Why I Love This Time of Year – Happy New Year 2012

“A Morning Wish” by W. R. Hunt

The sun is just rising on the morning of another day, the first day of the new year. What can I wish that this day, that this year, may bring to me?

Nothing that shall make the world of others poorer, nothing at the expense of others; but just those few things which in their coming do not stop with me but touch me rather, as they pass and gather strength:

• A few friends who understand me, and yet remain my friends.
• A work to do which has real value without which the world would feel the poorer.
• A return for such work small enough not to tax unduly anyone who pays.
• A mind unafraid to travel, even though the trail be not blazed.
• An understanding heart.
• A sight of the eternal hills and unbelting sea, and of something beautiful the individual hand has made.
• A sense of humor and the power to laugh.
• A little leisure with nothing to do.
• A few moments of quiet, silent meditation. The sense of the presence of God.
• And the patience to wait for the coming of these things, with the wisdom to know them when they come.

It’s a new day, it’s a new year! In the blink of an eye, we watched 2011 disappear into the distant memories, and welcomed a brand new year, 2012.

Once again, I got to wondering what it was about this change each year that makes us all behave so differently? Indeed, it’s not just the one day. Starting in November and well through the middle of January each year I notice people around me, and even in myself, a kind of reflective, thoughtful, generous sense that is not there through the rest of the year (maybe for short spurts, but not as thoroughly).

Maybe it’s because Thanksgiving is celebrated in late-November in the USA. While it was originally a celebration of the harvest and a time to rejoice after much hard work, it has become more broadly a special time for families and friends to get together to give thanks for the many blessings we have received. And it’s always a festive occasion!

Or maybe it’s because our Jewish friends celebrate Hanukkah, during which 8 days of lighting the Menorah, they give thanks and praises for miracles, wonders and salvation! Truly a blessed occasion.

Or maybe it’s because on December 2nd, 2011, we watched the youthful UAE celebrate it’s 40th national day with such pride and vigor. The events celebrated independence from the United Kingdom and the eventual formation of the union that is today the UAE. And, is it ever invigorating and refreshing as we had the honor of participating in the 40 days of celebration. Visionary leadership, pride in the history and culture, and a passion for redefining what it means to be a modern Arab nation were all on display. It’s really inspiring to see what can be achieved in a short time as the UAE has in just a short 40 years!

Or, maybe it’s still inspiring that we celebrate some 2000 years later, the birth of a baby Jesus. The exact date of his birth is no longer meaningful, but the life and death of Jesus has made such dramatic changes to the course of civilization (both good, and in cases due to perversion of his beliefs also bad). Christmas time has grown over the years to be another occasion to reflect on blessings, to spend time with friends and family to celebrate what can be achieved, to give gifts and generally to show care. It’s truly a beautiful occasion that so energize the kids, whose enthusiasm has to be infectious to every adult. I have to admit each year looking forward to opening my christmas gifts.

Maybe it’s just as simple as the clock and calendar change that naturally occurs as one year fades and another starts. The amazing thing is that it happens each year, and each year it brings an opportunity to wipe the slate clean on the past, and look forward hopefully to the future (the new year). New resolutions, and the belief that we can start over, achieve more, reach farther, is truly infectious and real. I know that every year on January 1, I feel like a new person.

Maybe it’s the smart commercial mavens who have figured out how to market to us so that we end up buying more cards, gift wraps, candies and assorted gifts than any other time of the year. Despite the truly commercial aspects of the season, true meaning still comes out, and as a student of economics, I am still awed by the power of demand consumption as an engine for growth. So, any excuse to be generous and spend can’t be all that bad if it helps drive commercial growth and economic independence around the world.

Or, maybe it’s just that a guy like me needs an excuse each year to reach out to old friends to say I am sorry we have not been in touch more frequently during the year. Thank you for being a good friend and for the part you had to play in shaping my history.

Whatever it is, it does not matter where the inspiration comes from, and I think in fact it is all of the above, it’s a fabulous time to pause and take a deep breath, reach out, be generous, be appreciative, be hopeful and plan for even greater successes. I know that I have been blessed with incredible experiences, wonderful friends and beautiful family. It’s hard not to look at the world and be awed by the possibilities, especially when looking back at where we have come from.

Let’s pledge to make 2012 the best year yet, and I hope that many years from now, we will look back and see that 2011 was the lowest point of a series of successful adventures that followed. Happy New Year!

Why you are likely to lose money if you follow some market analysts!

There are legions of websites, blogs, newsletters and firms peddling advice on how to trade or invest better in the stock market. They are driven by fundamental analysts, stock chart technicians, behavioral analysts and a variety of others who routinely look to the past, or build models of the future, on which basis they profess some insight on the probability that their chosen investment will either go up or down. They are hard to find, but some of these are quite logical, grounded analysis and worthy of paying attention to. Yet another group sound like astrologists, not making sense, or making promises that are too good to be true. These are the easy ones to avoid. The most difficult group are those that sound quite informed and use rational analysis yet reached flawed conclusions. This latter group will make you lose money, if you confidently follow their approach or advice.
Let me give you an example of this kind of analysis:

The author of this blog has identified that this year, the day before Thanksgiving was a losing day. He then conducts an analysis to to see when that happened historically and what the market did on the following trading day. He finds 10 occasions where the day before Thanksgiving was lower, and 3 of those 10 times, the following day the market was also lower, while 7 of the 10 times, the following day the market was higher. One would surmise therefore that there is a bullish bias that this next day upcoming should also be up. After all, 7 of the 10 times when this happened in the past, the market was up the following day. He also indicates that fridays after Thanksgiving historically, not just the ones that follow a down day, have been bullish. Moreover, he circles the two instance where the day before Thanksgiving was lower by more than 1% (which occurred this year), and those suggest that the following day could be very good winners.

The analysis shows that on average, the down days were down by 0.64%, while the up days gained 0.81%. And because there were more up days than down days, the average of all the occurrences was a positive 0.35%. This 0.35% positive return is a good tradable return from a statistical expectancy point of view. But is that the right way to look at this data?

I think not. Let me use an analogy to explore the concept. Suppose you were in the business of flipping coins (the market going up or down each day is equivalent to flipping a coin since it rarely stays the same, which would be equivalent to a coin landing on the edge). And suppose I told you that on reviewing your previous pattern of coin flips, we found there were 10 days on which you had flipped 5 consecutive heads. Further that when we reviewed what happened afterwards that 7 of the 10 times after you had flipped 5 consecutive heads, on the following coin flip you also got heads, while only 3 were tails. Now we have just gone five days in a row where you have flipped 5 heads. Would you bet $2.00 to win $1.00 that the next flip is a heads? How about $1.25 to win $1.00? The pattern analysis suggests you should, if you think there is a 70% chance of winning $1.00 (flipping a head) while there is a 30% chance of losing $2.00. And if you are using that reasoning, then you should be much more amenable to the $1.25 bet. But my guess is that you probably won’t take either bet.

The instinctive answer is correct, even though the rationale many people give may not be. Most people, who did not pay attention to the statistics classes, say that after they have seen a streak of five heads that it is more likely that they will see a tails. Some might even be inclined to bet $1.25 to win $1.00 that the next flip is a tails. There is some real cognitive dissonance going on here, and it goes to show why people looking at statistical data or patterns might be misled. The essence of the problem is in figuring out the likelihood of your next flip being heads, or the market going up. And the simple answer is that it is equally likely that the next coin flip will be a heads or a tails (unless of course the coin is weighted on one side more than the other). Similarly, the market is equally likely to go up the next session, as it is to go down.

So what is the likelihood that the market would be up on the day after thanksgiving when it was down the day before? 50%! And what happens to this fine analysis when we look at the expected results based on those probabilities? We know that on average it was down .64% on the losing days and up .81% on the winning days. Therefore, one might surmise that, on average, there is a 50% chance we could be up .81%, and a 50% chance we might be down .64%. The resulting expectancy is .08% up. This is an expectancy so negligible, it might not even pay for the commissions, and certainly is not trade-able.

But, that chart above, and the analysis was so compelling with so many positives and so few negatives. Just as compelling as those five heads in a row pattern should have been to you. Analysis of the past make you more or less confident about rolling a heads next time, when they should not. If the market goes up today, it will be by chance and rarely will it have anything to do with what happened yesterday or two days ago!

Why was the iPhone delayed from the typical June refresh?

Much has been written about the next version of iPhone, that was not launched in the typical Apple June refresh. Most of the articles written have been rumors and speculation about what the new phone will look like or what technology will be included. I call this the “what” stories. They include stories that evaluate purported component changes or screen saver manufacturer design changes to conjure up new apple specs such as bigger home button, different screen sizes, etc. In the meantime, the more important question (at least from an investor standpoint) goes unaddressed.

Why was the iPhone delayed?

Was the delay driven by a series of tactical circumstances, or reflective of a deeper strategic perspective at play? Let’s examine the possibilities and try to reach a conclusion about the most likely reasoning. For the reasoning will make a big difference in what we think will happen to the competitive landscape post launch.

On the tactical front, we may attribute the delay to unforeseen development or supply chain caused issues. In essence, the design was not done, or some key component was not available or quite ready for prime time. Or, the software changes they were making were harder than anticipated, and so they bought time (since IOS 5 was already announced as being available in October). With Apple it is hard to know exactly if this is the case because they never set expectations on when things are supposed to happen (except when they are ready to get it out the door, and pretty assured it will get out). They have been less guilty of “vaporware” announcements than many other competitors in the consumer technology landscape.

It is plausible that the delay was entirely tactical, but my view is that it was not. My hypothesis is that the delay was strategic, it was deliberate. And, my belief is that Apple has delayed the new phone launch to inflict pain, to expand it’s lead, and to drive a stake into the competition. Let me explain why I think so.

Apple is the “thinking” company. They have a long view, learn fast and make tough decisions that create advantages, that are rarely understood by competitors. Take for example the decision not to include a keyboard on the iPhone (remember Microsoft, Nokia and RImm reaction?), or the exclusion of flash (Microsoft just announced Windows 8 will not have a flash plug-in, in contrast to the entire industry reaction when this announcement was first made). So what lessons do we know apple has learned?

1. Unlike competitors, Apple did not need to deliver a new model in June. Amazingly, even though it’s competitors churn out new models more frequently, the iPhone 4 which is over a year old, continues to outsell the competition and gain market share as a device. The buzz continues to grow, and even rumors of a new iPhone has not been much of a damper on demand for the current model (ancient is what the competition would like you to believe, but the market does not seem to agree). This meant Apple was at leisure to pick the timing of it’s next launch. That the timing would be such to have strategic value is a logical conclusion.
2. The iPad lesson is that a product with dramatically enhanced feature set, at a price point hard to match by the competition, is a killer combination. We have seen the carnage in the tablet market as Blackberry Playbook, and HP Touchpad have failed to gain any traction. At the same time, Samsung is having a tough time dealing with the multiple lawsuits around the world which keeps them from selling the Galaxy tablet.
3. There are dramatic advantages in Apple design and the ability for the supply chain to react flexibly. The fact is they have the most streamlined line-up of products on a global scale, from a supply chain perspective. They can achieve differentiation with software and much simpler changes of memory chip sizes, than the competitors who have multiple designs, internal electronics etc. So, the bet when Apple goes from one design to another is relatively safer and less costly than the competitors. For example, The Touchpad bet on launch required a commitment against some 500K devices, which if unsuccessful (as they were) cost a pretty penny. The supply chain bet for competitors to go up against Apple have been increased dramatically because of the scale of the bet. The Apple Samsung injunctions, for example, mean that Samsung might have products built or commitments made to technology that will likely have to be revised (or worse obsolete) by the time they are able to resume deliveries.
4. Timing matters. The competition have all been practicing “fast follower” strategies. Apple makes an announcement of a new product with a delivery some time in the future, and the competition scramble to deliver a near capable solution before Apple ships. HTC and Samsung were both able to do this on the original iPhone launch. Fortunately for Apple, the device alone is not the sum of its offering (a lesson that most of the competitors have not learned yet as they frequently focus on their better specs, appealing to the least profitable segments of the market). While the competition has gained market share (from Blackberry and non-smartphones), they have been far behind Apple in profit share.

So what happens if we put this all together and Apple delivers a killer product line up in the most critical selling season, with no reaction time for competitors? We know that the last quarter of the year is the biggest selling season. Supply chains gear up well n advance to provide holiday treats and goodies. Rest assured many new phones will be sold this year also. The question is which device will have all the buzz? If the new iPhone lineup has a combined world chip (GSM and CDMA), it’s scale could allow it to deliver a single design globally, perhaps at costs below what a competitor might be able to deliver just one of those of those technology standards. If they announce a new lineup with a short delay for shipment, say two weeks, that will not give competitors enough time to ramp up “fast follow” pre-emptive design and delivery. If they deliver in October, they will have the whole season for buzz to build. If a great competitor can follow say six weeks later (which would be a quite remarkable feat), they would be trying to launch in mid-November. This will make the bet extremely expensive and risky for any competitor. It will require extremely high volume commitments and occur at a time when supply chains are constrained. And, what happens if those devices don’t sell? Ask HP!

We will find out shortly what the new iPhone looks like, and may be able to infer the reasoning for the delayed launch. For now, I am betting that Apple will deliver a well thought out line-up which is deliberately timed to create a large iPad like competitive gap between the iPhone and it’s competition. What do you think?

Which Version Of Myself?

I was driving in my car the other day, listening to music piped from my iPod as usual. It’s set to shuffle so I always get a changing playlist. Suddenly a tune from David Byrne, an old favorite, came bursting into my consciousness. Now, for those of you too young to remember, David was the brilliant founding member of critically acclaimed “Talking Heads”. He is a pure artist know for his quirky sound, mind bending lyrics and collaborations with the likes of Twyla Tharp and Brian Eno. And, if you don’t know who they are, then I am afraid you missed a lot of the “New Age,” experimental sound and modern dance history.

Anyway, back to my story. So David in his classical style belts out the line: “I am just an advertisement for a version of myself”!

My head did not start hurting immediately, but I started to contemplate the meaning of this didactic. I had heard the song and these words before, but not really listened to and considered their meaning. I know that from birth till now, there were infinite versions of myself that could have emerged. Based on the way the cards were revealed, and how they were played, we got to a single existing version (me in the now). That is, unless you believe in parallel universes and alternate realities, in which case this whole experience would be moot. I thought a little about those alternative versions that could have emerged over the years. What would have happened had I gone to MIT instead of Indiana, had I taken the Goldman Sachs job in 1986 instead of McKinsey, and so on? Interesting infinite possibilities, but I had no regrets. The way the cards played out were good for me. I like this version of myself.

Starting from this point, with this version of myself, I see in front of me the infinity of possible versions of myself that could result. And it occurred to me that at the end of the day, the version that would exist would depend on how well I played the cards yet to be revealed. What version lies ahead? A great husband and father, a leader, a good mentor, a thinker, a change agent, a builder, a creator, a do-gooder? I hope all of the above could be captured in one version. And I realized Andy Andrews is right (he has written some great books and he makes a big deal about the choices we make). What I do the very next moment is profoundly part of playing the cards right because of its effect on which version will emerge.

What should I do next? I turned off the music, got out of the car and had a great presentation of our capabilities to a potential client. I know that this act does not sound so profound, but in the grand scheme of things, we are working on building a great sustainable business, and the card that came up right then and there was a client meeting. And, I played it with the best I had in that moment. Because I know that the best version of the future me will depend on me playing my best each step along the way. I figure I have always tried to give my interests my best shot, but a little reinforcement did not hurt. After all “If a thing is worth doing, it’s worth doing well”.

In writing this blog, I am taking advantage of another moment to raise a dialogue on choices we all make. Perhaps it will catch one of you at the right moment as you contemplate which version of yourself you want to create. Perhaps, like David says, you think you are an advertisement for a version of yourself. If you want to create a better version of yourself, then you can get there with better choices.

I am excited to see what version of myself, my family and my friends will play out. Should be exciting!

I need better advice!

I come to my advisors warts and all.

My first advisor points out all the warts that can be seen. I have learned nothing new.

The second advisor points out that some of my warts are ugly. I have not learned anything really new, but am now self-conscious.

The third advisor points out my visible and hidden warts. At least I have learned something new, but have not gotten closer to value.

A fourth advisor points out that some of my warts are deadly. Again I have learned something new, but am now scared out of my wits.

The fifth advisor points out visible and invisible warts, identifies those that make me look worse, and those that are deadly and leads me down a path of surgical removal and repair.

Why is it that in business or personal affairs, when we bring someone a proposal or come looking for advice we get one of the first four advisors? Why is it so rare for our advisors to not only diagnose, but recommend a corrective path? That is what a great advisor does.

To be really helpful, contribute a solution, don’t just point out what’s wrong!

Wow!

There are some images that have such an effect on you that the only thing you can do is say wow! How did the photographer get such an amazing image? What’s your reaction?

Follow the link to see more wow images of the World At Night!

Matt Ridley: Down With Doom

By then I had begun to notice that this terrible future was not all that bad. In fact every single one of the dooms I had been threatened with had proved either false or exaggerated. The population explosion was slowing down, famine had largely been conquered (except in war-torn tyrannies), India was exporting food, cancer rates were falling not rising (adjusted for age), the Sahel was greening, the climate was warming, oil was abundant, air pollution was falling fast, nuclear disarmament was proceeding apace, forests were thriving, sperm counts had not fallen. And above all, prosperity and freedom were advancing at the expense of poverty and tyranny.

[From Matt Ridley: Down with Doom: How the World Keeps Defying the Predictions of Pessimists]

Congratulations, we all survived another apocalypse. In case you missed it, religious radio broadcaster and preacher, Harold Camping, had predicted the end of the world today. Since this was supposed to occur at 6pm local time around the world, and it is now well past that time, it looks like we have escaped another media hyped prediction of catastrophe.

Bad news sells, and the media thrives on bizarre stories of gloom and doom. Who is Harold Camping? Why was his prediction heeded and got so much play? Not sure that these questions matter anyway. The reality we face is that the pessimists dominate the airwaves.

As an unabashed optimist, I was relieved to find the article linked above. Matt Ridley does a good job of probing the question of why we are surrounded by those predicting our imminent demise, rather than recognizing the amazing progress of society. Stop and think for a moment about how fast the world is changing around us. Think about how much more advanced we are, how much more informed we are, how much healthier we are, and you will realize there is indeed a lot to celebrate!

Now back to worrying about the May 12, 2012, the end-date of a 5,125-year-long cycle in the Mayan Mesoamerican long calendar, and the next predicted dooms day. That is assuming we don’t get another prediction before then! LOL.

There is a reason to avoid hospital visits!

Quote from SuperFreakonomics:

So it may be that going to the hospital slightly increases your odds of surviving if you’ve got a serious problem but increases your odds of dying if you don’t. Such are the vagaries of life.

- Posted using BlogPress from my iPad

Making Sense Of Investment Advice

The miracle of “compound interest” has been well documented. Investing to leverage this power can be richly rewarding if managed properly. Done poorly, one can easily create great damage to a portfolio of assets. And over the last twenty years or so I have done both.

Being the curious type, and like many personal investors, I have been on a quest to find that “holy grail” of investing, the practice, process, method, newsletter, chart or whatever, that would lead to incredible returns. I have read voraciously, analysed, tried, tested, listened to others, and yet the holy grail remains elusive. That said, I have learned a number of important lessons along the way, which are well documented in books written by some amazing students of the market and great investors, like John Bogle, Ken Fisher, Joel Greenblatt and Benjamin Graham. I thought I should share some of these in the hope that you could avoid some of the pitfalls. Here are some of the lessons I have learned:

1. Fear and Greed are hazardous to your investment returns. Fear causes you to sell at the lowest price, while greed causes you to buy at the top. The whole idea of investing is to buy low and sell high, or buy high and sell higher, which is exactly the opposite of what fear and greed will try to motivate an investor to do. The contrarians have a great point, if you are doing what everyone is doing, then you are unlikely to get better results. To get extraordinary returns, you have to be buying when others are mostly talking about selling, and vice-versa.
2. You can’t time the market. You can find lots of analysis comparing returns if you buy and hold versus missing the best five days or the worst 5 days in the market. One example is the chart below from The Big Picture which shows what happens if an investor held an investment throughout (the middle line), avoided the worst five days (the top line), or missed the best five (the bottom line). Clearly, if one can avoid the worst five days, one will do much better than the market. Equally though, if one misses the best five days in the market, one’s return is worse than the market. The problem, is that the best and worst five days cannot be predicted. And because of Lesson 1 above, investors that try to figure out how to avoid the worst days, also end up avoiding the best days, leading to returns below the market. I have had so many conversations with investors who will tell me how they avoided a big crash. Good for them, but luck is not a strategy. And that’s just what it is “luck”.

   

3. There are no “legal” approaches which consistently outperform the market. The operative word here is consistently! It is the inconsistency of performance coupled with Lesson 1 above that conspire to make winning long-term approaches to investing turn into losers. If it sounds too good to be true, it probably is. The reality is that in order to get higher returns, one must take higher risks (the ride will be bumpier). And the bumpier the ride, the more likely an investor to get thrown off. The ads for methods to double your money in a short period don’t disclose the risks, or shoot very loosely with facts. Here is an example below that I received by email. Note the superlatives, and generous use of promises to suck you in. Sounds like the holy grail, doesn’t it? Just a few inconsistencies here. If you started with $5,000 and doubled your money 11 times, then you would have $10,240,000 not the $136,647 indicated. Let’s not be too picky you say, that is still a healthy return turning $5K into $136K. What the author does not tell is whether any investor actually achieved those returns, or whether this was a backtested result. And you know the saying that “Past performance is no guarantee of future results”? They really mean that, and you should heed it. Finally, you might think this is not such a bad deal if it is guaranteed. The reality is that this is not a guarantee against your loss. What you get back is your subscription price, which may be nowhere close to what you might lose by following bad advice.

   

4. Knowledge is valuable, but not a guarantee of good returns. What you have to remember is that every time you buy or sell, there is a seller or buyer on the other side of the transaction who is probably spending far more time and resources studying your chosen investment than you. Maybe that investor is Warren Buffet. That said, the failure of Noble Prize winning investors, such as Long Term Capital management, prove that sometimes being really smart does not always end up creating an advantage. Maybe their analysis was wrong, or they were too fixated on looking at the investment from one perspective and really missed something that you could see. For me, this means that I subscribe to Peter Lynch or Warren Buffets’ view that you should really invest in stuff that you understand, and preferably understand better than others.
5. Buy and hold has a built in advantage over short term trading. Transaction costs and taxes significantly erode investment returns. And short term trading drives both up. The more you trade, the higher the transaction costs you will incur. At the same time, short term investments (held less than a year) incur taxes at ordinary income, while investments held over a year are taxed at capital gain rates which are significantly lower. If your annual income was $50,000 then the tax rate on short-term gains (investments held less than a year) would be approximately 25%, while a similar investment held for longer than a year would only be taxed at 15%. If for example, you invested $1,000 and got a return of 40% in the short term, instead of keeping $400, you would be left with $300 (after paying 25% taxes on the gain). The effect is that your 40% return before taxes shrinks to 30% after taxes. On the other hand, if this investment was held for more than a year, you would keep $340 (after paying 15% taxes on gain). Your 40% shrinks because of taxes but only to 34% if it is long term. To get the same return after taxes, as a long term investment (say the 34% in this example), your short term investment must have much higher pre-tax returns (in this case approximately 45% pre-tax, instead of 40%). The short term investment must be 13% higher before taxes than the longer term investment to generate the same after tax return. The break-even gap gets even bigger if your income is higher of course (see table below).

   

6. There is a way to consistently beat the average investor, but most people will not follow it. Please note that I said “the average investor”, not the market. Incredibly, investing in market Indexes can lead to better returns than that achieved by the average investor, amateur or professional. so why don’t more investors use indexing? Because apparently just achieving market returns is not good enough, because it is too boring, because the lure of promises that will result in market beating performance is too hard to resist? Whatever the reason, many investors prefer an approach which is less tax-efficient, incurs more transaction costs, and delivers lower returns. For me, boring tax efficient, returns that keep up with the market are just fine!

Would love to hear about your experience and lessons learned!

Our Absurd Budget Debate

Michael Ramirez via IBD:

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[From Our Absurd Budget Debate]