Entries in books (4)

Wednesday
Dec252013

A Random Dance Down Wall Street

In the last few weeks, I’ve been reading A Random Walk Down Wall Street by Burton Malkiel.  Definitely an investment classic, required reading for anyone with more than a few months expenses in their savings.  The very simple conclusion of the book can be summed up as follows:

The strategy for the average investor with the highest expected value is to invest in broad-based low-cost index funds.  Though that’s obviously not the strategy with the optimum return, but it’s impossible to reliably identify a better strategy in advance.

(If you think you’re an above-average investor, the advice still applies to you if: You want some of your investments to be relatively low-risk, you don’t want to put substantial time and effort into researching investments (you’d rather spend it increasing and/or enjoying your income), or you’re willing to consider that your assessment of your investment abilities may be incorrectly high.) 

This book suggests that markets approximate the effect of the efficient market hypothesis (the disclaimer is important, since it’s unlikely that even the weak form of that hypothesis is precisely true, that would, among other things, imply P=NP).  Prices may not reflect all public information right away.  But there’s an incentive for prices to match public information eventually, so in the long-enough term there’s no easy augury that can profit reliably.  (And in practice that term is fairly short, if you want easy money, it’s probably shorter than you like.)  Not to say there’s nothing you can do to accurately predict the future.  It’s just really hard.

There are strong logical arguments in favor of both components of the book’s theory.  As to why the average institutional investor fails to beat the market:

  1. Every time someone chooses to buy an asset that beats the market, someone else chooses to sell it.  (It takes two to tango.)
  2. Generally, both the buyer and the seller are institutional investors because institutional investors do basically all of the buying and selling.
  3. Thus any time an institutional investor gains a relative advantage, another is likely to gain a relative disadvantage.  Taken together, they’d do as well as the market average, excluding the cost of all this buying and selling.
  4. The cost of all this buying and selling is substantial, so on average they do worse.
  5. Thus, buying an index fund also gets you a pre-expenses expected performance of the market average, but with substantially lower expenses.

As to why you (probably) can’t easily beat the market:

  1. If something is predictably under-valued, people will buy it until it isn’t.  (Even if only some people realize it’s undervalued, so there’s little time lag on this component.)
  2. If something is predictably over-valued, at some point people will start to sell it.  (There’s more of a time-lag on this component because they might expect to be able to sell it at an even higher price to a “greater fool”, but savers want to spend eventually and fools have finite money.)
  3. If some investor is predictably good, people will copy them until they no longer beat the market.  (Also, past performance doesn’t guarantee future results.)

So, good stuff.  The book focuses on presenting empirical evidence to back up those arguments, along with a lot of interesting history and a critical look at competing theories.

One weakness of the book is that, for an economics book, it seems to underestimate the effects of supply and demand.  It notes that the value that the market places on earnings and dividends varies during different “eras” of the market, that it was particularly low during the “Age of Angst”, 1969-1981.  During that era, stocks failed to keep up with inflation not because earnings failed to keep up with inflation, but because the P/E multiple fell sharply.  It mentions that the era was characterized by “demand-pull inflation” (demand for spending, not for saving!) suggests that investors were rationally “scared” and thus demanded higher risk premiums, which the market provided with lower P/E multiples.  But that sounds like an ultra-roundabout way to say that lower demand for savings and lower demand for having savings in stocks relative to other (perceived as less “risky”) things caused the P/E multiple to drop.

Which is odd, if you’ve accepted the author’s frame of referring to that earnings times market-average P/E multiple as a “firm foundation of value”, when that multiple is not nearly so firm, and may have as much to do with aggregate demand for stocks (in general) as opposed to anything about the specific companies being priced.  Something like gold, which Malkiel describes as “impossible to predict” has no dividends or earnings, only that unpredictable multiple.

Friday
Apr202012

Who Will Pay for the Future?

I recently read The Coming Generational Storm.  It’s an alarming book, and well worth reading.  Of particular note is the method of generational accounting.  It seems to take a page from formalism in treating all promises equivalently (whether that promise is that benefits will be delivered, that bonds will be paid off, or that taxes will not be raised) and treating the status quo as an implicit promise.  Looking at the possibility of implicit and explicit default is also key:  Benefits delivered worthless are the same as benefits not delivered at all, and inflation functions as a tax on financial assets even if taxes aren’t raised.

Of course, the question isn’t just whether promises will be broken or renegotiated, but whose promises will be subject to adjustment.  The youngest generation had little say in the current political order, so to what extent will they be willing to foot the bill?

If there’s a generational conflict, the young don’t seem to be winning, as noted in the Esquire article, “The War Against Youth”:

In 1984, American breadwinners who were sixty-five and over made ten times as much as those under thirty-five. The year Obama took office, older Americans made almost forty-seven times as much as the younger generation.

This bleeding up of the national wealth is no accounting glitch, no anomalous negative bounce from the recent unemployment and mortgage crises, but rather the predictable outcome of thirty years of economic and social policy that has been rigged to serve the comfort and largesse of the old at the expense of the young.

[…]

Nobody ever talks about generational conflict. […] Even the Occupy Wall Street crowd, while rejecting the modes and rhetoric and institutional support of Boomer progressives, shied away from articulating the fundamental distinction that fills their spaces with crowds: young against old.

The gerontocracy begins at the top. The 111th Congress was the oldest since the end of the Second World War, and the average age of its members has been rising steadily since 1981.

And it’s not just congress (and other formal, governmental politics), but academia:

From 1980 on, the price of attending a four-year college has risen by 128 percent. While the price has spiked, the quality has tanked. […] In a survey published in 2011, 45 percent of students showed no improvement in “critical thinking, complex reasoning and writing” after two years of college. […] And how could the results be any different? Three decades ago, 43 percent of professors were adjuncts. Now, with colleges bloated by older, tenured professors who take up huge slices of academic budgets while teaching crumbs of courses, the vast majority of classes are taught by adjunct.

[…]

But maybe […] you want to get a master’s or a professional degree. With entry to the professions comes another opportunity to be taken advantage of, and it’s not just the inherently ridiculous price of a creative-writing M.F.A. or journalism school, where on some level, everybody understands the students are being played for suckers. The cost of medical school has spiked over the past three decades. In 1981, average medical-school debt was less than $20,000. Today it is $158,000. Law-school tuition rose 317 percent between 1989 and 2009 while American laws schools wildly increased the number of lawyers they graduate. Naturally, a glut of lawyers decreases their value. So kids pay more for a worse education that leads to lesser prospects in order for the schools to prosper temporarily. […]

And unions:

New workers will earn a “globally competitive wage.” […] Newer workers at unions across the country earn ten to fifteen dollars an hour less than established workers, and the unspoken but widely reported understanding with the AFL-CIO is that the wage of these workers will not increase. In other words, Boomer workers make almost double what their young counterparts do […]

To the extent that the recent economic crisis hurt retirees as well, it’s not clear that this doesn’t exacerbate the transfer of wealth and opportunity away from the younger generation, as would-be retirees delay retirement.  This MarketWatch commentator notes that the BLS statistics on that point may be exaggerated if compared with statistics from different samples at face value, but concludes the trend is still there:

Part of this story is a real phenomenon: More baby boomers are staying on the job because they are healthy enough to keep working. They like working. Further, many of them desperately need the money: They lost their retirement nest egg when the housing market collapsed and the stock market stalled. Fewer of them can rely on a defined benefit pension, and more of them must rely on their own savings to fund their retirement.

[…]

The good news is that employment has been growing faster than the population in every major demographic group. In other words, the employment-population ratios have been rising since the depths of the recession. But, except for the oldest age group, the employment-population ratio is far below pre-recession levels.

[…]

The same thing happened to the generation that came of age in the 1930s. They put their lives on hold for years, and we are still living with their legacy: the baby boomers who are now clinging to their jobs. [emphasis mine]

American politics in particular is hooked on wishful thinking about the future.  If the future is one of unmitigated economic growth, increase productivity might pay all bills and pave over the entire problem.  Admitting that this is not to be is politically untenable.  It is tempting (and reasonably so) for middle-class children to view their parents as excessively optimistic, as opposed to viewing them as short-sighted cowards who sold their children’s birthright to the ultra-rich in order to secure their own retirement.

And it will be hard to renegotiate the social safety net in the face of a retiree voting bloc convinced on the one hand that the whole thing was a bad idea after all and should be scrapped, but on the other hand it’s good that we can just barely afford to keep it around for those who are really counting on it.

As the Esquire piece concludes:

Youth should be the only issue of the 2012 election, because all the subsidiary issues — inequality, the rising class system in America, the specter of decline, mass unemployment, the growing debt — are all fundamentally about the war against young Americans. But the choice young Americans face is between a party that claims to represent their interests but fails to and a party that explicitly opposes their interests and actively works to disenfranchise them.

[…]

By bus and train and car pool, they will follow the gerontocracy to Tampa and Charlotte, the cities with the utter misfortune of hosting the presidential nominating conventions. Then we’ll see if the people inside the convention centers can find the youth anything better to do.

We’ll see then how the flowers of rage, planted and nurtured so carelessly for three decades, have sprung up and who will harvest them.

Wednesday
Aug312011

FLY THE PLANE

I know it’s been a while since I’ve posted here, and I still don’t have a full post together.  But I would like to write briefly about a book I read recently, Atul Gawande’s The Checklist Manifesto.

In the book, Gawande advocates for the use of checklists as a means of improving outcomes in medicine.  He bases his analysis on three key cases:  The use of coordination checklists to ensure essential communication between the parts of a construction team, the use of “read-do” and “do-confirm” checklists (routine and contingency) in the airline industry (with a particular look at the case of US Airways Flight 1549, the recent “Miracle on the Hudson”), and the design and testing of the World Health Organization’s Safe Surgery Checklist.

The book is a great example of popular nonfiction:  The information is interesting, the narrative is compelling, and the argument is sound.  The tradeoffs involved in the WHO’s design process were also interesting to me as an engineer.  A checklist (in this use) isn’t an algorithm for amateurs, but a tool to help someone who already has a great deal of expertise.  The key is to identify the tasks where a reminder is of greatest benefit; maximize the product of the likelihood that a checklist item will avoid a task being missed by the magnitude of the consequences if it is overlooked.  Extremely high-level goals often end up omitted, since they won’t be forgotten in any case.  On the other hand, sometimes important things are easy to forget in crisis situations; the subject line of this post comes from a checklist for restarting a dead jet engine (the result, one hopes, of some embarassing simulator incidents).  When the tasks themselves are unknown, the key is identifying which communication tasks have the highest probability of identifying serious potential problems before they actually occur, so the risk can be mitagated.

If you’re intersted in medicine or engineering or like reading nonfiction in general, read it.

 

Monday
Jan172011

Reading "The Bow of Ulysses"

(Note: I wrote this ages ago but inadvertantly left it on the draft queue instead of marking it as published.  So here it is.)

In the weeks since my last post (before the time in which I was unduly delayed in posting this), one of the things I’ve done is taken Moldbug’s advice and read Froude’s The English in the West Indies: or The Bow of Ulysses.  The book, published in 1888, is a travelogue.  Froude builds on the work of Charles Kingsley (who published At Last: A Christmas in the West Indies in 1871) and Père Labat (who was living in and writing about the West Indies in the eighteenth century).  Much of the book is typical travelogue stuff (if very erudite; the book is scattered throughout with snippets of Greek and some Spanish and French, little of which Froude bothers to translate), and Froude writes a good travelogue; his descriptions are colorful, interesting, and sometimes funny.  The rest is political musings on the state of the British Empire, the (past) emancipation of British-held slaves, and (present and future) efforts to instate democratic, constitutional governments in the British colonies.

Historical Context

In Jamaica in 1865, the Morant Bay rebellion (Froude points out that this was a riot and not really a planned insurrection) was suppressed and George William Gordon was hanged under martial law outside of ordinary due process, since a speech of Gordon’s was a proximate cause of the riot. (Froude thinks that was questionable, since Gordon did not apparently do anything illegal; it’s not clear that Gordon planned or attempted to incite the riot.  Froude, rather, blames democracy, but in particular democracy with a black majority and white minority.)   In 1866, the Jamaican legislature was dissolved, turning Jamaica again into a Crown colony, and in the 1880s, an effort to return Jamaica to self-government was underway (full self-government was not achieved until 1962).

Haiti faced all sorts of political troubles from the 1789 revolution onwards (brutality on both sides during the turmoil of the revolution and massacres of whites in its aftermath), foreign embargo, coerced reparations, rebellions, civil wars, and all sorts of political turmoil.  Froude was writing his book during a brief lull in the storm of Haitian history (1874-1911), but as far as he’s concerned the Haitians have been busy eating babies and worshiping Satan from the moment they got out from under the watchful eye of white-people government.

Of course Froude, as a historian, tries to keep a sense of perspective when evaluating the veracity of such claims:

[…] Sir Spenser St. John, an English official, after residing for twelve years in Port au Prince, had in a published narrative with many details and particulars, declared that the republic of Toussaint l’Ouverture, the idol of all believers in the new gospel of liberty, had, after ninety years of independence, become a land where cannibalism could be practised with impunity. The African Obeah, the worship of serpents and trees and stones, after smouldering in all the West Indies in the form of witchcraft and poisoning, had broken out in Hayti in all its old hideousness. Children were sacrificed as in the old days of Moloch and were devoured with horrid ceremony, salted limbs being preserved and sold for the benefit of those who were unable to attend the full solemnities.

[…] Yet one had to set one incredibility against another. […] I reminded him of the universal conviction through Europe that the Jews were habitually guilty of sacrificing children also. There had been detailed instances. Alleged offenders had been brought before courts of justice at any time for the last six hundred years. Witnesses had been found to swear to facts which had been accepted as conclusive. Wretched creatures in Henry III.’s time had been dragged by dozens at horses’ tails through the streets of London, broken on the wheel, or torn to pieces by infuriated mobs. Even within the last two years, the same accusation had been brought forward in Russia and Germany, and had been established apparently by adequate proof. So far as popular conviction of the guilt of the Jews was an evidence against them, nothing could be stronger; and no charge could be without foundation on ordinary principles of evidence which revived so often and in so many places. And yet many persons, I said, and myself among them, believed that although the accusers were perfectly sincere, the guilt of the Jews was from end to end an hallucination of hatred. I had looked into the particulars of some of the trials. They were like the trials for witchcraft. The belief had created the fact, and accusation was itself evidence. I was prepared to find these stories of child murder in Hayti were bred similarly of anti-negro prejudice.

However, he seems happy to repeat the same claims without this veneer of skepticism later in the book.

Froude on Race

As a lead-in to the former topic, Froude talks about meeting the Chief Justice of Barbados, which leads to a bit of discussion about Froude’s views on race in general:

Before my stay at Barbadoes ended, I had an opportunity of meeting at dinner a negro of pure blood who has risen to eminence by his own talent and character. He has held the office of attorney-general. He is now chief justice of the island.  […]  Having heard the craniological and other objections to the supposed identity of the negro and white races, I came to the opinion […] that whether they are of one race or not there is no original or congenital difference of capacity between them, any more than there is between a black horse and a black dog and a white horse and a white dog. With the same chances and with the same treatment, I believe that distinguished men would be produced equally from both races, and Mr. _____’s well-earned success is an additional evidence of it. But it does not follow that what can be done eventually can be done immediately, and the gulf which divides the colours is no arbitrary prejudice, but has been opened by the centuries of training and discipline which have given us the start in the race. We set it down to slavery. It would be far truer to set it down to freedom. The African blacks have been free enough for thousands, perhaps for tens of thousands of years, and it has been the absence of restraint which has prevented them from becoming civilised. Generation has followed generation, and the children are as like their father as the successive generations of apes. The whites, it is likely enough, succeeded one another with the same similarity for a long series of ages. It is now supposed that the human race has been upon the planet for a hundred thousand years at least, and the first traces of civilisation cannot be thrown back at farthest beyond six thousand. During all those ages mankind went on treading in the same steps, century after century making no more advance than the birds and beasts. In Egypt or in India or one knows not where, accident or natural development quickened into life our moral and intellectual faculties; and these faculties have grown into what we now experience, not in the freedom in which the modern takes delight, but under the sharp rule of the strong over the weak, in of the wise over the unwise. Our own Anglo-Norman race has become capable of self-government only after a thousand years of civil and spiritual authority. European government, European instruction, continued steadily till his natural tendencies are superseded by a higher instinct, may shorten the probation period of the negro. Individual blacks of exceptional quality, like Frederick Douglas in America, or the Chief Justice of Barbadoes, will avail themselves of opportunities to rise, and the freest opportunities ought to be offered them. But it is as certain as any future event can be that if we give the negroes as a body the political powers which we claim for ourselves, they will use them only to their own injury. They will slide back into their old condition, and the chance will be gone of lifting them to the level to which we have no right to say that they are incapable of rising. [emphasis mine]

One thing that surprised me about the book: Despite Moldbug’s recommendation, Froude is not a reactionary.  He’s very clearly a conservative.  That is, he believes in progress, but thinks that progressives, in their rush forwards, will screw things up.  Froude’s views on slavery follow a similar course:

The negroes who were sold to the dealers in the African factories were most of them either slaves already to worse masters or were servi, servants in the old meaning of the word, prisoners of war, or else criminals, servati or reserved from death. They would otherwise have been killed; and since the slave trade has been abolished are again killed in the too celebrated ‘customs.’ The slave trade was a crime when the chiefs made war on each other for the sake of captives whom they could turn into money. In many instances, perhaps in most, it was innocent and even beneficent.  Nature has made us unequal, and Acts of Parliament cannot make us equal. Some must lead and some must follow, and the question is only of degree and kind. For myself, I would rather be the slave of a Shakespeare or a Burghley than the slave of a majority in the House of Commons or the slave of my own folly. Slavery is gone, with all that belonged to it; but it will be an ill day for mankind if no one is to be compelled any more to obey those who are wiser than himself, and each of us is to do only what is right in our own eyes. There may be authority, yet not slavery: a soldier is not a slave, a sailor is not a slave, a child is not a slave, a wife is not a slave; yet they may not live by their own wills or emancipate themselves at their own pleasure from positions in which nature has placed them, or into which they have themselves voluntarily entered. The negroes of the West Indies are children, and not yet disobedient children. They have their dreams, but for the present they are dreams only. If you enforce self-government upon them when they are not asking for it, you may turn the dream into a reality, and wilfully drive them back into the condition of their ancestors, from which the slave trade was the beginning of their emancipation. [emphasis mine again]

 To comment on those highlighted sentences:

  1. Froude’s spectacles seem to be a particularly high-powered shade of rose on that particular issue.
  2. Okay as a hyperbolic rhetorical claim.  But I wouldn’t take him at his word on that one, Froude (like most people) does not seem like he would actually be happy as a slave under any circumstances.
  3. Since his criticism is directed towards white liberals and he (evidently) doesn’t view blacks as having much moral agency at all, it’s tempting for him to mischaracterize pro-democracy movements as being entirely driven by minorities and outsiders.

Tennyson, Gladstone, and Froude

One bit of the book that caught my attention was the story that frames Froude’s departure:

The morning papers were occupied with Lord Tennyson’s new ‘Locksley Hall’ and Mr. Gladstone’s remarks upon it. I had read neither; but from the criticisms it appeared that Lord Tennyson fancied himself to have seen a change pass over England since his boyhood, and a change which was not to his mind. The fruit of the new ideas which were then rising from the ground had ripened, and the taste was disagreeable to him. The day which had followed that ‘august sunrise’ had not been ‘august’ at all; and ‘the beautiful bold brow of Freedom’ had proved to have something of brass upon it. The ‘use and wont’ England, the England out of which had risen the men who had won her great position for her, was losing its old characteristics. Things which in his eager youth Lord Tennyson had despised he saw now that he had been mistaken in despising; and the new notions which were to remake the world were not remaking it in a shape that pleased him. Like Goethe, perhaps he felt that he was stumbling over the roots of the tree which he had helped to plant.

The contrast in Mr. Gladstone’s article was certainly remarkable. Lord Tennyson saw in institutions which were passing away the decay of what in its time had been great and noble, and he saw little rising in the place of them which humanly could be called improvement. To Mr. Gladstone these revolutionary years had been years of the sweeping off of long intolerable abuses, and of awaking to higher and truer perceptions of duty. Never, according to him, in any period of her history had England made more glorious progress, never had stood higher than at the present moment in material power and moral excellence. How could it be otherwise when they were the years of his own ascendency?

Here’s the poem in question (which, of course, follows this poem; if you prefer your poetry in audio form, you can listen to both here).  Gladstone’s essay is here, and his journal article did indeed get attention in the news at the time.

Froude continues:

[…] I will not despond with Lord Tennyson. To take a gloomy view of things will not mend them, and modern enlightenment may have excellent gifts in store for us which will come by-and-by. But I will not say that they have come as yet. I will not say that public life is improved when party spirit has degenerated into an organised civil war, and a civil war which can never end, for it renews its life like the giant of fable at every fresh election. I will not say that men are more honest and more law-abiding when debts are repudiated and law is defied in half the country, and Mr. Gladstone himself applauds or refuses to condemn acts of open dishonesty. […]

[…] The periods where the orator is supreme are marked always by confusion and disintegration. Goethe could say of Luther that he had thrown back for centuries the spiritual cultivation of mankind, by calling the passions of the multitude to judge of matters which should have been left to the thinkers. We ourselves are just now in one of those uneasy periods, and we have decided that orators are the fittest people to rule over us. The constituencies choose their members according to the fluency of their tongues. Can he make a speech? is the one test of competency for a legislator, and the most persuasive of the whole we make prime minister. We admire the man for his gifts, and we accept what he says for the manner in which it is uttered. He may contradict to-day what he asserted yesterday. No matter. He can persuade others wherever he is persuaded himself. And such is the nature of him that he can convince himself of anything which it is his interest to believe. These are the persons who are now regarded as our wisest. It was not always so. It is not so now with nations who are in a sound state of health. The Americans, when they choose a President or a Secretary of State or any functionary from whom they require wise action, do not select these famous speech-makers.  [Not at that point, anyways.]  Such periods do not last, for the condition which they bring about becomes always intolerable. [paragraph break mine]

I do not believe in the degeneracy of our race. I believe the present generation of Englishmen to be capable of all that their fathers were and possibly of more; but we are just now in a moulting state, and are sick while the process is going on. Or to take another metaphor. The bow of Ulysses is unstrung. The worms have not eaten into the horn or the moths injured the string, but the owner of the house is away and the suitors of Penelope Britannia consume her substance, rivals one of another, each caring only for himself, but with a common heart in evil. They cannot string the bow. Only the true lord and master can string it, and in due time he comes, and the cord is stretched once more upon the notch, singing to the touch of the finger with the sharp note of the swallow ; and the arrows fly to their mark in the breasts of the pretenders, while Pallas Athene looks on approving from her coign of vantage. [emphasis, as always, is mine]

Incidentally, that last, I think, is one of the reasons why Moldbug favors this book:  The Bow of Ulysses is not a metaphor for conservatism.  It is a wonderful metaphor for reaction.