Howard Marks, a fellow Chicago alum, runs Oaktree Capital and is known for his concise and colorful memos (http://www.oaktreecapital.com/memo.aspx), which have gained the status of Warren Buffett's shareholder letters in the financial perspective oeuvre.

He came to LSE to speak and I jotted down a few notes.  Keep in mind that I tend to only jot notes on items personally interesting to me, which is likely a very different set from those that would be interesting to the rest of the world.

After taking a few moments to indulge in that newly-resurrected-and-made-socially-acceptable hobby of efficient-market-bashing, Marks offered some principles for investing with his usual folksy charm.

1.  The average is not the norm
Or in other words, you can't ignore the outliers.  Not just the Black Swans, but all the outliers.  You can understand this at a surface level, but there are significant implications for how you try to model the future when the validity of averages is in question.  Some might ask, what's the point of putting together a model at all if your "sensitivity" analysis is a football field wide in scope?

2.  "I know" vs. "I don't know" school
Some people belong to one, some to the other.  Do you always start with what you know?  Do you feel like you have a good understanding of the principles that drive the world?  Or are you constantly aware of the massive uncertainty that pervades the world?  Are you comfortable with saying "I don't know" frequently to people you respect?  The difference between these schools of thought is the difference between playing offense or defense.  Marks is of the "I don't know" school.  He thinks you might do well with both strategies but every once in a while, playing offense in markets will result in a blow-up.  Taleb is also of this school - he never sells options, only buys them (though I wonder if this intellectual subscription is in contrast to his natural propensity).  

I'm also a fully paid-up member of the "I don't know" school.  The name of this blog is no coincidence.  However, I wonder whether this must by necessity be a continuum rather than a binary choice.  You can't operate very well in an objective reality without some "I know."   The question remains then how do you know what can be known, how do you decide what you will seek to know, and what do you leave in the effectively enduring realm of uncertainty? 

[Speaking of schools of thought, are you an asker or a guesser?
http://www.guardian.co.uk/lifeandstyle/2010/may/08/change-life-asker-guesser]

3.  Bull and bear markets are driven by mass psychology
The 3 stages of a bull market:  (1)  A knowledgeable few think things will get better; (2) Most people recognize improvement is underway; (3) Everyone believes things will get better forever

The 3 stages of a bear market:  (1)  A knowledgeable few think the market is overpriced; (2) Most recognize that a decline is taking place; (3) Everyone believes things will get worse forever

4.  Beware the twin impostors of short-term success and short-term failure
The correctness of a decision can't be judged by the outcome.  You never know whether you were just lucky.  It is the process and protocols that must be judged, and the only way to do so is over time.  

Interestingly, I asked Marks how Oaktree judges decisions if not by outcomes, how do they grade their investment professionals.  He basically said they don't, going on a tangent about how they want to promote collaboration rather than competition and therefore don't do a lot in the way of individual variable compensation.  But of course they grade their individual employees, implicitly if not explicitly.  For someone that seems to put significant weight on process, I'm surprised they don't have an established protocol for grading decisions, at least qualitatively.

5.  Develop an appreciation for "alternative histories"
This is related to the previous point.  All the other things that could have happened should be part of one's context for "now."  I've always thought this.  Like, perhaps in another forked universe, I am poverty-stricken, uneducated and a paraplegic, and I begged the divine fates for the life I have now, and poof!  Here I have this golden life but never have a full appreciation of what could have been.  In the same way, we always view what is, as inevitable.  We forget that at the point of a decision - say, one of Alan Greenspan's more destructive decisions - no one knew what the right decision should be.  We still don't know what the best decision would have been.  We only know that there were certain effects that stemmed from one particular fork.  

[By the way, while Alan Greenspan from his actions seems to be of the "I know" school, this quote from him indicates that he has a foot in both:  "I say this without a great conviction because anyone who has a great conviction at this stage about what the economy is doing or what proper policy is I think is under a mild state of delusion."]

6.  Three individual traits for investing success
Aggressiveness, Timing and Skill.  It's very hard to have all three traits at once.  If you think you do, you probably don't.  

7.  Invest in the most complicated investments that you can fully understand
Marks didn't say this but he did make the point that the more simple and intuitive the investment, the more likely it is that the value has already been baked into the current share price.  If you believe, as I do, that you shouldn't make an investment without fully understanding it, then that means you should invest near the top of your intellectual capability.

8.  The problem of commitment
The problem of commitment is quite intuitive.  There are not that many large opportunities out there.  They are relatively rare.  If you talk to a trader, they make most of their money on a few big trades (a la John Paulson).  The same, in principle, holds true for investment managers.  In order to reap the benefits of a potentially large opportunity, you have to commit a sizable amount of capital.  But in so doing, you take on some nontrivial amount of risk (almost by definition).

9.  Good judgment is the ability to make optimal tradeoffs with available information; great judgment is knowing what information to use
Marks says:  "Everyone has an opinion; it doesn't mean it's right"

This is the critical problem.  Your intuition is sometimes right and sometimes wrong.  Your intuition likely tells you roughly the same as everyone else's intuition, our biology being shared.  When it conflicts with everyone else's intuition, your intuition tells you that you should share their intuition, making you doubt your own.  But their intuition is also sometimes wrong.  So what do you do?  You can try to institutionalize judgment using models and formulae, but what you get in a complex system tends to be uselessly predictable.  Great judgment is hard to come by.  


For a concatenated PDF book of Howard Marks' memos:
http://streetcapitalist.com/2009/09/26/oaktree-capital-memos-from-our-chairman-1990-2009/

http://www.theatlantic.com/magazine/print/2010/06/how-to-save-the-news/8095/

Some good stuff here.

From Krishna Bharat:  “I believe the news industry is finding that it will not be able to sustain producing highly similar articles.” 

The importance of presentation:  “Schmidt and others talk about how much easier and more efficient it is to assess, at a glance, stories on a broadsheet newspaper page than to click through to see the full text on a screen…The three pillars of the new online business model…are distribution, engagement, and monetization. That is: getting news to more people, and more people to news-oriented sites; making the presentation of news more interesting, varied, and involving; and converting these larger and more strongly committed audiences into revenue, through both subscription fees and ads.”

I sent a note to Gordon Crovitz and Richard Zannino back in early 2007, at the time publisher and CEO of the Wall Street Journal, recommending that they think about digital formatting and presentation for people on the go.  There's really nothing like scanning a broadsheet for efficiency; they have the format thought through, down to a science, and honed over time.  But it's not intrinsically better - it's only because no one has really come up with a good replacement.  Both Crovitz and Zannino were kind enough to respond to me, though their response was essentially that I might be interested in a program designed to train professionals to get the most of the WSJ.  The last thing I want to do as a busy professional is take a training program on how to read a newspaper.  WSJ was taken over by Murdoch not long thereafter.

One measure of whether a publication produces "high-quality journalism":  "Burdened as they are with these “legacy” print costs, newspapers typically spend about 15 percent of their revenue on what, to the Internet world, are their only valuable assets: the people who report, analyze, and edit the news...Buying raw newsprint and using it costs more than the typical newspaper’s entire editorial staff. (The pattern is different at the two elite national papers, The New York Times and The Wall Street Journal. They each spend more on edit staff than on newsprint, which is part of the reason their brands are among the most likely to survive the current hard times.)"
 
High-quality journalism costs.  I'm not advocating increasing salaries of mediocre journalists.  I'm advocating investing in high-talent journalists and giving them the time, resources and scope to do what they do best.  

As well as all that other stuff I mentioned before.

In reading this article, it occurs to me that Google is taking systems thinking to a whole new level.  Their scope is not just their company, their ecosystem, their industry, the private sector - or alternatively, their region, state, country, online landscape.  They are playing a worldwide all-in-scope game of mental chess and moving preemptively.  

“We help people find content.  We don’t generate content ourselves... We believe in making information accessible. The surest way to make it inaccessible is if it doesn’t get created in the first place. That is why it is in our interest to deal with the problems of the industry.”  They are speaking of the newspaper industry but it wouldn't be too hard to make the leap to problems of political stability and environmental sustainability.  Google Foundation makes much more sense now.

I regularly follow Futurity.org, where layman-level summaries of academic research from a host of universities are posted.  

There were a couple of findings recently that seemed to have implications for the Homicides & Income Inequality post (March 31, 2010).


Brawn Beats Beauty to Get the Girl
http://futurity.org/society-culture/brawn-beats-beauty-to-get-the-girl/

According to a Penn State anthropologist, "male physical competition, not attraction, was central in winning mates among human ancestors."  This was in line with Martin Daly's assertion of the importance of physical (as well as material) competition for men in an evolutionary context.

"Puts suggests that while a deep voice has been considered an appealing trait to women, it actually signals dominance...A low voice’s effect on dominance is many times greater than its effect on sexual attraction.”

This implies paradoxically (and perhaps with semantic inaccuracy) that women are motivated to have sex for reasons other than sexual attraction.



Drop in Violence Crime Tied to Immigration? 
http://futurity.org/society-culture/drop-in-violent-crime-tied-to-immigration/

The second piece of research found that "cities that experienced greater growth in immigrant or new-immigrant populations between 1990 and 2000 tended to demonstrate sharper decreases in homicide and robbery."  The research "suggests that, controlling for a variety of other factors, growth in the new immigrant population was responsible, on average, for 9.3 percent of the decline in homicide rates."

Hard to argue with the correlation, but the causal relation that "immigration may have been responsible for part of the precipitous crime drop of the 1990s" because "immigrant communities are often characterized by extended family networks, lower levels of divorce, and cultural and religious beliefs that facilitate community integration" seems much more tenuous.

In the 1990's, "many immigrants...settled in new growth states. Evidence from the 1990s, when California experienced an economic slowdown, suggests that jobs and higher wages drew many immigrants to other states, especially in the Rocky Mountain and Southeast regions. Public benefits do not appear to have driven these migration choices. In fact, California, Illinois, New York, and New Jersey rank among the most generous states in providing benefits to noncitizens, and most of the "new growth" states have relatively weak safety nets for immigrant families."  (http://www.urban.org/publications/410589.html)

This suggests that areas that attracted immigrants had specific advantageous trends already underway that may have resulted in a reduction of crime even without the participation of immigrants.  I had quoted Bob Dylan in my previous post, “when you got nothin’, you got nothin’ to lose.”  The reverse should also hold.  

I sent a note to Martin Daly to get his thoughts.  Will post if he responds.

On a side bar, I should mention that though I had some questions about this particular analysis, I am strongly in favor of increased immigration.  The reasons probably could make up a whole posting on their own, but I will be brief.  The  American competitive advantage is cultural.  We are no smarter and no more hard-working than any other nation.  Our genes are no different, and having seen our education firsthand as an intern teacher, our secondary education can be dramatically worse.  If we are special, then it is only our culture that makes us so.  In particular, our culture is highly attractive to talented knowledge workers in a way that is globally almost unique.
 
There is a disjoint between the frequent failure of our secondary education and our position as (and ambition to remain) the nation-leader in innovation, technology, and creativity.  Have we ever asked ourselves how this is possible?  How do people become so much smarter when they're in workforce, when they could barely do algebra in high school?  The answer, if you look at the ethnic and national breakdown of our Ph.D. students, new entrepreneurs, and technologists, is immigration.  Without immigration, the whole system falls apart.  Yet we yank so hard at the linchpin that is the only thing holding our current preeminence together while we work desperately to fix our educational system in time.

If you have nothing better to do than wade through these, I recommend a life coach.

--

Book Review - Organisational Psychology by Edgar H. Schein

Excerpt:  He recovers, however, in his review of formal and informal groups in organizations.  Schein’s discussion of informal groups is particularly convincing, arguing that these informal groups arise out of formal factors.  He cites striking correlations between informal association and structural factors that include direction of doorways and geographic distance of desks.  Long before Google bribed its engineers to stay on campus with a myriad of perks, the field of organizational psychology knew the importance of designing physical facilities to maximize probability of interaction.  The discussion on cliques – horizontal, vertical and mixed / random – is also highly informative for managers and aspiring theorists seeking to facilitate informal “communities of practice.” 

Academic Essay - Knowledge as Competitive Advantage

Excerpt:  In general, we find that knowledge which is possessed alone tends to be a weak source of competitive advantage, with the main exception of explicit-group knowledge (especially that which enjoys legal protections).  Knowledge which is held by individuals can walk away from the firm on two feet, or otherwise accrues benefits to the owner rather than the firm.  Knowledge that is easily codified and transferred tends to ‘leak’ away (Brown and Duguid 2001), especially in this era of digitization.  Knowledge that is, in its essence, rules for behaviour offers trivial advantage next to the constantly negotiated practice of such knowledge.  As Brown and Duguid notes, knowledge without the context of practice and social learning is only a tool, and one that could potentially even fossilize into a competitive disadvantage (Hamel and Prahalad 1994).

Academic Essay - The Community Approach to Managing Knowledge

Excerpt:  Assessing the value of the community approach from a management perspective has historically been a stumbling block to focused adoption.  As Duguid (2005) has noted, skepticism around the reality of tacit knowledge as an irreducible and distinct form of knowledge has led to a corollary skepticism about the real value of communities of practice.  If one did believe that all knowledge could be reduced to the explicit, then the incremental cost associated with this ‘social endeavor’ (Duguid 2005: 2) seems somewhat inexplicable.  However, if one does acquiesce to the wealth of social science literature on tacit knowledge (Polanyi 1966, Cook and Brown 1999, et al), as we do, then the business case is far more convincing.

Academic Essay - Organisational Development in Non-Western Cultures

Excerpt:  The human genome shows that human beings share over 99% of their genome sequences (“Human Genome Information Project” 2010).  It should not be surprising that we share a number of biologically driven motivations as well.  These motivations drive our value set, some of which have been shown to be universal...Despite this striking commonality in shared values, Hofstede (2002) has noted that conceptions of business are “part of national value systems, which belong to national cultures.”  He finds significant differences between nations on five cultural value dimensions of Power Distance, Uncertainty Avoidance, Individuality, Masculinity and Long-Term Orientation.  China, for instance, has a high power distance, meaning that the culture is relatively accepting of unequal distribution of power.  This implies a preference for more formal organization and centralized hierarchy than, say, the United States.  These more formal cultures tend towards high-context communications, meaning that most information conveyed is contextualized in the person and manner of conveyance rather than explicit coding.