When The Times survey came out, Mexico's UNAM university sent out ecstatic press releases to the media that resulted in headlines such as UNAM leads Latin American universities.
UNAM's actual rank was 195 out of 200. Nonetheless, their claims are true. Read more on the survey and the struggles of Latin American Universities here.
Buffett, the well-written biography of Warren Buffett by Roger Lowenstein, offers an interesting biographical sketch with several insights into principled business and investing. In this first reflection I am going to compare Warren Buffett's management philosophy with that of Charles Koch's.
While their businesses face a host of different incentives — Berkshire Hathaway a publicly owned company and Koch Industries privately held — their principled approach to business echoes many similarities.
Both Buffett and Koch approach business with an openness to change and with a focus on creating value, wherever they can find it.
"Buffett did not think of Berkshire necessarily as a textile company, but as a corporation whose capital ought to be deployed in the greenest possible pastures." As Berkshire's textile business struggled, Buffett began directing it's profits into new sectors and opportunities.
Similarly, Koch, initially in the oil refining business, diversified his re-investments in the company into other more value-rich propositions — from commodities trading to fiber. Koch Industries' vision does not focus on a particular industry, but on value creation:
"Apply Market-Based Management to identify and capture those opportunities for which our capabilities will create the greatest value and develop and implement strategies that will maximize this value long-term."
To reach these lofty goals both Koch and Buffett rigorously look to align the incentives of their companies and employees with creating value for shareholders and society.
"I believe in establishing yardsticks prior to the act; retrospectively, almost anything can be made to look good in relation to something or other." Buffett's basic theory of return on investment is to focus on "the return on equity capital — that is, the percentage profit on each dollar invested." He strongly emphasized not wasting time on quarterly projections and other time-wasters.
Koch also frowns on needless paperwork and aims to measure profitability whenever it is practical, placing emphasis on value created by the economics means rather than by the political means.
After a series of government investigations and media attacks in the 1980s 1990s, Koch restructured his company and added an entire division to focus on the public sector and compliance. This fueled a new stage of growth.
Buffett also sees the value in operating within the legal environment. While he does his best to invest in companies with high standards and good management, from time to time he finds himself holding a bad apple. When unordinary situations have arisen, such as they did with the fraud at Salomon Brothers, Buffett felt it his duty as a long-term investor to help restore the company's long-term position as a financial leader.
As Lowenstein frames it: by the end of the ordeal, Buffett had been so compliant that if the regulators had punished him too severely, they would be encouraging less cooperation in the future from other corporations under similar investigations.
Though perhaps the value that trumps all else is one of character. "[M]ost people, regardless of what they say, are looking for appreciation as much as they are for money," writes Lowenstein.
Buffett and Koch both seem to understand this and act accordingly as they search for new investment opportunities and new personnel. Their investment decisions focus on long-term value.
Koch avoids operating as a public company as he believes their quarterly requirements to be adverse short-term incentives. Buffett refuses to offer dividends or divide his stock in order to attract long-term investors. Koch upholds a rigorous hiring process and would place a higher value on someone with good character and adequate skills over someone with adequate character and high skills. Buffett chooses to invest in companies whose management he trusts and believes will be running their company for a long time.
At a talk this Fall, Charles Koch mentioned that the book Why Wages Rise by F.A. Harper was an influential book in his career. Curious of the subject and the inspirations of such a successful man, I decided I best read it myself.
It was fascinating to see that the book did not begin with much framing and jumped right into the discussion with a focus on labor unions and the misperception that their demands lead to a rise in wages. This says a lot about who Harper was trying to communicate these ideas to and places the stage of development of the US economy at the time the book was written, in 1957.
Harper draws a nice analogy to explain why it can be harmful to simply raise workers wages without a commensurate increase in productivity:
During 1955, the average pay of an employee of GM was $5,011. Yet GM's profits for the year were $1,189,477,082 (or $3,751,477,082 before any ascertainable taxes) on a total business of $12,433,277,420. It can be seen at a glance that doubling the pay of this employee would be no more noticeable in the whole enterprise than would be the adding of another automobile to those owned in the State of Michigan.
Doubling the pay of all GM employees, however, would be quite a different story. It would eat up in one year more than the total value of the firm's real estate, plants, and equipment.
He continues to explain how productivity is the true source of real wage increases and how inflation can harm wages. He emphasizes the role a sound currency play when considering wages:
When you accept money in trade, you are proceeding on faith in it as a sort of implied contract. The implied contract is this: When you trade something for money as an intermediate step to getting what you eventually want in exchange, you are operating on the assumption that the money will serve your intent rather than thwart it.
Harper's broad approach to understanding the forces which influence wages is commendable. I truly enjoyed Harper's use of images throughout the book to complement his main points. Here are a few of my favorites:
The eloquence of this graph captures the fluctuation of the economy as a force that is always present rather than a cycle that fluctuates around some sort of equilibrium, as the business cycle is often depicted.
What I particularly like about this graph is how it labels the section in between the citizens buying power before taxes, and the citizens buying power after taxes. The section is labeled: The Cost of Being Governed. I find the language eye opening in a small way. Most of the costs that we have in our life we try to find a way to reduce. Increased productivity involves identifying better ways to do things and then changing our ways accordingly, freeing up more time to invest in other ways or for leisure in the process. By framing the data in such a way, it suggests that governance has a specific role in the economy and leaves the hope that: if we can improve the ways in which we currently govern our society, we can reduce our necessity of this governance, freeing up more time to invest in other ways or for leisure across the society. A very nice way to put it.
"Reality is far more vicious than Russian roulette. First, it delivers the fatal bullet rather infrequently, like a revolver that would have hundreds, even thousands, of chambers instead of six. After a few dozen tries, one forgets about the existence of a bullet, under numbing false sense of security," says Nassim Nicholas Taleb. He refers to this as the black swan problem.
Fooled by Randomness is a book about mistaking luck for skill, a mistake Taleb sees most prevalent in journalism and the world of markets. At the root, "risk detection and risk-avoidance are not mediated in the 'thinking' part of the brain but largely in the emotional one." "The consequences are not trivial: It means that rational thinking has little, very little, to do with risk avoidance. Much of what rational thinking seems to do is rationalize one's actions by fitting some logic to them."
Yet, "[p]eople fail to learn that their emotional reactions to past experiences (positive or negative) were short-lived." "[T]hey continuously retain the bias of thinking that the purchase of an object will bring long-lasting, possibly permanent, happiness or that a setback will cause severe and prolonged distress (when in the past similar setbacks did not affect them for very long and the joy of the purchase was short-lived)."
He paraphrases a remark by Einstein: "[C]ommon sense is nothing but a collection of misperceptions acquired by the age eighteen."
Taleb also redefines a common misperception of the word 'mistake': "A mistake is not something to be determined after the fact, but in the light of the information until that point."
This point ties succinctly with the concept of creative destruction which embraces the role of failure in development. Mistakes need not be avoided, but learned from. But, many environments are not conducive to such a framework. Many of these frameworks have been engrained in society and social relationships for years. Taleb explores why "bad traders have a short- and medium-term survival advantage over good traders," by tying the world of markets to naive evolutionary theories.
"[M]any amateurs believe that plants and animals reproduce on a one-way route toward perfection. Translating the idea to social terms, they believe that companies and organizations are, thanks to competition... irreversibly heading toward betterment." This is simply not true.
Taleb offers multiple reasons. I will follow each with a few of my own thoughts.
In Taleb's mathematical verse: "Just as an animal could have survived because its sample path was lucky, the "best" operators in a given business can come from a subset of operators who survived because of over-fitness to a sample path--a sample path that was free of the evolutionary rare event." "[E]volution means fitness to one and only one time series, not the average of all possible environments."
Distinguishing between signal and noise is widespread, though, journalism receives the largest swath of Taleb's relentless skepticism: "[J]ournalism may be the greatest plague we face today -- as the world becomes more and more complicated and our minds are trained for more and more simplification."
This effect of this large-scale compression -- going from the particular to the general -- "is the reduction in the degree of detected randomness." Journalism, through induction, favors the palatable over the counter-intuitive. In sum: "[M]ost poetic sounding adages are plain wrong."
From journalism to winning streaks, "if someone performed better than the crowd in the past, there is a presumption of his ability to do better in the future." But this is a weak presumption. It depends on two factors: "The randomness content of his profession and the number of monkeys in operation."
While Taleb doesn't offer any advice on which particular profession to choose, he does offer a suggestion. Don't shoot for a profession where you only like the way people live at the top. Consider the lifestyle of the average person, there are many more of them.
The idea of alternative histories across several disciplines all seem to converge on the same concept of risk and uncertainty: "certainty is something that is likely to take place across the highest number of different alternative histories; uncertainty concerns events that should take place in the lowest number of them." Taleb mentions examples in philosophy, physics and economics.
However certain this convergence may appear, one still has to stay alert. Profits and losses are never guaranteed. "The frequency or probability of [a] loss, in and by itself, is totally irrelevant; it needs to be judged in connection with the magnitude of the outcome."
For a while now I've shared common hopes to have the Economic Freedom data take new forms. The relationship between Economic Freedom and GDP per capita for example is not hard to imagine, however there is always something a bit more compelling about a nice visualization. Gapminder's Trendalyzer seemed to have established the perfect format ? it was just a matter of time before unique data sets could be plotted in a similar manner. Google has now made this possible, and with the release of their new spreadsheet gadgets I've taken the opportunity to dive into the Economic Freedom data, and add motion.
This first graph compares the Heritage Foundation and Wall Street Journal's Index of Economic Freedom country scores with GDP per capita in US dollars as reported from the United Nations Common Database the data from 2000?2005. Colors denote regions. Size denotes population.
This second graph uses the same data minus some of the clutter. I've selected to display just a few countries which I think are interesting to compare to one another: North Korea and South Korea, China and Hong Kong, Cuba and Spain, and Botswana and Zimbabwe.
A hat-tip to Google for making this powerful tool available at such an accessible level. Now, on with setting free all that interesting information housed in academic jargon, repelling visuals, and bullet-pointed presentations.
Buffett's actions draw a strong distinction between a speculator and an investor — the former trying to cash in on short-term fluctuations and emotional movements of stock price, the latter interested in the underlying quality and long-term prospects of a company. These observations are drawn from the book Buffett, by Roger Lowenstein.
Buffett stuck to industries he knew well. When the investment environment presented him with new challenges he didn't understand, he got out until he felt comfortable again.
"Diversification had become an article of faith; fund managers were commonly stuffing their portfolios with hundreds of different stocks. Paraphrasing Billy Rose, Buffett doubted that they could intelligently select so many securities any more than a sheik could get to 'know' a harem of one hundred girls."
However, Buffett's objections are largely targeted at professional investors. Lowenstein doesn't go into detail, but if your specialization is outside of investing, diversification may be a decent strategy.
Even with his great success, Buffett was always cautious and didn't presume he had better information than others. Perhaps he only excelled at using that information more wisely.
Buffett said: "I have never met a man who could forecast the market," and "Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future."
But his secrets were simple: "You try to be greedy when others are fearful and you try to be very fearful when others are greedy."
Operating in this counter-cyclical manner allowed Buffet to get solid assets while they were cheap and, most likely, unload less impressive assets while other investors were willing to pay more for them.
This principle extends to borrowing. "If you wait until you need a loan, it is likely to be when others are also borrowing, when?per force?rates will be higher."
Lowenstein explains this concept as Buffett did to the manager at Berkshire when he purchased it as a textile firm.
"He didn't particularly care how much yarn Chace produced, or even how much he sold. Nor was Buffett interested in the total profit as an isolated number. What counted was the profit as a percentage of the capital invested."
"He told Chace not to bother with quarterly projections and other time-wasters. He merely wanted Chace to send him a monthly financial report and to warn him of any unpleasant surprises."
"Buffett did not think of Berkshire necessarily as a textile company, but as a corporation whose capital ought to be deployed in the greenest possible pastures."
Buffett developed many of his investing principles from Graham and Dodd who argued, "The market... was not a 'weighing machine' that determined value precisely. Rather, it was a 'voting machine,' in which countless people registered choices that were the product partly of reason and partly of emotion."
He was also influenced by Charlie Munger and Philip Fisher, "each of whom stressed good, well-managed companies as distinct from statistically cheap ones."
"...one's house is not quoted day-by-day, and most people do not lose sleep over it's value."
"Ultimately... there were only three ways to avoid a tax: 1) to give the asset away, 2) to lose back the gain, and 3) to die with the asset..." Buffet believes "...people's emotional distaste for paying taxes blind[s] them to acting rationally..."
He also comments on how the disconnect between political preferences and those of the taxpayers may be similar to the disconnect between a corporate manager and that of their shareholders: "Many corporate managers deplore governmental allocation of the taxpayer's dollar but embrace enthusiastically their own allocation of the shareholder's dollar."
For some time I have been struggling to come up with a personal philosophy toward donations and philanthropy. Growing up, I always felt some sense of social obligation to be donating to the guy on the corner, the Red Cross, poverty in developing countries, or one of a million things. But how does one choose?
Until recently, I have resisted giving more than a couple dollars here and there. I've always felt a bit stingy about it but my end goal isn't to not be blindly charitable at any cost, it is to give to causes that I understand in a way that supports values that I believe in.
I also resisted because I felt, as a kid, my job was to become educated and be able to get a good job to support myself and my family. Being able to donate a couple dollars in college is fine but I hope that it doesn't compare to what I am able to give throughout my adult life.
Much like an investment philosophy, I want the highest return on my donation and think it is appropriate to ask: Why should I spend one dollar on aid today if I can invest it and have the ability to give several times that amount to similar problems in the future?
Furthermore, the government gives tax breaks to certain types of philanthropy so I need to ask myself what distortions this causes and how to approach them. Do tax-incentivized methods of giving offer the best return on philanthropy or are there other methods which do better?
This is largely a personal question. Each of us will value the problems we see in the world differently, so the answer I have come to shouldn't be viewed as an absolute answer, but what best fits this description based on my values, my understanding of how the world works, and my current circumstances in life.
The best way that I have found to give is to enable creative individuals in low-income countries by giving entrepreneurs micro-loans in areas where governments tend to distort incentives and leave these people at a disadvantage.
While I don't wish to over specify, I also try to make several of my loans to entrepreneurs in the agricultural industry. These entrepreneurs frequently have the comparative advantage in economic terms but face both local and international political challenges as developed countries use protectionist measures to subsidize international competitors and local governments use agriculture boards and a hodgepodge of other regulations to transfer wealth from the agricultural export industry.
Let's say you donate $25, 4 times a year to the guy hanging outside Whole Foods. Very nice of you, but unlikely your money goes much farther than that. It will likely be consumed by that individual and return little more than that. In 10 years time, you will have donated a total of $1000.
| Year | Calculation | Donation |
|---|---|---|
| 01 | 4*25 | 100 |
| 02 | 4*25 | 100 |
| 03 | 4*25 | 100 |
| 04 | 4*25 | 100 |
| 05 | 4*25 | 100 |
| 06 | 4*25 | 100 |
| 07 | 4*25 | 100 |
| 08 | 4*25 | 100 |
| 09 | 4*25 | 100 |
| 10 | 4*25 | 100 |
| Total | $1000 | |
But, if you donate $25, 4 times a year through the Kiva loan system, not only are you enabling a motivated individual who is pursuing an idea to create value in society (that will give back at a local level in their community) but you slowly get your money back and can re-invest it in other entrepreneurs. In 10 years, being generous with the same amount of money, (my rough and slightly improper math suggests) you will have donated (invested?) around $5500:
| Year | Calculation | Donation |
|---|---|---|
| 01 | 4*25 | 100 |
| 02 | 4*25 + 100 | 200 |
| 03 | 4*25 + 200 | 300 |
| 04 | 4*25 + 300 | 400 |
| 05 | 4*25 + 400 | 500 |
| 06 | 4*25 + 500 | 600 |
| 07 | 4*25 + 600 | 700 |
| 08 | 4*25 + 700 | 800 |
| 09 | 4*25 + 800 | 900 |
| 10 | 4*25 + 900 | 1000 |
| Total | ~$5,500 | |
Awesome? I think so.
In celebration of an elegant solution to the knowledge problem: Join the Kiva Team Information is Beautiful.
Pietra Rivoli's Travels of a T-Shirt in the Global Economy is an excellent biography of an unexpected protagonist: her Florida Parrot T-Shirt. From analyzing the institution of slavery as a cotton subsidy to looking at the US used clothing market in East Africa, Rivoli takes a tastefully empirical look at what has led the cotton industry to thrive and exist as it does today. NPR has even done a three-part audio series inspired by the book.
I think most commendable to her analysis is how she has mentioned that in all of her travels, and in all of her interviews, she did not meet a single bad person. It suggests the solution to the many conflicts that arise out of all countries cotton subsidies must be much deeper than the everyday people making decisions about what and what not to purchase.
While the book does not offer any solutions to the many dilemmas faced in the global textile trade, it adds a remarkable amount of depth to an often two-dimensional debate. Rivoli has mentioned one thing she sees as possibly hopeful for removing these engrained cotton handouts is an increase in non market distorting subsidies. She defined these subsidies as when you pay people to go sit on the beach rather than pay them to produce an excess supply of something that will drive prices down.
While I would guess the idea of a non market distorting subsidy may be contested, it does raise an interesting question. Ten years from now, might it be easier to push for the end to cotton subsidies if all of the cotton growers are working hard in their feilds, or if they are all off enjoying the beach?
On related issues, Russel Roberts writes on the peculiar relationship between Chinise textile quotas and the WTO.
McKinsey and Co. states that high corporate taxes and obstacles to entry and exit are pushing businesses into the informal marketplace and undermining "enterprise-level productivity." This article focuses on business practices in Asia but clearly is model is applicable to the stagnation of Latin American development as well.
Go figure, China looking to outsource to the US and several municipalities trying to woo in their investment. I wonder if the University students in China will stand up for this abuse of foreign labor.
It is likely that the US could benefit a great deal from Chinese foreign direct investment. If more Chinese companies were investing in the US there would become more reason for Chinese firms to respect the property rights and contracts of US firms invested in their country.
Well, don't say it wasn't expected. Hugo Chavez is heading forward with his plans of land reform in Venezuela. Apparently, Chavez has promised to put an end to 'idle' latifundios. That is, estates of 5000 hectares (12,350 acres) that aren't being used efficiently. You can take your guess at what efficiently may mean. Especially when the land in question is 6.6 million acres of private holdings.
The claim is that there is too much land in the hands of too few people. As the government hasn't enforced property rights in the past, there should be low expectations to see a drastic change in the future. In one case, where the government ignored demands to remove a few squatters from private land, the number of squatters grew to several hundreds, now equipped with housing settlements and yucca crops.
The wisdom behind these acts is best summed up by Chavez's motives to "tax farms into productivity." Unfortunately, such wisdom is having a hard time being implemented since the government doesn't even have a registry of land ownership. Hey, there's a policy that might work for a start--respect of ownership!
A great lead from Alina at Totalitarianism Today discusses randomness and rationality in markets through fractal finance. And in a bout of rationality, a vermont businessowner bought a free-ride into a Dutch business school on eBay for $36,000. Perhaps he'll learn why Metcalf's law. is a bit weaker than it was cracked up to be.
Another of the Forbes rich listers is spamming copyright offices around the world:
Bill Gates is an intelligent man who has done a great deal of good in the world. So when he gets caught out in a bare-faced lie this should matter to all of us; and last week, when he called the opponents of American intellectual property law a "communist" movement he was encouraging a mistake that could impoverish the entire world.
Read more on the war against copyright communists. Also check out Creative Commons who is leading the movement of sharing creativity with their 'some rights reserved' copyrights and encouragement of things like the up and coming music sampling commons, Mixter.
Yahoo! has even put out a beta Creative Commons search engine, so tally up on how easy home recording is these days and if you're feeling entrepreneurial, turn your Mac Mini into a recording studio and, to Gates' spite, head for the communes.
Is dollarization or improved printing technology leading to more counterfeiting throughout Latin America? Or perhaps it is more intrinsic in the structure of their institutions and culture in these countries.
Here's an interview on Peruvian women in the informal economy who are joining trade unions. I wonder how much they think about the economics of unemployment in their negotiations? Government concern for the Alpaca trade has led to a questionable program to put microchips in the Alpacas ears in hopes to keep good wool local, even though it is valued much higher abroad.
In other places, some are trying to change incentives on the informal market. India has implemented a VAT that includes hopes of stunting the informal market for mobile phones. This opinion discusses some features of the value added tax, including how it cuts into informal markets.