Sunday, September 24, 2006

The failed elitism behind egalitarianism

Many of the most eloquent proponents of egalitarianism experience deep narcissistic rage at hierarchies. They would only join a club that would make them president, and since no club actually would make them president, their "idealism" advocates the abolition of all clubs.

Friday, September 22, 2006

Hitler lost the second world war, but will he win the fifth?

It is almost a cliche to posit that the greatest Geniuses often combine different disciplines. From this perspective, Benjamin Graham brought the excessive detail-orientiation of a classically trained philologist to financial analysis. Or Picasso blended primitive art with a classical concern for structure and composition. Einstein is often held as a counter-example as someone who simply intuited a massive framework that was beautiful and correct, but newer biographers argue that Einstein's years at the patent office were formative, and that his conception of the universe derived from combining mechanical engineering with theoretical physics. From that perspective, Einstein was not an overlooked outsider, but rather ahcieved his successes because he was an insider in a different discipline.

If we accept that Genius is a form of intellectual arbitrage -- buying and selling ideas in different markets -- computers will ultimately dominate the world of intellectual arbitrage. Once there are computer readable theoretical mappings of the essences of different disciplines -- imagine an XML specification for intellectual history -- "genius ideas" will be generated at the push of a button.

My biggest fear is that, when we reach the point where humans are no longer unsurpassed the traditionally human domains, those in power will treat the less fortunate humans as bio-mass, different in degree but not in kind from so much algae. My deepest hope is that, once we reach the point where there are no tasks that humans can perform better than robots, it will open up a tremendous wave of fellow-feeling of humanity, because the traditional legitimation for social injustice ("that person deserves more because he is better than you") will no longer be sustainable, since automated agents will be performing all major tasks. How do we encourage the latter and avoid the former?

Thursday, September 21, 2006

Sarbanes-Oxley (again)

It has been fascinating, awful and surprisingly delightful to watch how the mechanics of the pursuit of earnings growth has slowly eviscerated Dell Computer company.

Once expected earnings growth is factored into his company's stock price, the CEO faces a dreadful choice as his company settles into a mature field and business pattern. On the one hand, a great company, with a great business model can make a great deal of money and pay great salaries to a great many employees, but the stock will plummet when earnings stabilize, even if the company has settled into a regular and profitable groove, as it will be valued more as an predictable annuity than a growth equity. As the company makes the transition into a mature institution, the ceo is vilified, the stock painfully adjusts to a more realistic level, until ultimately becoming so despised and undervalued that the former growth stock becomes a candidate for the "value" basket a few years later. And this is the best case scenario.

On the other hand, many publicly held companies are destroyed because CEOs lack the courage and incentives to manage the transition. Modern CEOs rarely think in terms of the employees, customers & the institutional future of the company, particularly because CEO compensation is often linked to stock price. The modern CEO continues to relentlessly squeeze employees, customers and suppliers, to manufacture earnings growth for Wall Street by monetizing the company's good will. If they can hand the business to a new CEO before the inevitable reckoning, they can even socially mingle with their jet-setting friends in Jackson Hole, who will say things like: "Gosh, I wish you were still running your company. That new guy is doing a _terrible_ job."

Before Sarbanes-Oxley, the "discipline of the market" led many CEOs to condone accounting fraud, while their underlying companies continued to be sound businesses. Sarbanes-Oxley was designed to protect investors, but it has ended up hurting employees, customers, and society in general. With Sarbanes-Oxley, since CEO's can no longer just make stuff up, their pursuit of earnings growth is destroying the companies themselves. The collapse of Dell is a beautiful example. A company once known for quality control and customer care has been slowly cheapening its brand for the last ten years, until the customers who buy exploding laptops find themselves unable to parse the thick accents of the customer care representatives.

I should be clear that this is not a slam on South Asians: there are many people in Kerala with impeccable, beautiful, and easily understood accents. Dell, of course, does not just go to India for cheap labor, but their need for earnings growth has led them to buy ever-cheaper labor in India. Further, just as intelligent Americans are avoiding Dell as a brand, intelligent Indians are avoiding Dell as an employer. And that means that the customer service representatives with mellifluous Bollywood tones and charming names like Sita are working for other companies, and people who call Dell are routed to somewhat abrasive and slightly overwhelmed people with names like Abdul.

So it's not just that the stock market itself is volatile, it's "discpline" increases the volatility of the businesses that are listed on it. If Dell had simply been privately held, they would probably have resisted the temptation to cheapen their brand until there was nothing left. In other words, if they could find a way to be meeker, private equity funds are poised to inherit the earth.

Tuesday, September 19, 2006

Elevator conversation

A: "I'm starting to lose my vision, and it is getting harder and harder to read."
B: "You should learn braile now, while you can still see."
C (a complete stranger to A & B): "Actually, no. Blindness will hypersensitize your fingers and make it easier to learn braile."

Thank you C, where ever you are. That was the best elevator conversational intervention that I have ever experienced. Would we become smarter as a country if more people broke the elevator chat taboo?

Stupid patent system

One of the biggest problem with the way that intellectual property law is constructed is that, in business, as in fashion, timing is everything. Business is filled with visionaries who bankrupt their companies pursuing the future a few beats too early: Control Data Corporation, for example, got drunk on a vision of the internet during the nineteen seventies, squandered a huge company (while, of course, providing invaluable training to many of the people who would ultimately become rich creating the real internet).

As in fashion, in business almost every idea has its time. A business genius is the person who recognizes when the risk-reward ratios for pursuing new ideas have titlted in favor of the idea. Under the current patent system, one of the tests of unpatentability is "obviousness", but long before an idea is inappropriate for a business venture, it is usually not "obvious", but rather, in fact, it is "stupid".

In contrast to the subtle understanding of Zeitgeist that informs the decision to bring an idea to market, coming up with "ideas" themselves is astonishingly simple, almost mechanical. One could practically write software that melds conceptual blocks from different fields, to arrive at "genius ideas". In our current patent system, the turnkey monkey who runs that software would get a patent, and his patent would throttle the business genius who has waited for the appropriate time to bring an idea to market.

Saturday, September 09, 2006

Why boring people are dead

"What stands still is the absolute. The relative is definitionally in motion. When the relative stands still, it is dead."

Warren Buffett is being left behind

The traditional purpose of the American financial system is to redistribute wealth from feckless Aristocrats to the thrifty middle class. A patient and intelligent middle class, well schooled in common sense and value analysis, would methodically and unimaginatively accumulate stock in reliable companies headed for long-term success. Meanwhile, the scions of the elites would "play the market", introducing noise that would allow members of the middle class to get stocks at attractive prices. Warren Buffett is, of course, the paragon of the middle-class investment philosophy, and his efforts to retain a middle class life despite stratospheric wealth underline that a fundamentally middle class attitude is essential for success in the markets.

Or is it? It is hardly a secret that Berkshire Hathaway hasn't done terribly well in the last five years, but the reason is not simply that Warren Buffett is "getting old" or "losing his touch" -- the diminishing returns of Buffett's portfolio relate to a fundamental change in the balance of market participants in financial markets and the reduction of opportunity for the entire thrifty middle class. While Buffett's returns have stagnated, the number of hedge funds has exploded. Many of these funds are highly leveraged long short books that crunch statistically sound models, and arb away the gap between "value" stocks and "bullshit" stocks. The fact that many long-short books are leveraged at 4 to 1, 8 to 1, or even 11 to 1, means that the net returns captured from statistically valid and intelligent strategies (traditionally passed on as "common sense" in the middle class) and pursued without any leverage are being crushed.

So, in a very concrete way, the SEC's refusal to level the playing field between hedge funds and regular investors makes the rich richer at a much faster rate than the middle class. Insofar as there is genuine opportunity remaining the traditional middle-class approach to equity markets, the leverage permitted to hedge funds allows the capital growth rate for the wealthy to exponentially outpace the capital growth rate for the middle class. This is beyond Henry George's worst nightmare, and suggests that any analogies to the broader social implications of the last great period of capital accumulation are not likely to hold.

Overly Soft

People often mention the irony that one of the most "successful" men in America is a college dropout. But is it possible that there is a relationship between his scorn for established institutions, his relentless agression against our society, and the fact that he refused to allow himself to be judged by his betters when he was young? Would Microsoft produce better software if he had learned the follow-through of sticking with a subject until it was actually mastered, rather than imagining that what grownups do is over-promise and under-deliver?

Yes, I know that, in the long-run, Gates will use his capital-accumulation to cure AIDS, while someone like Larry Ellison will use his capital-accumulation with about as imagination as Adnan Kashoghi used, but, in the short run, it is astonishing to think the amount of human suffering that Gates has imposed on the race by selling C work at A prices.