Political party's rules are made to be broken

It's interesting to see that both the Democrat and Republican party leaders have no respect for the rules they are ostensibly following.  This convention season has seen blatant fake vote counts by the chairs of the conventions to create optics that will favor their candidate in the election.

Exhibit 1: The Republican Party changed the rules so a Maine delegation more supportive of Romney could be sat down. The rule change also ensured that there wouldn't be a counted vote for or against Mitt Romney during the convention.

Exhibit 2: The Democratic leadership realizes that the language in the document pertaining to "god" and Israel will not play will for Obama in the election and change it against the wishes of supporters.

Neither of these changes actually did anything significant. Romney was going to be the Republican nominee either way and Obama's policies on religion and Israel aren't going to shift as a result of the altered platform. They just broke the rules to give themselves better optics to the voters. If they'll blatantly ignore their rules in order to look good to certain voters, it's interesting to think about what party leaders will do when the stakes are higher and something like their business interests are threatened. 

A Chart for EM investors

Those counting on high GDP growth to help their investments should give this chart a second look: 

This post summarized the Morgan Stanley report in more detail, but in general real GDP growth does not necessarily coincide with higher equity returns. Not when your shares are being diluted in order to expand (or in order to enrich shareholders).

CNBC on Facebook

CNBC has been talking about Facebook 24/7. They are focusing on Facebook's stock price and early investor selling, not bothering to mention that this investor was also taking risk off the table all the way up as well. They are constantly asking "Does this mean Facebook was not ready to be a public company?"  What it means is that that Facebook and their investors who sold stock got a very good price for their IPO. Combine Facebook's 50% fall with LinkedIn's 100% rise after its IPO and early investors come out even. Adjusting for Facebook's larger market cap and the early investors in both deals have now taken more money from Wall Street than Wall Street's mispricing cost them.

CNBC's constant harping a little silly until you realize what is really upsetting them. Europe is still largely on vacation and they need a story. No one from Facebook is going on their show to talk to them about what is going on, making their job a little bit harder. In response CNBC seems to be running with the theme of "Talk to us or we are going to say bad things about you." 

It would be amusing if their coverage of Facebook wasn't so repetitive and inane. 

Taleb is fooling himself about randomness

Nassim Taleb is back in the news! This time, he is telling investment professionals not to go into investing in his new paper Why It is No Longer a Good Idea To Be In The Investment Industry

For those unfamiliar with Taleb, he wrote Fooled by Randomness and The Black Swan, books primarily about why he is so smart and everyone else is pretty stupid. In addition to this, the former book was about how causality is generally overestimated and the latter book is about how the world is much more strange than we think. Indirectly, they are also about how the people who Taleb worked with or knows that ended up being far more successful than him did so only because they were luckier.  While this is doubtlessly true in some cases, he likes to exaggerate the case and his latest paper is no exception. He even developed a name for these people. 

The “spurious tail” is therefore the number of persons who rise to the top for no reasons other than mere luck, with subsequent rationalizations, analyses, explanations, and attributions. The performance in the “spurious tail” is only a matter of number of participants, the base population of those who tried.

With fat tails, he sees the spurious tail as far too hard to out compete. There is undoubtedly some luck when it comes to investment returns, as investors are making decisions while taking into account varying states of the world, only one of which will turn out to be true.  But this analysis assumes that the only thing that matters are investment returns and ignores the rest of the factors that those in charge of allocating capital use when deciding to trust their money to an investment professional. Returns do help raise funds, but there are many other variables that matter, especially now when funds have to be registered with the SEC and people are worried about losing their money to another Madoff that the population of investors making spurious returns and raising capital is not rising that much relative to the assets deployed to investment professionals.

So what is Taleb's final advice?

To conclude, if you are starting a career, move away from investment management and performance related lotteries as you will be competing with a swelling future spurious tail. Pick a less commoditized business or a niche where there is a small number of direct competitors. Or, if you stay in trading, become a market-maker.

The "find yourself a niche with fewer competitors" idea is always good advice, but as for the other... maybe Knight Capital is hiring?

This is a little scary

China won nearly twice as many medals as the closest countries in the 2008 Paralympics, winning over 200 medals. Their take in 2004 was only 1.5 times their nearest competitors. We know that China starts training their athletes from the age of 4. China's out sized success at the paralympics makes me suspect that those who can't quite make the cut are incentivized to injure themselves in such a way as to make themselves viable competitors in the paralympics. Think of it as a more glamorous version of Indian beggars who are forcibly amputated in an attempt to increase their donation rate.  Another possibility is that the training routines in China are so rough or general safety conditions are so much worse in a large developing country that when this is combined with a government program focused on winning medals then many more athletes end up being qualified compared to developed countries. Diminished mental capacity qualifies athletes for certain events at the paralympics, so those who decide to fake it at least don't have to inflict permanent bodily harm on themselves.

Strange source of sanity

There is a massive drought in the US and corn production looks like it will be lowest that it has been in 15 years. Still, ethanol targets need to be hit so much of that corn is going into government subsidized ethanol production. So it falls to the UN to be the voice of reason.

The UN has called for an immediate suspension of government-mandated US ethanol production, adding to pressure on Barack Obama to address the food-versus-fuel debate in the run-up to presidential elections.

If the EPA also removed the ethanol requirements in gasoline then getting rid of the mandate and subsidies could even bring corn back down to its pre-drought levels.

A theory on Stripe

I saw Stripe on CNBC today.  They do online payments for developers and have raised money from some very big names.

Regardless of their revenue stream, they have a lot of value to these investors. Stripe's customers are generally start ups (they also have a lot of retail stores) and they can track their revenue in real time. This gives their investors access to additional information for judging potential investments and can put new companies on their radar. 

I wonder if the people at Stripe will be able to monetize this value. Done properly, it should be worth much more than the $20 million they recently raised.

Musings on fashion and start ups

I recently came across an article about fashion in Silicon Valley. It is interesting, but it doesn't really touch on why being fashionable, in the context of spending money on Chanel and other brands, doesn't work too well at start ups.

1. Fashion is a status game that most engineers are not good at. Making sure that engineers are appreciated is a big deal, so bringing in people who put a lot of importance on status outside of the ability to solve problems is not going to help the culture of a company.

2. The article mentions brands like Chanel. These things cost money. Spending lots of money around people who are taking low salary/high equity compensation is not great for the culture of a start up. It encourages people to leave in order to take high pay/low equity at a more mature technology company. A entrepreneur who always dresses in expensive clothing is showing off their wealth the same way as one who drives a Maserati. 

3. Following fashion rules and trends is correlated with other types of conformity. In a culture that prides itself on how non-conformist they are an interest in fashion is not a good signal.

That said, engineers at start ups have been willing to push fashion boundaries in ways not seen elsewhere in the professional world. The difference is that this is done by breaking fashion rules, ignoring current trends and not spending lots of money at boutique shops. (If I was less respectful of my friends' privacy I would now post a picture of three engineers from a very successful start up: one person has a mustache, the other with a mullet and the third with a neck-beard) Maybe the fashion industry, like the car industry, can make more inroads into Silicon Valley at the successful companies where many people have already made their money but it's going to be hard for them to get in on the ground floor and attract people building the next great companies.

Amazon's interesting experiment

On Amazon's homepage today we find this an announcement about incentives that turns working in positions that require low amounts of human capital and might not otherwise advance a person's career path such as a job in customer service into a way to acquire significantly more useful human capital:

So, for people who've been with us as little as three years, we're offering to pre-pay 95% of the cost of courses such as aircraft mechanics, computer-aided design, machine tool technologies, medical lab technologies, nursing, and many other fields.
The program is unusual. Unlike traditional tuition reimbursement programs, we exclusively fund education only in areas that are well-paying and in high demand according to sources like the U.S. Bureau of Labor Statistics, and we fund those areas regardless of whether those skills are relevant to a career at Amazon.

This makes a lot of sense. Amazon gets good employees for at least 3 years + the amount of time they are in school part time. At the end of that time period, their employees will be able to acquire significant human capital to increase their pay down the road. Making the employe pay for 5% of the cost means that only people who put some value in the education will sign up for it. It doesn't look like the United States will move towards an apprenticed based education system model like Germany anytime soon, but approaches like Amazon's are the next best thing.  It will be interesting to see how it works out.

Speaking of Police States

What is going on at the 2012 London Olympics is pretty ridiculous.

The government has told the courts they may wish to take particular account of anyone using two or more words from what it calls ‘List A’ — ‘Games’; ‘Two Thousand and Twelve’; ‘2012’; ‘twenty twelve’. The judges must also come down hard on a business or charity that takes a word from List A and conjoins it with one or more words from ‘List B’ — ‘Gold’; ‘Silver’; ‘Bronze’; ‘London’; ‘medals’; ‘sponsors’; ‘summer’. Common nouns are now private property.

London already has crazy libel laws so it isn't like they had freedom of speech in the first place but this is taking things to a new level.

Sponsors who are benefiting from this policy: Coca-Cola, McDonalds, GE, Acer, Atos, Dow, Omega, Panasonic, P&G, Samsung and Visa.

I'd suggest that people around the world think twice about whether they could conveniently patronize the competitors of these businesses instead of giving money to sponsors that are in favor of such draconian policies.