Category Archives: Non-fiction

“Houdini!!!” by Kenneth Silverman

 

Houdini (FYI – he didn’t really like the “Harry” and not even “Mr. Houdini” – just “Houdini”) was a remarkable figure.  “He achieved afterlife as a fabulous archetypal being.”  How did he get to this point?

Skill and dedication to his craft certainly played a part.  He gained fame initially as the “Handcuff King.”  He claimed to be able to get himself out of any pair of handcuffs that were in working condition.  How it did it is not always known.  But, certainly part of the trick involved substantial research – knowing the intricacies of the 20 or 30 most popular models of handcuffs in current use, and having the master keys or relevant lockpicks hidden somewhere on his person.   (For the famous “naked” escapes … there were some rubbery capsule-like objects found in Houdini’s effects that could hold a key or two and then be inserted into some bodily oriface…)  Then there were the “strange” cuffs which were one-offs or custom-made jobs.  For these, he often made a show of testing them out with the owner’s key, then swapping out their key with similar looking one. Or he would make sure the strange cuffs were put higher up the arm so they could be wiggled off easier.  Or, finally, there was always old-fashioned bribery in order to get a copy of the key or obtain similar help.

Besides skill, being an extreme publicity hound undoubtedly helped Houdini find lasting success.  Starting out America, he claimed to be famous all over Europe before he’d even been there; after building up a reputation in the States he did go to Europe and found great success in England and Germany; then when he got back to America he was a really big star.  One successful technique was to visit the local police station when arriving in a new city, and offering to test out there security by being locked up and put in a cell.  Invariably, he would invite members of the press to attend the event, and they would obligingly write up wonderful stories after Houdini freed himself from the best the city’s police could muster after only a few minutes (undoubtedly using some of the methods described above).  He was also famous for being suspended by a crane or from the tallest building in town a hundred feet in the air or more, upside down, and extricating himself from a straightjacket (lots of wiggling!) in just a few minutes.

Later, as he expanded beyond magic into other endeavors, his publicity-seeking gene remained alive and well.  He bought a second hand plane and learned to fly it shortly before a trip to Australia; he whole motivation to learning to fly was to be able to claim being the first to fly a plane on that continent.  (Apparently that claim is now not really recognized.)  He wrote a large number of articles, books, and short stories, but used unattributed ghost writers so extensively it is hard to tell what’s really his own work.

Finally, he ensured an air of mystery about his life because he never really revealed how he did all his tricks.  Unfortunately, the author of this book is also a magician and follows the “code” – he doesn’t  explain the tricks either!  Being curious, I looked up most of them.  There are some good Houdini-specific explanations I found, but the best overall “reveals” were Youtube excerpts from the show “Magic Secrets Revealed.”  (Apparently, the “masked magician” from this show got a lot of heat, but justifies breaking the magician’s code for these tricks because they are so old and well-known anyway.)

Houdini was born as Ehrich (“Harry” comes from “Ehry”) Weiss in Hungary, to a Jewish rabbi father.  The family emigrated to the US when he was a child, but Mayer Weiss struggled to find steady work and provide for large family.  Houdini grew up in poverty.  But, apparently it was a loving childhood – he always respected his father and felt like he got a raw deal; and Houdini had an almost reverential affection for his mother.  Her death really depressed him for the rest of his life, and when he himself died, per his own request Houdini’s burial pillow was a stack of letters his mother had written.

That said, this book didn’t contain a whole lot of info on his childhood.  The story pretty much starts with him doing magic shows at cheap “dime museums” (aka freak shows). How did he get there? What made him want to be a magician?  Unanswered questions…

Houdini was always interested in magic history and used his fortune to build up a formidable collection of texts and artifacts.  While on tour around the world, he looked up and visited with elderly magicians of yesteryear.  One touching story in the book is about his visit to Wiljalba Frikell in Germany.  The aged Frikell was very excited anticipating the visit — but he died the same day Houdini was slated to arrive.  Houdini “retained all his life a small scrap of paper found in Frikell’s dress suit, on which the revolutionary magician had written his last words, in pencil, illegibly.”

This sentence may be a linguistic paradox: As a magician, Houdini knew that magic wasn’t real.  (After being impressed with one of his shows, Theodore Roosevelt asked Houdini whether there really was something supernatural about it all.  “No Colonel – it’s just hocus pocus.”)  Trained magicians like Houdini were well positioned to recognize the fraud of the popular Spiritualist movement, in which mediums claimed communication with dead spirits.   However, most hesitated to speak out, since the mediums’ tricks were often the same as their own: “such exposés came perilously near violating the cardinal rule of magic: Don’t Expose.”

Houdini, however, was famous enough to make a stand without worrying too much about incurring the wrath of his fellows (he was president of the Society of American Magicians, after all).   He was famously intransigent as a member of the Scientific American committee investigating the claims of “Margary“, when the committee was nearly convinced of the veracity of her paranormal claims.  Houdini quickly saw through her shams but nonetheless struggled to convince his academic colleagues.  “Men like <them> are menaces to mankind, because laymen believe them to be as intellectual in all fields as they are in their own particular one.”

Houdini’s death from appendicitis and subsequent infection was sudden, as often the case in a world before antibiotics.  It does seem like an overconfidence in his invincibility, and a failure to heed warning signs about his own health, sadly contributed to his demise.

All-in-all, it seems Houdini lived a genuine and a happy life.  I liked the little anecdote in the book’s appendix by one of his nieces — when she was 4 or 5, she would jump into Houdini’s bed in the mornings.  They would both have their arms outside the covers, but something would start pinching her legs!  Houdini’s dexterous toes were undoubtedly another factor, whether natural or practiced, which contributed to his escapes.

 

“Trading in the Zone” by Mark Douglas

This is a book on trading psychology.  Too many traders are governed by emotion (both good, like euphoria and a feeling of invincibility; and bad, like fear and greed) which prevent them from being consistent winners.  The key is to look at trading objectively, from a probability standpoint.  You must accept that the probability of a win is never 100%.

Fear manifests itself when we, either consciously or subconsciously, avoid information which would “prove us wrong.”  Eg. we avoid positive news about a market you already exited (because you would have to admit you exited too soon) or we avoid negative news about a current trade (especially one that’s already a loser that we hope will “bounce back” soon).

Consistent winning can be problem too, if we get a “can’t lose” attitude and become reckless with larger and larger trades.

There is always going to be uncertainty.  The key is to find a strategy that gives an edge, and then don’t worry if it sometimes is a loser – account for that.  Before every trade, predefine: risk (probabilities of up/down), loss-cutting point, profit-taking point.  Don’t emotionally consider recent wins or losses.  Over and over again trade when you see your edge (only risking some predetermined, small percentage of your equity) and don’t worry when you sometimes lose; just make sure your edge wins on average.  Sounds like he is advising traders to be like an automated algorithm!

But … (the big but) how do you find an edge???  He doesn’t really go into that at all; it seems his intended audience are technical analysts who already have an edge but fail to use it consistently.  For those without, well… find one with quantopian?

I like his approach to “scaling out” profits.  He reports noticing that 1 in 10 trades go down and hit his initial stop immediately.  Another 2-3 in 10 go up a few ticks but then go down to the stop.  What to do = scale out of trade gradually.  When up a few ticks, sell 1/3 of position.  At some other predefined rise (something higher than a few ticks), sell another 1/3 and reset your stop on the remaining 1/3 to your entry position.  Now you have already captured some profit and have a “risk-free” position to see how it turns out.

 

“Carrying the Fire” by Michael Collins

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Michael Collins, most famous as the third man in the Apollo 11 crew along with Armstrong and Aldrin, is a very gifted writer.  This account of his time as an astronaut – six years and two space flights, Gemini 10 and Apollo 11 – was a joy to read.  Collins seems very down-to-earth and doesn’t take himself too seriously.  Lots of good humor and great storytelling here, along with some very candid impressions and recollections of his fellow astronauts, the training process, and the events of his two space missions.

As I am realizing happens with most men who achieve “greatness,” Collins didn’t set out to particularly do any “great” thing, much less go to the moon.  Rather, he was an intelligent, capable individual who took opportunities as they came.  Collins went first to West Point, then into the Air Force as a pilot, then an experimental test pilot, and finally to the astronaut corps.  Even his assignment to Apollo 11 was somewhat of a fluke; he was originally slated to fly Apollo 8 (which admittedly would have also been a pretty big deal) but had to have neck surgery and was bumped to 11.

There are some funny stories about the astronaut jungle and desert survival training, ostensibly required in case of a landing in some remote area.  Most of the astronauts laughed off this chance; however contingency planning was a hallmark of NASA in these early days.  Much of it was never needed, but Collins agrees it was time and money well spent.  For example, the consideration of using the LM as survival craft was already well documented prior to Apollo 13.

Surprisingly for a pressure suit expert, and as a Gemini EVA veteran, Collins admits to some claustrophobia during certain suit tests, but of course never reported it for fear of being grounded.  Everything ended up just fine during his EVA, but it made me wonder … what other dangerous conditions did other astronauts conceal for fear of losing their chance at glory?  (This is one of those process-breaking things that occur when humans get involved … we are not always dispassionate creatures of logic.)

During a down moment as CAPCOM for Apollo 8, Collins relayed a question from his son to the crew enroute to the moon: “Who’s driving, is it Mr. Borman?” Answer: “Nope, Isaac Newton is driving now.”  It really is incredible how Apollo was shot to the moon – 250,000 miles and three days out, towards a spot ~40 deg away from the moon’s position at launch – and then hitting within 60 miles or so.

As also reported in “First Man”, the Apollo 11 crew didn’t seem to be very close or communicate much beyond the technical.  Collins also reports the same “distance” with John Young during Gemini 10.  Maybe there was just so much going on that there was little time or brainspace to spare for non-technical matters?

The crew knew that Apollo 11 was going to be a big deal and expected a certain amount of fanfare upon their return, but none of them could have predicted what the never-ending fame (including being asked “What was it really like up there?” approximately one million times) would actually be like.  For three introverted engineers, dealing with fame was not always enjoyable.  Furthermore, nothing in life ever really seemed to come close to the challenge or fulfillment that came from making the moon shot.  I guess that nothing on earth can really compare once you’ve already done the impossible.  But I suppose that, among all hardships, this is not the most terrible one to experience.  Also, it really put some problems in perspective – hard to be terribly concerned with issues where lives are not on the line, and also some of planet Earth’s squabbles and feuds seem so small when you can view the whole Earth as a tiny ball outside a single viewport of your spacecraft.  On the other hand, even the great honors of the Earth that were bestowed on the crew don’t seem like much — “through it all, the earth continues to turn on its axis …. I am less impressed by my own disturbance to that serene motion, or by that of my fellow man.”

The crew also returned to a pivotal moment in the future of manned space flight, as the voices in opposition to the vast sums being spent on such endeavors where becoming loud indeed.  Collins’ book was published in 1974 and it is clear he and NASA were at least by then very much on the defensive.  I think he and many in Apollo would be surprised that we still as of 2017 haven’t sent a man to Mars yet — it seemed like the next logical step.

Nearly fifty years too late, but let me say, “Great job, Mike!”  And also to the other astronauts and literally thousands of others who made it all happen.  Apollo is a story which will inspire humanity through the ages.

“How to Make Money in Stocks” by William J. O’Neil

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William O’Neil is the famous founder of Investor’s Business Daily (ironically now printed only weekly) and seems to deserve his reputation as a pro stock picker.  He shares his secrets in this book (along with plenty of plugging for IBD products…).  He outright refutes the concept of a “random walk” (throwing darts directly at Malkiel?), claiming it is definitely possible to beat the market.

CAN SLIM is O’Neil’s stock picking system (it’s not a weight loss system as the name may imply):

  • C – Current earnings per share >20% higher than same quarter one year ago. Also check that sales are increasing over the last three quarters.
  • A – Annual earnings per share growth of 25 – 50% over past 3 years. Also look for high ROE.
  • N – positive News. Don’t be afraid to buy a stock making new highs. Don’t worry about P/E ratio at all. Focus on newer companies (<10 years since IPO).
  • S – prefer companies with smaller number of outstanding Shares – easier to budge price.
  • L – (Leaders vs. Laggards) DON’T buy stock which has retreated to the point it looks like a bargain – too much risk it will keep falling. Buy when going up and hope it keeps going higher. Look for breakout after 7-8 weeks of stable base. Look for high, increasing relative strength. Average up if you must (when your pick is up a few %) but never average down.
  • I – look for increasing Institutional sponsorship, especially from high performing mutual funds.
  • M – sign of Market top: “distribution day” (distribution as in “selling”) – major indices flat or down on increased volume from previous day, occurring on 4-5 days in 4-5 week period.  When a bear market is detected, get into cash fast.  Then wait for the signs of a bull market before jumping back in: look for an up day, followed within 4-7 days by a “follow-through” day of very large gains (~2%) on heavier volume than the preceding day.

After all that…O’Neil admits that only 10 – 20% of his picks have ever turned out to be real winners. So, the savvy investor must be aggressive about limiting losses. Always cut and run if stock goes down 7-8%.  Think of it like insurance.  A variant that yields same results but is maybe easier to swallow: sell half at -5%, other half at -10%.  Given that expected gains on remaining winners are 20-25% you’ll still come out ahead if you can pick winners only 1/3 of the time.  If you must invest during a bear market (not recommended), lower your acceptable loss to 3% and profit taking to 15%.

Other sell signs (some confusing and contradictory – maybe why the aforementioned 20% rule exists):

  • largest daily gain or loss occurring after many days of solid gains
  • heavy volume with no price change or loss
  • rapid price run-up for 7-8 days out of 10
  • 4-5 down days for every 2-3 up days (whereas it had been the reverse)
  • new high on lower volume
  • close at day’s low for several days
  • 8% decline from peak
  • major publicity with good news
  • overabundance of optimism
  • deceleration in quarterly earnings increases for two quarters in a row

Don’t buy stocks <$15. O’Neil recommends holding no more than 5 stocks, since timing is important and monitoring multiple holdings may cause you to miss something important. Don’ be afraid to use margin once you are comfortable with the system and are seeing success.

Biggest mistakes: stubbornly holding on to losses for too long, buying on the way down, and not sticking to rules!

Research winning companies/industries to find opportunities in supplier companies – eg. Monogram, maker of chemical toilets for Boeing during airline boom.

There’s a lot of technical analysis charting discussed in the book, primarily focused on the perfect buy point.  I didn’t spend too much time squinting at the charts – seems like there are plenty of points on the charts which meet the cup-and-handle or stable base criteria but did NOT turn out to be a perfect buy point.  Anyway, cup-and-handle with large volume increase on the handle seems to be the recommended buy point.  Basically looking for a point where price and volume steadily drops for a time, then slowly picks back up until a large volume, large increase day.  (Only buy solid CAN SLIM companies – not just anything which meets the technical pattern!)

I plan to test out a few things from this book on Quantopian, particularly the market direction signals.  Even if you could just time the market and jump into and out of index funds at the appropriate time you would end up miles ahead.

“First Man” by James R. Hansen

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Listened to the audio book.  My impression of Neil is that he was a fine engineer – slightly socially distant and awkward as all good engineers are – and a hard worker intent on completing the job at hand, but very uncomfortable with his unasked-for celebrity status after being the first man to walk on the moon.

In his pre-astronaut days, Neil took pilot lessons of his own initiative at a very early age.  He became one of the youngest fighter pilots in Korea.  Then he took a job with NASA testing the X-15 at Edwards AFB.  When he applied to be in the second group of astronauts, it was almost like the eligibility requirements had been written just for him.  Tragically, just before applying to be an astronaut his 2-year old daughter Karen died.

His first space mission, Gemini 8, was more important than typically remembered, overshadowed as it was by later Apollo 11.  Gemini 8 was the first time two spacecraft docked in orbit.

As for Apollo 11, the lunar landing itself was the real pinnacle of achievement for Neil, not stepping foot on the moon.  The more I learn about Apollo, the more in awe I am at this great engineering achievement.  I wish there was something comparable going on today.

I never knew that Buzz took no pictures of Neil on moon’s surface.  Apparently he just didn’t think about it at the time.  Neil took plenty of Buzz when he was behind the camera.  There’s some who think there might have been some lingering jealously on Buzz’s part, since early on it was thought he might be the first man, but despite (or maybe because of?) some lobbying on his part, the honor was given to mission commander Armstrong (who never sought it).

After the mission, life was never quite the same.  Armstrong easily could have given in to being a “professional celebrity” full-time (and he did do many things to help worthy causes with his notoriety) but he just wanted to keep on being an engineer.  That never really was possible; the myth and legend surrounding him was just too great.  He never sought the limelight and was uncomfortable with constant attention.  Ironically, this relutance may have driven up his public fame “scarcity” and thus drove even more extreme behavior from fans.

Many people tried to “cash in” on even loose associations with Armstrong.  Lots of people from his hometown told blatantly false stories – one in particular stuck in my mind: a local amateur astronomer told the media about how Neil came on a Scouting activity to look through his telescopes and then frequently came to observe the moon and wonder if man would ever go there.  Sounds great, but … not true.

I didn’t know that Neil’s wife Janet left him in the 1990’s.  Apparently, she thought life would calm down after their children grew up and left home, but Neil just kept on going with his many corporate board activities, leaving little time for her.  Also living on a working farm probably didn’t help matters.  Why in the world did they move to a working farm?  That seemed a bit much for him being gone all the time, thus leaving a lot of work on Janet’s plate.  …. doing a little psychoanalyzing here: maybe he was thinking he could get away from the publicity and all by “retiring” to a more pastoral way of life.

“The Wright Brothers” by David McCullough

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I liked McCullough’s account of the Wright brothers a lot, but fact-wise did not get too much out of it since all of this ground had been covered in my previously-read To Conquer The Air.

One new facet that struck me on this reading of the story is how determined Wilbur was to not fly until everything was ready, no matter what/who was pressuring them.  Multiple times in France and later famously at Ft. Myers near Washington, DC, many thousands of onlookers, dignitaries, and even royalty gathered hoping to see a flight, only to wait all day and be disappointed when Wilbur judged the weather or the airplane not quite right yet.  The mechanics assigned to help Wilbur with the Flyer in Le Mans were amazed how he insisted on inspecting and doing much of the work himself.  Very high standards in this regard led to a remarkable safety record for the Wrights.  The one major accident, where Orville crashed and Lt. Selfridge was killed, took place while Wilbur was away in France…I wonder if Orville let the crowds pressure him more than Wilbur did, and thus he failed to notice a crack or weakening of the propeller which eventually broke in mid-air.

Once again, I am amazed how nobody believed that they were really flying despite numerous eyewitnesses at Huffman Prairie.  I guess it gave all the more wonder and glory when they finally showed the world nearly simultaneously at Le Mans in France (Wilbur) and Ft. Myers in the US (Orville).

I think it would be fun to do a Wright Brothers-focused tour someday – Dayton, Kitty Hawk, Ft. Myers, maybe New York; then Le Mans and Pau in France followed perhaps by Rome and Berlin.

Wilbur’s early death at age 45 in 1912 from typhoid fever is sad … but at the same time, it seemed like his work was complete – the world knew flight was possible and the new age of aviation had begun – and thus the main actor freely exited stage left with characteristic humility.

“One Up on Wall Street” by Peter Lynch

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Peter Lynch is famous for heading up the Fidelity Magellan fund during the eighties, when he averaged +29% annual returns.  Just lucky?  Maybe!  But in this book he shares his secrets of stock picking anyway.  He is a fundamentalist, long stock only investor – serious about buying pieces of good companies at deal prices, betting that the market will eventually realize what gems the companies really are.  The specific examples in the book are quite dated, but the principles hopefully are sound.

  • First, a knock against index funds.  Lynch says that the index funds’ gains are usually propped up by a small number of stocks in the index. I wonder if this is still true?  He says to look at the advance/decline numbers (number of stocks rising vs those falling) and you can see this.
  • “To me, an investment is simply a gamble in which you’ve managed to tilt the odds in your favor.”  Lynch puts his success ratio at around 60%, but some of these were “tenbaggers” (increased 10x in stock price) or better.  The trick is to realize companies which are in a good position before the market at large realizes it too.  Because when it does, that is when stocks shoot up.  He even goes as far as to recommend dull-sounding companies in dull industries, which have little or no institutional ownership or analyst coverage.
  • Be aware of companies growing – new products or entering new markets.  Put these companies on radar screen, then check fundamentals next.
  • Search for companies or industries with large earnings growth as % of market
  • Slow growers, medium growth, fast growth, cyclical (vulnerable in recession), turnaround, asset plays (holds assets land etc which aren’t yet reflected in share price).  Important for knowing how much profit to take.  Slow – moves @ GDP growth, medium – 25%/yr, fast – sky’s the limit.
  •  Simplicity is a virtue: “When somebody says, ‘Any idiot could run this joint,’ that’s a plus as far as I’m concerned, because sooner or later any idiot probably is going to be running it.”
  • Insider buying is a strong indicator that things are looking up.  Many reasons for selling but only one for buying – believe stock is going up
  • Prefer companies that buyback stock rather than make dubious acquisitions.  (“diworseification”)
  • Don’t buy anything without earnings.
  • Don’t buy company too dependent on a single customer
  • Use p/e to classify companies – higher p/e than average indicates sentiment of faster earnings growth
  • Increase Earnings – reduce costs, raise prices, expand to new markets, sell more in old markets, revitalize or sell losing operation
  • Balance sheet: (cash + marketable securities – long term debt) / total shares outstanding =  available cash per share.  If available cash per share is close to the share price, then the stock is probably a great deal.  (Don’t count other “assets” since their stated book value is probably much higher than they could ever be sold off for). Also check balance sheet for: decreasing debt, decreasing # of shares, increasing cash.  P/e should be roughly equal to earnings growth rate.  If lower p/e than % earnings growth, good.  Also compare long term debt to total stockholder equity.  Want equity >> debt to ensure low bankruptcy risk.
  • Three phases: startup, expansion, saturation.  Want to get stocks out of risky startup phase but still in expansion.
  • Make yourself write short paragraph on each buy decision – what is the compelling story that is making you buy this company?
  • Don’t sell when stock goes up or down some set percentage; sell if you think the company’s “story” has changed.  Simple sell test – “Would I buy this stock again right now?” (per all the rules) If not, sell.
  • Some typical “story-changers” that indicate it is time to sell: no insider buying during past year, slowing earnings growth rate, p/e much higher (50%) than industry average
  • “It can’t possibly go lower!”. Oh yes it can.  Beware stocks in free fall.
  • Don’t mess with options or futures.  Ought to be outlawed.  Very expensive since they expire; you don’t own the companies.

“How to Fail at Almost Everything and Still Win Big” by Scott Adams

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Scott Adams, the creator of Dilbert and a vigorous blogger, shares some of the secrets to his success – and they are actually ones you can use.  I think a lot of times when we look at how successful people achieved great things, it is hard to say whether their actions really did cause their success, or if they were just lucky.  A bit of survivorship bias, since we don’t examine the much greater multitude of people who tried and failed nearly as much.

Adams’ success tips are shared around the story of his overcoming spasmodic dysphonia – his brain basically “forgot” how to control his vocal chords.  Quite a rare condition.

Here’s the main points I got from the book:

  • “Goals are for losers.  Systems are for winners.”  When we make goals (eg. lose 20 lbs), we are in a constant state of failure, which is demoralizing, until we (maybe) achieve the goal.  Then we are left rudderless and often revert back to our prior state.  Instead, we should develop systems (eg. exercise everyday and never eat fast food).
    • Furthermore, everyone has only a limited willpower pool so we must set up our systems such that we aren’t forcing ourselves to “go along” – need to make healthy and good choices fun and rewarding in their own right.
      • I like the idea of using our own laziness in our favor.  I might copy his example of keeping a bunch of healthy snacks on hand, prepped and ready (carrot sticks and celery in water, berries, apples, bananas, peanuts) so I go for them rather than other unhealthy snacks.
    • Another system – always be looking for your next, better job.
  • Make choices that maximize your personal energy.  Especially good diet and exercise.  Get your health right, acquire key skills, obtain a flexible schedule = happiness.
  • Learn from failures.  Before going into a new venture, make sure it would at least provide new learning or connections, even if it fails completely.
  • Look for patterns of success and try them out on yourself.
  • Every new skill you learn doubles your chance of overall success.  Good + good in two complementary skills >> excellent in just one.
    • Public speaking
    • Business writing
    • Psychology of persuasion
    • Social skills
      • I like the idea of the “conversation stack” Adams shared from the Dale Carnegie school.  To make small talk with strangers, start with these questions and keep going until you hit something mutually interesting to talk about.
        • “What’s your name?”
        • “Are you from around here?”
        • “Do you have a family?”
        • “What do you do for a living?”
        • “Do you travel much?”
        • “Do you have any hobbies?”
      • Another nice conversation hack: “Is there anything you can do for me?”
    • Voice technique
    • Basic accounting
  • Sometimes you just need to be lucky.  But you should always set yourself up to take advantage of opportunities when they come.

“41: A Portrait of My Father” by George W. Bush

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In the intro, George W. writes that he heard David Mccollough lament that John Quincy Adams never wrote a bio of his father.  So George W. sets out to rectify that here.  It’s a pretty personal account of George H.W.’s life.  Kind of funny how W. brings up parallels to his own presidency time and again – very different from a typical bio where the author keeps out of it.

George H. W. Bush is a great example of leadership and decency that I wish we had more of in our country today.

A few stories from the book stick in my mind.  As a torpedo bomber pilot in the Navy, Bush was on a mission to attack Chichi Jima when his plane was hit by flak.  He managed to bailout, but got injured in the process.  Luckily some other plane dropped a raft and he madly paddled away from the nearby island.  Some Japanese ships tried to get at him, but they backed off after being strafed by other Navy planes.  Finally, a US submarine rescued Bush.  Some of the Japanese later said how they marveled at all those resources being directed to save a single pilot.

Second is the tragedy of losing daughter Robin at age 3 to leukemia.  I can’t imagine how this must make a parent feel.

Finally, there is the pain of loss in 1992.  George seems to have a bit of a grudge against Ross Perot even now – the split vote was probably the reason for Bush’s loss.

“A Random Walk Down Wall Street” by Burton G. Malkiel

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Here’s the secret to making money in the stock market: buy low-cost index funds which cover the whole market.  There, not so hard, right?  Burton Malkiel has been espousing this for 40 years, when the first edition of this book was published and index funds didn’t even exist yet.  The data, as he presents in the book, shows him out well.  Sure, some years some active fund managers score big, but they are no more likely than any other manager to outperform the market the following year(s).  The only consistent winner is a properly-weighted portfolio of index funds.

That said, Malkiel gives lots of bits of advice on manual methods of picking stocks.  After all, if you see a $100 bill on the street, don’t be like the finance professor who said “it must not be real; otherwise someone would have already picked it up.”  Really you should respond “I must pick it up quickly, otherwise someone else will come and pick it up very soon.”  There still are market inefficiencies to be exploited … it is just very hard to do so consistently.  Keep your core in index funds, but keep a small pool of funds ready to pick up the $100 bills when you find them…

Stock Picking

As far as stock picking goes, Malkiel sees all technical indicators as junk.  Well, besides maybe some short term value to a relative strength strategy.  But…if any indicator really did work well, the discoverer is surely not telling anyone about it.  Too many people doing the same thing would change the market dynamics such that the indicator no longer works.

Fundamental analysis doesn’t bear much fruit either.  And we must avoid bubbles, even though they are hard to spot.  Here’s a tip: be very wary of buying into something touted as “the future” if it isn’t making solid profits now.

Malkiel does give a “secret formula” for picking stocks late in the book:  Long-run equity return = Initial dividend yield + growth rate (of earnings and dividends combined).  The trick is knowing what the expected growth rate will be.  The typical stand-in here is the P/E ratio — if it is high, then this (might) signify the expectation of growth.  But then again, value investors like to buy low P/E stocks…

There is a pretty strong correlation of overall market P/E ratio to forthcoming returns.  The lower the P/E ratio of the market, the higher the returns.  Based on historical data, a market P/E ratio of < 10.6 has yielded on average 16.4% returns over the next decade while a P/E ratio of > 25.1 yields on average 3.7% returns over the next decade.  The returns vs. P/E curve is generally linear between these two points.  (Malkiel’s chart on pg. 347)  As of this writing, current market P/E is 24.89…we are unfortunately in for a decade or so of single digit returns.  (Note: MMM has this point covered as well.)

Smart Beta

There are a couple of strategies that Malkiel mentions may have some potential to beating the market.  Maybe.  (He’s is oh so careful about admitting that anything could ever beat the market long-term!)

1) Value wins.  Tilt towards low price-earnings ratios.  VVIAX

2) Tilt towards smaller cap companies – they have more room to grow.  (IWM – Russell 2000; or IWN, DFSVX – combo of 1 & 2)

3) Momentum and reversion to the mean (AMOMX)

4) Low volatility bought on margin (SPLV)

And a final bit of advice: buy closed-end funds which are selling at discount vs NAV.  The WSJ maintains a listing where they already have the discount computed.

Diversification

There’s a chart on almost the final page of the book which kind of blew me away.  The 2000’s decade is called the “lost decade” because overall market returns ended up pretty much where they started.  But … a diversified portfolio of 5 different funds (using the “age 55” mix), rather than just total market, was up ~100%.

diversification

(Note: Malkiel gives the exact same weights for International and Emerging Markets, so on this plot they are right on top of each other.)

In an individual stock portfolio, diversification is also very important in lowering risk.  The beneficial effect seems to diminish after about 50 stocks or so.  Should also make sure to get about 20% exposure to international stocks.