Tag: book

In Narrative Economics: How Stories Go Viral and Drive Major Economic Events (Amazon,) Robert Shiller, Nobel laureate, pitches the importance of incorporating popular narratives in economic and financial models.

The biggest problem I have with the way most research is done in quantitative finance is that whatever data is available gets analyzed to death while data that is hard to get, unorganized or tedious to collate is ignored. And given the adaptive complex dynamic nature of the markets, signals derived from the former attenuate at a much faster rate as time goes on.

When markets break quant models, it is often because the underlying narrative has changed. The word “narrative” is just a fancy word to describe the stories we tell each other. And stories are virus. The spread of a narrative can be modeled like how epidemiologists model the spread of contagions. And the main thrust of the book is that it is high time economists and policy-makers began to incorporate narratives into their models and playbooks.

By 1932, the bottom of the stock market decline, the US stock market had lost over 80% of its 1929 value in less than three years. We have to ask: Why did people value the market at such a low level? A big part of the answer was a narrative that went viral: modern industry could now produce more goods than people would ever want to buy, leading to an inevitable and persistent surplus.

Narrative Economics, Shiller 2019

Investors would do well to take Shiller’s ideas and start to systematically track narratives that could impact their portfolios. Maybe, instead of Risk-Parity, try Narrative-Parity portfolios!

Recommendation: Must Read!

What It Takes: Lessons in the Pursuit of Excellence (Amazon,) is Steve Schwarzman’s biography. He is the founder of The Blackstone Group ($BX,) a $60 Billion enterprise.

Sadly, the book is not about private equity. It is about whatever Steve decided to share about himself to a wide audience. So, if you were looking for investing gems, then you would to sourly disappointed.

I have excerpted the interesting bits on my Evernote. You can skip the book and read that instead.

Recommendation: Avoid!

In Alchemy: The Dark Art and Curious Science of Creating Magic in Brands, Business, and Life (Amazon,) Rory Sutherland makes a strong point that the pendulum has swung too far to the side of “rationality.” Businesses are so enthralled by scientific thinking that they have stopped taking risks.

The problem that bedevils organisations once they reach a certain size is that narrow, conventional logic is the natural mode of thinking for the risk-averse bureaucrat or executive. There is a simple reason for this: you can never be fired for being logical. If your reasoning is sound and unimaginative, even if you fail, it is unlikely you will attract much blame. It is much easier to be fired for being illogical than it is for being unimaginative.

The fatal issue is that logic always gets you to exactly the same place as your competitors. If you are wholly predictable, people learn to hack you.

For an investor, there are quite a few aha moments. To out-perform, you need to be different from everybody else. But if you are a professional money manager, then being different is very hard to defend if things don’t work out. So the larger your get, the lesser the risks you can take. If you think quantitative models will solve this problem, think again:

The risk with the growing use of cheap computational power is that it encourages us to take a simple, mathematically expressible part of a complicated question, solve it to a high degree of mathematical precision, and assume we have solved the whole problem.

We should also remember that all big data comes from the same place: the past. Yet a single change in context can change human behaviour significantly. For instance, all the behavioural data in 1993 would have predicted a great future for the fax machine.

The book is an insightful, yet easy read.

Recommendation: Must read!

The Behavioral Investor (Amazon,) by Daniel Crosby had me nodding in agreement at every page. It is one of those books that produces your thoughts in print.

You are not built to be happy or to make good investment choices, you are built to survive and reproduce. Asking someone built for short-term survival to become a long-term investor is a bit like trying to paint a room with a hammer. You can do it, but it’s not pretty.

Successful investing is hard. It has more to do with controlling one’s own emotions than finding a superior strategy. Being mindful of our decision making process is half the battle won. The book has some good ideas on how we can be aware of when we are making poor decisions so that we can take a pause and reconsider.

Recommendation: Read it now!

In the book The Myth of Capitalism: Monopolies and the Death of Competition (Amazon,) authors Jonathan Tepper and Denise Hearn lay out the case that capitalism is dead in America and that over regulation and under-enforcement of anti-trust is to blame.

Key points:

• Regulation suppresses startups and cements the lead of incumbents who can afford the added compliance costs.
• Current anti-trust only focuses on “consumer welfare.” And the welfare of the consumer is really only measured by low prices. But what about keeping markets open to all new entrants, dispersing economic and political power, preventing collusion, and protecting small suppliers from predatory pricing?
• What is good for the CEO to do for his company is not necessarily good for the whole economy. In the economy, it is logical for big companies to try to seek efficiencies, acquire competitors, pay lower wages, and increase their own income, but when all companies try to do this at the same time, everyone is worse off.
• Investing in a portfolio of companies that spend the most on lobbying and influencing regulators would consistently beat the market. Over the past 10 years, the Strategas Lobbying Portfolio beat the Standard & Poor’s 500 by five percentage points every year.
• Government is not a passive bystander in the increase in inequality. It is an active participant, granting favors to the wealthy and powerful, looking after the interests of the well connected.

I thought I had a personal philosophy about competition but according to the book, I am an “Ordoliberal.” Ordoliberalism argues that capitalism requires a strong government to create a framework of rules that provide the order (ordo in Latin) that free markets need to function properly. And I completely agree with the label.

A lot of supporting evidence is provided in the book to further the point. And the policy prescription is fairly straightforward. But here are some exceptions that do not really fit the narrative:

1. Amazon routinely steals ideas from successful marketplace products. Does this mean we need marketplace regulation? Probably not because without Amazon, those businesses probably wouldn’t exist in the first place. And there are other market place competitors, like Etsy, Instagram, Pinterest, etc who act as a counterweight.
2. Facebook is effectively a payola scam where you have to pay up if you want your own fans to see your content. Does this mean it should be regulated as a media company? The last company that had a walled garden of content was AOL. The world wide web is just a click away.
3. Kraft Heinz took a huge markdown on its brands because consumer tastes changed and they hadn’t invested enough in R&D to be on top of it. Moats are only apparent when they are under attack.

Do I agree with the authors that capitalism needs fixing? Yes. But do I think the situation is as alarming as it is made out to be in the book? No.

Recommendation: Must read!