reflex. And it does not concern itself with the reasons for ends being chosen. Within the framework of human action, all actions taken are either effective, or ineffective, they can never be judged as irrational or rational. For man to act, he must be aware of causal relationships that he believes he can influence. Human action demands methodological dualism— human action is assumed as an ultimate given, it is beyond the scope of praxeology to investigate causes antecedent to it. Human action is a necessary category of the life of man, he can not avoid choosing in the act of living, life itself being a choice over death. What man strives for in acting is to relieve felt uneasiness— some call this happiness but it is not an objective category and can best be thought of as an improvement in his position as judged by himself, though happiness is a commonplace referent for the concept. Positivism demands an experimental, inductive, natural sciences approach to knowledge of human action yet it tacitly accepts the methodological dualism of praxeology in appealing to man’s rational mind to consider an alternative way of performing economic science.

II. Epistemological Problems of the Science of Human Action

Praxeology and history are the two main branches of the science of human action. History is a collection and systematic arrangement of data of human action experience in the past; it can not tell us anything that is valid for all human action and thus can not predict anything about the future, it can only tell what has taken place before. Complex phenomena with interlaced causal chains can not be used to validate an existing theory— the natural sciences require the ability to set constant all entities but one variable which is then tested. All human experience is filtered through human reason, which is a priori valid and universal to all individuals. It is the unique structure of the human mind and it is impossible to conceive of or interpret human experience other than through the logical structure of man’s mind. This gives rise to methodological apriorism, which means that it is impossible for man to conceive of a reality in which the fundamental logical relationships of his mind and his understand of causality do not hold. “Human knowledge is conditioned by the structure of the human mind.” Primitive man who is said to understand miracles is a man who has a difference of content of thought, not of the process of thought itself— the attribution of miracles to life phenomena was an early attempt at establishing causal relationships in the world around man. The concept of action implies belief that the means chosen are valid and that the end sought is valuable— it does not imply that the action is guided by a necessarily correct theory or appropriate technology for achieving the end sought. Action == reason, action is how man effects his reason in the world around him. All human experience must be filtered through pre-existing logical categories, for example, experience of money requires knowledge of the theory of medium of exchange to make sense of the data of money. “It is the meaning which acting individuals and all those who are touched by their action attribute to an action, that determines its character.” In this way, collective entities can have meaning for man’s actions even though methodological individualism holds, which implies that only individuals are capable of acting. “There is no social collective conceivable which is not operative in the actions of some individuals.” Methodological collectivism is revealed to be a false idol when considering the fact that there is a multiplicity of coexisting social units and mutual antagonisms— which social collective is “acting” in this case? Human action also follows methodological singularism, it is convened with concrete action of a definite person, at a definite date and a definite time, not action in general. Praxeology is causal-realist— what happens in acting? what does it mean to say that an individual did X, at Y place and Z time, and not A at B place and C time? What is the result of him choosing one thing and setting aside another? Human life is an unceasing sequence of individual actions, though these actions may be taken in the context of a larger project to which they belong. For example, “A cathedral is something other than a heap of stones joined together. But the only procedure for constructing a cathedral is to lay one stone upon another.” Historians must select which data are valuable to study by referencing a specific end or theory which they are using to make their choice. The historian seeks at “verstehen”, or understanding, he does not make up facts or interpret data as he likes but applies all his best knowledge of existing science in other branches to understand the “meaning” of the data he looks at— its implications and significance. However, this “understanding” is always limited by the current state of the underlying sciences he depends upon. Empirical data by itself is seen to be hollow when we acknowledge the recording of miracles and witchcraft by numerous human witnesses in past history— these events can not have logically occurred even if we have collected data of people verifying them in the past. Where the underlying science is unsettled, history may prove to be “open to interpretation” as to the significance of events recorded. There are no constant relations in the field of economics and so establishing things such as the “elasticity of demand” of a good are nothing more than historical facts, not future-predicting theories of human action. “Happiness” is not an inappropriate measure of human action due to technological limitations but because it is not objective and universal in its implications— it means different things to different people. Logic, mathematics and praxeology are universally valid for all humans capable of reason. “What counts for history is always the meaning of the men concerned.” All historical events are described and interpreted by means of ideal types, e.g., general, president, businessman, entrepreneur, doctor, tyrant. But ideal types belong only to history— human action concerns itself with real acting man as he is, which is the mistake made by the German Historical School or the American Institutional School, which built their theory around the “ideal type” of “homo economicus”. This was a make believe intellectual phantom with no connection to real, acting man. “Praxeological knowledge is within us” and is in this sense experience based, but it is something that belongs to everybody who is capable of human reason, and no amount of experience or description to an entity not capable of it could lead to their understanding. “The end of science is to know reality”, and we use our experience of daily life to decide what interests us and what we should explore, but not how we should explore it (theory building). Economic theory refers to practical problems simply because that is what man is concerned with understanding. Economics is necessarily politically contrarian because it serves to provide knowledge of the limitations of human action and thus the necessary restraints that exist for human legislators and warlords in their social engineering endeavors. Economics is holistic, special theories of economics must be encased in a greater framework which is itself consistent in order for special theory to be valid. Praxeology belongs only to man— superhuman entities capable of anything would not fit into a theory involving entities which have limited means of satisfying their ends. 

III. Economics and the Revolt Against Reason

The classical economists destroyed all socialist theories and demonstrated their impracticality. Instead of admitting defeat because they could not construct a logical theory, the socialists turned to questioning the efficacy of human reason itself. They decided to substitute mystical intuition for universal logic (similar to divine right of kings for monarch). Marxian polylogism states that every social class has its own distinct logical structure within the mind. There is no biological support for this assertion and Marxists make no attempt to establish anything beyond this assertion. Marxian “ideology” is a doctrine which is incorrect from proletarian pure logic but which is beneficial to the class interests of the one who espouses it. Marxists provide no explanation for why minority policies which are deemed injurious to the wider social body nonetheless come to pass without the majority stopping them. “The fundamental logical relations and the categories of thought and action are the ultimate source of all human knowledge.” We can not even imagine a system that operates otherwise without referring to this logic in our inquiry, and we can not explain logic without using logic. This means logic is an ultimate given. Polylogism scan not explain why people of the same social class nonetheless arrive at different conclusions about the truth.

IV. A First Analysis of the Category of Action

Economics concerns itself with the way thinking man turns things into means by way of action. It is concerned with the meaning men give to things through their action and not what third parties think about such action. Man’s ends can be thought of as existing on a scale of values, which are ordinal. It is a simple rank of things he’d like more over things he’d like less, the satisfaction of which serve to remove felt uneasiness. These scales don’t exist in any real sense and are simply a tool used to understand the concept of action, and they are revealed definitely only through concrete action. The values that things have are within the person of whom action is taken, they are not intrinsic to the things themselves. Economics concerns itself with what man DOES do, not what he should or ought to do, e.g., prices of “sinful” goods must be explained from the way men value them, not how an ethical system claims they should. Action can be thought of as an exchange, where a less satisfactory set of conditions is given up for a more satisfactory set of conditions. Costs are the value of the next best thing given up. Profits are the excess of gains over costs. Anytime costs exceed gains, loss is incurred.

V. Time

Change and time are two aspects of the same phenomenon. Thinking takes time and is itself an action. Action is always aimed at altering the events of the future because the present moment is fleeting. The present is an ideal boundary line separating the past and the future. The past is designated as the place where opportunity to consume or do has passed. The future is designated as the place where the opportunity to do or consume has not yet taken place. The present is the place in which it is too early to do some things and too late to do others. The uncertain nature of the future means that we have a vague notion at any given moment of how much of our action we can consider “now” or present. Time must be economized like any other good due to the fundamental nature of reality. Actions are never synchronous, they always are in a relation to one another of being sooner or later. Man’s values and thus actions can change over time. There is a difference between logical consistency, and praxeological constancy. Irrationality does not apply.

VI. Uncertainty

“To acting man the future is hidden”, it is possible in a metaphysical sense that events are entirely deterministic but this is not the experience that man himself faces; he faces an experience of choice. In matters of uncertainty, acting man faces two kinds of probability, class probability and case probability. In class probability, the actor knows all qualities of the class itself, but knows nothing of the character of any specific event which might take place within that class. In case probability, he knows some of the factors guiding the outcome of a specific event but not all of them and the outcome itself is unique and not categorizable with other “class” events. The case is characterized by its uniqueness, not its similarities, to other identical events. Human action is based upon case probability, where no safety or stability can be purchased or achieved— all human action is inherently speculative with regards to the likelihood of a given action achieving the aimed at end. Case probability can not be quantified because it would require the summing of non-identical items. And game theory is an inappropriate means to study human action because human action in the division of labor aims at benefitting all participants, not just sum (i.e., zero sum game). Competition has been wrongly characterized as a form of combat when really competitors win their customers by achieving excellence and preeminence. All allusions to military terminology or characteristics is purely metaphorical. Because praxeology studies multi-causal events, its prediction is necessarily qualitative and reliant on “understanding” (verstehen), it can never be quantifiable or mathematical in nature and there can never be any certainty with regards to its outcome.

VII. Action Within The World

Utility is that which has causal relevance to removing felt uneasiness. Subjective use-value utility is different than objective (or technological) use-vale utility. Objective use-value may be obscured, incorrectly utilized or multiplicitous in comparison to subjective use-value. Acting man does not choose between total supplies of various goods serving as means— he chooses only between the relative, discrete amounts for his purposes against other ends he could pursue. And because he satisfies his most urgent wants before his less urgent wants, he values the means “at the margin”, meaning in consideration of the value of the least urgent want he’d have to give up. The law of diminishing marginal utility is implied in the category of action. It is futile to attempt to calculate composite values of total supply based off of knowledge of partial supplies— this is not how acting man utilizes discrete amounts of supply. Supply itself is characterized by a set of homogenous goods which could equally satisfy a given want. Technological recipes are not part of supply, once known they are inexhaustible and can be used as many times as is desired— however, the action leading to their discovery does involve scarcity and supply. The law of returns simply states that for any combination of real factors of production there is an optimum in relation to the productive end desired with regards to most efficiently utilizing scarce resources. It can only tell us that there is an optimum. It can not tell us how to arrive at it— this is something that must be achieved through experience (technological vs. teleological knowledge). The law of returns applies to all branches of production equally. The indivisibility of certain means of production is what gives rise to the fact that often large-scale production is more efficient and therefore optimum than small scale variants. Labor is the employment of human physiological capacities as a means of obtaining desired ends. Leisure is preferred to labor and labor itself suffers from the law of diminishing marginal utility. Additionally, not all labor is equal in quantity and quality within an individual or population. “Men do not economize labor in general, but the particular kinds of labor available.” The supply of labor available is conditioned upon genetics, social conditioning and innate human subjective preferences for labor vs. leisure. The potential supply of labor for each kind of work necessarily exceeds the demand in the long run because labor can be shifted and retrained to perform new tasks. Labor is always more scarce than the material factors of production (land, capital). The substitution of “labor saving” machinery for human labor does not render labor abundant so long as there are still more material productive factors available to combine with the freed up labor to pursue additional human well-being. Activities which provide immediate gratification are not labor nor work but consumption goods themselves, of the first order.  Mises believes the creative genius is a special case which does not subscribe to the praxeological laws conditioning labor and is more equivalent to “manna from heaven” in that he toils under different conditions, for different reasons, and he can not be substituted, ordered/planned nor replaced. Production is not a creative act but one of rearrangement of already existent phenomena. Man is creative only in thinking, not rearranging the world according to his thoughts. Man’s capacity to work is a given much like the state of natural resources and animal substances. The material changes of man’s economy are due solely to the ideas he holds in his head about what is desirable. “Production is alteration of the given according to the designs of reason.”

Geoff Gannon As Kierkegaard: Leap Of Faith Net-Net Investing

Net-Net guru Geoff Gannon breaks down the secret ingredient to successful Net-Net investing using the example of one of his recent Japanese Net-Nets which received a buyout offer:

What special skills did earning this 130% return require? You didn’t need smarts. The key information – the cash and securities per share – was publicly available. Anyone could find it on the Internet. And the gap was egregious. If you looked at hundreds or even thousands of stocks – in Japan and around the world – Sanjo would’ve popped as a Ben Graham bargain.

No. You didn’t need smarts. You didn’t need any real insight or appetite for risk or anything like that. You just needed to embrace uncertainty.

Sanjo was certainly worth more than 200 yen a share. A lot more. No reasonable person would deny this. But most reasonable investors probably wouldn’t buy the stock. Why? There was no catalyst. No reason for the stock price to rise. Sanjo is a Japanese company. It’s a micro cap. Stocks like that don’t get bought out.

As it turns out, Sanjo’s largest shareholder had been in “intensive discussions and price negotiations with management over the last year.” So there was a catalyst. It’s just that nobody – except the company’s biggest shareholder and its president – knew about it.

That’s the uncertainty in net-nets. Most of the best net-nets have this certain/uncertain duality. It is certain the stock is selling for less than it’s worth. It is uncertain how the stock will ever sell for what it’s worth.

Net-nets are half about knowing and half about believing. They are part knowledge and part faith. If you can’t accept both of those ideas at once – you’ll never be a good net-net investor.

You can only know the stock is selling for less than it’s worth. You simply have to believe the stock will someday sell for what it’s worth.

This is probably also why Net-Nets are best bought in baskets and groups. You usually don’t have enough of a clue of what the catalyst will be to concentrate your holdings into just one company.

So it isn’t necessary to be super smart in your analysis as long as you are super smart in your actions. The big problem for a lot of would-be net-net investors is not bad analysis. It is bridging the gap between analysis and action.

And this is the key point to make about net-nets that earn low returns on equity. You don’t have to see how mean reversion will occur for it to occur.

The future does not care if you can envisage it ahead of time. It comes whether you see it or not. The good news: You can bet on things you can’t imagine.

Close your eyes and jump!

Great Expectations For Investing

I enjoyed the following two commentaries from value investor blogs I follow.

First, from Rohit Chauhan’s “Intelligent investing”, an absurdist scene in near-future India:

If the market and a lot of investors are correct, I can visualize a scene where I will be sitting in my house without power, gas and connecting roads but with the best plasma TV and all kinds of soaps, detergents and packaged goods.

Rohit comments on the fact that infrastructure companies in India are trading cheaply as if their regulatory burdens will not be removed and not allow them to grow, while consumer goods companies are trading at high valuations as if they are about to strongly grow their sales and expand their margins. But for the latter to happen, the former must be resolved.

Conclusion?

Company specific growth depends on a lot of factors beyond the basic macro opportunity and it is rarely a simple, linear process. If you make simplistic assumptions and pay top valuations for it, then the experience can be bad if those expectations do not materialize.

Speaking of expectations, here is one from the “Margin of Safety” blog, written by an anonymous PM managing a private investment partnership, on the differing assumptions between the “I Know” and the “I Don’t Know” schools of forecasting:

In pointing out our inability to see the future in my letter, my intent was to calm potential investors’ nerves. Many saw markets plummeting and they were converting everything to cash just at the moment when the best investment opportunities were arising. I had hoped that I could get them to stop listening to the many pundits in the media who pretended that they knew the future and who all repeated the mantra that we were doomed. I wanted them to focus on what was knowable like the Net Nets that existed at the time. We went “all in” in March 2009, two days before the market bottomed out, not because we could predict the future better than everyone else, but precisely because we tried not to predict it and instead focused on what was knowable.

There has been a seeming race amongst self-declared value investors over the past couple of weeks of ongoing bloodletting in the financial markets to make a contrarian “buy the panic dip” call. It’s like the moment the S&P 500 went 3% into the negative, everyone ran to their dressers and pulled out that dusty old copy of Warren Buffett’s “Be greedy when others are fearful” and began running around town, trumpeting it out to anyone who would take the time to listen.

In their haste to do so, many seemingly ignored whether things were already cheap, or merely getting cheaper. More importantly, few had any specific suggestions as to which companies were now cheap. Instead, these people seemed in a panic of their own to be the first one to declare that everything was now on sale.

But sometimes garbage is garbage and just because it has sold off a little doesn’t mean it didn’t deserve to, or that it won’t ultimately sell off some more. What kind of macro thesis is betrayed by such urgent calls to get one’s money in while the getting is still good any day there happens to be a broad market selloff?

The anonymous PM’s conclusion:

The pendulum reached its apex and has made a significant move back to the other side. Soon it will again be time to buy all of the babies that will get thrown out with the bath water. Are you prepared to pick off bargains, or are you one of the people in the “I know” school who was fully invested on July 7 and selling indiscriminately today? Can you trust your contrarian instincts when those instincts are supported by hard, knowable data, or will you follow the herd and the prognosticators? Which way you answer often accounts for the difference between investment success and failure.

Better yet, I want to know who was fully invested August 5th, prematurely assuming we’d seen the worst of it and so busy making assumptions they didn’t have time to go out and “know” some true discounts firsthand.