OPEN INSIGHTS Newsletter
Issue 43 – On Prudence
April 7, 2008
by Sean Hull
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In This Issue:
With recent market freefall, and economic uncertainty, I’ve felt echos of the dot-com crash. Suddenly a lot of people are losing a lot of money, and strangely changing their risk profiles too! I recently saw an article in the economist "Requiem for a prudent man" bringing back an old idea. Prudence of course isn’t just a concept you carry with you when times are down, it’s even more important to keep your resolve and stick to your guns when all around you people are thinking money is falling from trees.
What’s Your Risk Profile
In an Economist piece titled "Requiem for a prudent man" they quoted Tony Dye’s thinking. "Dye used the analogy of being asked to board a train which you were convinced would crash at some stage in its ten-station journey. The optimal strategy may be to stay on board the train for five stops or so. But if your main concern is safety, you should not board at all." Well said. It reminds me of conversations with financial advisors, where they ask this perplexing question: "What is your risk profile?" I always chuckle. Only an outsider can see the humor I guess. It’s so common a question in the financial world, it’s come to carry some semblance of sense. My answer, well I don’t want to risk my money at all, I just want to make more. They then smile at me, at my naivety. I actually think that this is most people’s actual philosophy, though their emotions tend to get in the way. People figure, well I want to make high returns (ie I want to make a lot of money), and then backward justify the actual risk or let it get lost in the numbers.
Is It Different From Off Track Betting
The truth is unless you’re a Warren Buffett, or George Soros, or have some inside insight on what the markets are going to do next, betting the markets and stocks is a lot like gambling on horse races. I know, I know, there are all sorts of trends, and t-bill rates, and comparisons against the index and so forth. But if Long Term Capital Management with all it’s world class economists and experts wasn’t a lesson, the recent bailout and related chaos should surely be instructive. While the human variable remains in the mix, the movement of the markets will remain somewhat unpredictable.
Below I review Richard Bookstaber’s prescient title "A Demon Of Our Own Design – Markets, Hedge Funds, and The Perils of Financial Innovation". This title came out in April 2007, so I guess he’ll be getting a lot more speaking engagements now!!
The Advantage of Being An Outsider
When I talk to folks that are not in technology, they often have insights invisible to me. Their attention and focus is different, so they can see things that are not obvious to me. So in that sense I take it as a blessing perhaps that my background is not focused on finance. It allows me to see that cash is different than the proverbial "paper", that options remain abstract to me, full of legal jargon, and hidden surprises. And it allows me to maintain my scrooge type skepticism that if it seems to good to be true, it probably is, so yes, read the fine print.
Risks Worth Taking
All this caution and prudence is not to say I don’t think their are real risks worth taking, I just think they’re different risks. I used to debate finance with a good friend of mine. I’d say, what is the marginal return of me spending all this time on learning about stocks, and funds? I’d rather just park my money in an index that tracks the market (see John Bogle review below) and be done with it. Sure I could spend a *LOT* more time, and potentially get some small margin greater, but what will this make me in real dollars. I can think of a few much better ways to spend that time.
Build Your Career and Skillset
There are a few tried and true methods for building real wealth for you right now. On the low risk side there is building your skillset. Spend time learning more, in a wider arc, about your discipline. Even better, widen it by learning about related fields. For instance if you’re a lawyer, and you learn a whole lot about technology, you could push yourself into a niche where fewer lawyers reign supreme. Are you a tech guru, go ahead and learn something about business. Start thinking strategically about your resume too, and what skills are missing there. Then go and fill in the missing spaces. Keeping sending your resume out to recruiters and headhunters to gauge the market. It’s an ongoing process.
Next up is writing. Writing about your chosen field does a couple of things. It forces you to learn it well enough to teach it, which can be challenging. And then it also puts you up on a stage, to potentially be criticised. But this also will keep you on your toes. The huge upside is that it sets you apart from your peers as an authority, and the more you write the better you get. If your writing style is popular with readers, this can have a huge upside.
And then of course there is public speaking. Public speaking may seem like a risky proposition, but to me it’s nothing against risking my money on shaky funds! The first few times are sure to be a trial for you, but from there you will grow. You will learn about yourself, and also what your audience may be looking for. You’ll learn a lot about how much you know. And it’ll also make you better at interviews, and initial meetings with clients. These are key, and being able to build up rapport with an audience is much harder and more daunting that one or two people in a conference room.
Keep An Eye On The Market
I also recommend always keeping one eye on the market. This is mainly for informational purposes, but also for self-esteem at the thought that your skillset is still in demand. Watch the job boards, such as www.indeed.com, www.craigslist.com, www.dice.com, www.hotjobs.com, www.careerbuilder.com, www.monster.com and so on.
I can’t emphasize enough how much I like Indeed. Firstly it’s a one-stop shop because it aggregates content from these other sites. Secondly it has a great salaries tab, which can give you real insight into what the range of salaries your skillset can command. Third and perhaps most importantly is the interesting trends tab. This can provide insight into where the market is going.
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In our most recent interview we had the opportunity to talk with Norman Yamada CTO of Millburn Corporation.
Norman shares with us his experiences providing world-class computing solutions, and the pros and cons of doing it with open source.
This book has been on my to read list for quite some time. It’s time has certainly come. It argues, with plenty of great examples all around us, that the financial innovation is as much a curse as it is a blessing. Good stuff.
Bogle is the founder of the Vanguard Group, who brought indexed investing to the masses. The theory kind of boils down to, if the markets are so hard to predict, why even try? Track the market with an index, lose the manager and the fees, and beat 90% of investors. Who can argue with that? A lot of people apparently.
A little inane humor to brighten up your day… Jessica Hagy has this cute little blog called indexed. She uses index cards to illustrate little truisms, often with funny comments on venn diagrams. Here’s a funny one the relationship of status to money.
We all want to optimize our sites for Google. I mean other than a select few, that’s where most of our traffic comes from, so the more our site plays well with Google, the more users, readers, customers, and clients will find their way to us.
Most of the SEO material I’ve read has been pretty sparse, and unclear. But I’ve been following the topic over at my good Felix’s #comments blog, and I’m starting to get it. So you can too! Take a read: Google loves me, again!
If you haven’t been following the news on the topic, take a look over at this NY Times piece: Silicon Valley Start-Ups Awash in Dollars, Again. Personally I don’t think there is much hysteria this time around, sure there’s some, but not much. The industry is more mature now, and computers in general have lost their initial wow factor, so people are general more sober, and able to step back and see what is actually useful, can make money, is making money, or might well make money. That’s the root of investing smart.
Issue 42: On Efficiency
Issue 41: Roshomon Effect
Issue 40: Self Taught
Issue 39: Reputation Management
Issue 38: Are You Fast Failing
Issue 37: A Real Open Book
Issue 36: Rarity of Excellence
Issue 34: Hindsight Is Always 20/20
Issue 33: Market For Experts
Issue 32: Different Heritages
Archive: Past Issues
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