Quick Update

Over the last few months I’ve spent a lot of time working on projects that were completely unrelated to business/investing, but that I’m fairly excited about. In that time I’ve allowed this blog to just languish because I have always expected myself to write long, complete thoughts when I update. I think that compulsion comes from too much time as a journalism student, trying to perfect a story before submitting it. From now on I’ll try to focus on shorter, more shoot from the hip articles.

As an update for what I’m working on right now I’m focused primarily on two projects. One is a soon to be beta released reimagining of ASBConnect.com that will allow high school leadership classes to keep records of their projects, search them later (future years when new kids need ideas), and share them with other schools. I feel like a lot of leadership students have great ideas of events/projects to do at their schools, it’s just that the ideas get lost quickly and are never shared across geographic areas. We’ll see how it goes.

The second project is a ‘problems database’ and is still in heavy development. The basic idea come from my belief that a lot problems reported by the news are reported and then forgotten as journalists move to the next story. There needs to be a way to keep track of problems, figure out their underlying causes, see how problems relate to each other, and then try to find the solutions. I believe that journalism is a game of attention and it is focused on ’symptom’ style problems rather than digging in and really finding underlying causes of those problems. Don’t get me wrong, journalists do the best they can but rarely do they get rewarded for depth over speed. The incentives are just against it in an era where first gets all the hits. I’m curious to see if there is a way to change the incentive, even if only in a limited area.

After reading those two descriptions, it seems like my projects are very similar. Makes sense, I’m the main creator of both, but we’ll see how they actually turn out. I’m going to do as much as I can to let the users dictate where they go and let the solutions grow organically.

Oh, and thanks @holdenpage for getting me back writing again. Your blog was a good reminder that I needed to write again.

Investing to Solve Problems

I started this blog with the intention of finding a way to define why and how I invest money. I’ve known my whole life that I am an investor and that I truly enjoy investing, but I’ve never really known why. I hoped that by writing to this blog regularly I’d find out. The funny thing was that I actually found out when I just let it sit and bubble for a bit, without any writing.

Here is the first draft of my beliefs, I’ll spend the rest of my life redefining and enhancing these:

1) I believe that investors are faced with a choice of investments generally split into two categories: finding loopholes or solving problems.

Most investors, both these days and over time (you should have a read of some of my older investment books, you’d laugh), have been focused on finding a method for outwitting the rest of the investors. It usually works for a very short time until the ‘trick’ proves to just be a magical coincidence or the rest of the market figures it out. Either way, it blows up or stops producing and the investor goes running for the next trick.

A few investors search for major problems and then figure out who is solving those problems. They vote for  the company they think that has the best solution by giving them money and then they trust the company and wait for the payoff. Some people believe this is the buy and hold strategy, but in fact that isn’t always the case. With many companies the problem/solution event happens in a relatively short period of time (six months to five years) and then they have to find another problem to solve faster than their competitors. Just investing in the team once without evaluating the investment can get you into a lot of trouble.

2) I believe that investing in the solving of important problems is the most profitable investment over time because it’s sustainable and has built in demand.

When a major issue affects society, people are willing to pay whatever it takes to get the problem solved. If a company anticipates a problem and develops a solution in time to fix the problem, they’ll be highly compensated because what they’re doing is incredibly valuable. For example, one major problem affecting the United States right now is that our infrastructure is crumbling right under us. Bridges are getting close to collapse, sewer systems and water mains are about to burst, our interstate system is full of cracks and potholes, levees are dangerously misengineered, and our electric grid is getting old. The cost to fix all of those problems is well outside of our ability to pay for it, using current technologies. But if a new technology for even one of these problems was developed that lowered the cost of fixing the problem to a managable level, the company that developed the technology would make a fortune.

3) I believe that adaquately defining problems and their effects helps investors find problems worth solving (investing in). A problem well defined is a problem half solved.

Most of the time investments go to problems that are well understood, fashionable, or within a domain that the investor understands. This is because the process of really understanding the problems affecting a given area, comparing the effects of each problem and the smaller problems that make up the larger problem is an incredible task. No one can possibly understand every factor, so we just invest in what is easy. As Warren Buffett says, he never invests in anything he doesn’t understand. My charge is that there are more problems than any investor could ever solve and we need a way to figure out what problems are affecting us most so we can direct investment money in that direction.

4) Most entrepreneurs today aren’t creating companies that solve useful problems because we don’t value them the way we should, simply because we don’t understand them yet.

We have a tendency to put off solving problems until they’re in our faces. In that case we have only moments to slap together a quick fix, hoping that will do the trick. The reason Hurricane Katrina was so devestating was because the levees broke and there was no way to patch them back up quickly. Few people had anticipated the problem and the few that did notice the problem did a terrible job of transmitting that information to the rest of us. It’s not that they are particularly bad at communication, it’s simply that there are no ways of communicating potential problems, what is causing them, and how they can be stopped. I believe that if we had a way to collect and develop essentially a ‘problems database’ then we could start to solve some of the things facing out world by inspiring people to solve problems that matter. Who really cares about getting your music streamed over the internet tin a predictive manner the way that Pandora serves it up? It’s an amazing service, but it doesn’t solve a big problem. We need to start solving big problems and investors need to start investing in big problems.

My goal: I believe that it is very worth my time to start finding a way to adequately capture problems affecting people in the world. There are tons of problems, from droughts in Africa to trash flows in the Pacific Ocean that are starting to affect people without our real understanding of how they’ll change our lives down the line. I’ll let you know how it goes, feel free to pitch in with any ideas.

Gambling vs Investing

Recently I stared up a website with my roommate. He is a gambler who makes bets on basketball and football games. The site was set up to let him make predictions on the games and post them for all of his friends to see. While I don’t gamble, learning about sports betting has caused me to see the connection.

A few days ago I realized that sports betting is very similar to investing in options, a derivation of investing in equities. To set up the connection, I’ll explain how both stocks are traded, simply, and how sports bets are played. In sports betting, a handicapper (someone who knows a lot about the sports) makes a prediction about who is going to win and by how much. Then gamblers place bets on whether or not he is right. I have very rarely seen handicappers get the numbers right consistently. More often than not one team blows the spread out of the water. So that means that the reality of sports betting is that you’re just going head to head against the bookie’s handicapper. Do you have more information about the game than he does? Consider that most handicappers are predicting the outcome a fifty to a hundred games a day. Is there something that he overlooked that could significantly affect the performance of one of the teams? And, when you consider that almost every bookie has the same odds (set by Vegas) so they can stay competitive with each other (and so they don’t have to try and predict the outcomes themselves), you’re really only competiting again one guy’s best guess.

Now lets consider equities. What causes stock prices to move? Almost exclusively it’s profitability in some form. News that could affect future profitability will cause a stock to move up or down. Quarterly reports that explicity say last quarter’s profitability move a stock up or down. So ultimately if you buy a stock, you’re predicting that the company will be more profitable in the near future (if you hope to flip it) or will be massively more profitable in the long term future  (if you plan on holding for the long haul). Instead of having one bookie that determines the price, millions of people buy and trade their opinions each day. Instead of being smarter than one guy to win, you have to be smarter than a crowd to win.

There are two crucial differences between stocks and sports bets. One is time. Sports bets are timed events in which you make a bet, it gets played and you’re either a winner or a loser. Owning a stock that doesn’t perform as you expect still gives you the option to hold it and sell it later once it’s profitable. This is where options come in to play. Options are almost always time sensitive. They expire at a certain point and if they’re not ‘in-the-money’ or correct, then they expire with little to no value.

So looking at stocks/options and having the betting lines set by millions of players, it at first seems significantly different from sports betting, but think again. Just like individuals, entire crowds get swayed. How else do you explain the fact that the DOW traded above 14,000 in mid 2008 despite the fact that the real estate bubble (underlying much of the current crisis) burst as early as March 2007? Shouldn’t a few people have noticed and started gambling against common knowledge?

I believe that the basis of gambling and trading stocks is the same. You don’t have to beat some mythical standard to win, you just have to beat the guy (or millions of guys) across from you. You have to realize that most people are incredibly uniformed, so by having the discipline to only play the few bets where you have a massive knowledge advantage (and then managing your money well), you can make significantly better than average returns on your investment, whether it is sports betting or investing.

As a side note, I still don’t bet on sports. I don’t have any better knowledge than anyone else, despite the fact that my roommate does quite well at it.

Soil Erosion in Africa

More and more as I write for this blog I realize that it is actually serving as a training ground for my understanding of an economic world. Everything is now filtering through my view of consequences and outcomes. Today I read a really interesting article about a project called the Global Soil Map which is being developed based on soil mapping in Africa. It’s supported by the Bill and Melinda Gates foundation (an $18 million dollar grant) and is hoping to be able to map the surface of Africa in order to educate farmers about the best places to grow, the areas most likely to erode, and what type of crops to grow in which areas. Read more at IRIN Africa.

Again this seems to be an area where a mideconomic view or a multi-year view could work perfectly along with good predictive analysis in order to develop a wonderful theory of commodity prices in Africa. If one were to use the global soil map and overlay it with annual weather pattern models, there is the possibility of being able to predict which products are going to be needed most in which areas. As an investor, that means that I would be able to either redirect resources there or bet against the resources that are heavily influenced by African imports.

It’s interesting to think about using predictive modeling in this way. The question in some senses becomes “if you can predict what’s going to be short, why would you try to make money off of it rather than fixing the problem?” I believe that trying to make money off of the situation is in fact fixing the situation. Think about it. If I find an inefficiency in the market, an accurate prediction of crop shortages, then I should announce my findings to the world. So what happens when two or three people have differing findings? Who decides what gets done? That’s where capitalism becomes the amazing voting machine. I vote with my dollars that the crop is going to be short this year. You vote that it’s not. The winner gets paid. And, by betting that the crop is going to be short this year, I am redirecting crops to the area that need them most because that is the singular area that I can make the most money from it. If demand is very high, price is as well. Price is simply a rationing tool that allows us to ensure that everything is distributed in as fair a manner as possible.

I say predict away. Place your bets and move resources to the places that need them the most. And really, the better capitalists and investors get at predicting things, the less money that gets made and the less crisis happen. Place your bets on investors, they usually steer you right (until they all start referencing each other hoping the other guy is right, then all bets are off.. good luck).

Economics and a View of Life

I’ve found it interesting to think about how people organize their lives. I feel that most of us, myself included to this point, choose a particular view on life because of the events that have shaped our lives. We learn from experience and most of our experience tends to be in an area that we are drawn to as children or young adults. I know that is certainly true of myself.

I find myself drawn more and more to economics as a means of explaining the world, even if it’s just a framework for hanging knowledge on. Recently I drew out a little diagram that indicated how economics, as a viewpoint, shapes the other areas that I spend my time working on. Marketing, which I do for Click Consulting, is very directly related to economics for the simple reason that economics studies the spread of money and marketing tries to redirect the flow of money. Investing, my other business love, is directly related to economics because investing is the attempt to purchase assets before money flows to them and then sell the assets after people with money want it.

In many ways all of my interests, from psychology and biology to architecture and engineering, are directly related to economics. I picked up a book the other day called Butterfly Economics about how economic theory is mostly flawed because it looks at markets more like physics problems than biological, chaotic problems. The math and movements are less like Newtonian motion (even Brownian motion) and are in fact more like the evolution of animals or bacteria. I have found it funny that most kids believe all the random things they learn in general education classes have no use to them. Everything, if you’re willing to put it all together, is connected and influences each other. Knowing a little bit of a lot allows you to see a lot of casual connections you wouldn’t otherwise see or even have any inkling to see.

I am beginning to understand that I can learn a lot of things, even things that I would have never had any interest in, if I am willing to relate everything back to economics. I feel that economics is the study of how people place votes on what they value. It’s almost like psychology but with a voting mechanism. And in many ways I’ve found the models created to be interesting ways to look at the world. The idea that raising prices during a crisis is the humane thing to do seems counter-intuitive at first. Why would you take advantage of someone like that? In fact, it’s the exact opposite. By raising prices, the shop owner is actually ensuring that everyone gets a little bit instead of a few people hoarding. He might get lucky and might get a lot of money for his troubles, but there is always the possibility that there will be no recovery and the money he got for the goods is worth nothing. We all get paid based on risk and the value of the goods was have on hand. So I can learn psychology both directly through examples like the one above (both how the shop owner reacts, the people react, and the actions they take illuminate a lot about their views of the world) and by seeing how psychology models of the world match up to economic models of the world.

It will be interesting to see how an economic view of the world, looking at how people transfer value to each other, affects the ways I interact in the world. I wonder how your own model affects your view of the world, how you learn new knowledge, and how you interact with other people.

Bookmarks for December 16th through December 17th

These are my links for December 16th through December 17th:

• FT.com / Columnists / Luke Johnson – The toughest year I have ever had to call – Interesting article about next year's economy. Some thoughts are good, others are still missing things. ie, he said that now is a great time to buy real estate, but there are still 8 million ARMs set to adjust over the next year to two years, so the best bet may actually be towards the end of next year.
• Lean muscle mass helps even obese patients battle cancer – The better shape you're in… meaning amount of lean muscle mass not necessarily fat or skinny… has massive affects on survival rates with cancer. Get in shape now.
• What Club Penguin Can Teach Media Companies | BNET Media Blog | BNET – Pay for social network. How can you add that in to your own projects?
• Answers to huge wind-farm problems are blowin’ in the wind –
• Brown economists: Ancestral history explains roots of income inequality – Interesting idea, but seems flawed in a few ways. What if this study had been done in the 1930s or what if it's done again in 10-15 years (if the US/Europe declines)? And, why the 1500s as opposed to 0 bc (in order to take the Arab conquests)? The idea that is most interesting is how communities transmit information from generation to generation. Are we reaching a point where we are transmitting information directly between interested parties instead of by communities? Will that change the cultural landscape, the future of economics, and migratory patterns?
• Aging brains allow negative memories to fade – Interesting ideas about the cause of this. Their theory: older people have trained themselves to discount bad experiences.

Bookmarks for December 12th through December 15th

These are my links for December 12th through December 15th:

• The Three Most Important Words for Sales Success | EyesOnSales –
• Don’t be tricked by your Web analytics results – DMNews –
• We’ve got your number: Consumers choose products with more technical specs –
• No regrets: Avoiding bad feelings about missing a great sale –
• How To Sell MORE During the Meltdown | Sales Machine | BNET –
• Why Your Elevator Pitch Stinks | Sales Machine | BNET –

Bookmarks for December 2nd through December 5th

These are my links for December 2nd through December 5th:

• FT.com / Business Life – Bosses are a bad idea – fantastic discussion of W.L. Gore's "management" model
• Loneliness and friendship – Bloody good.
• Use Small Actions to Get Big Results – Creating Business Relationships – Entrepreneur.com – Absolutely genius piece
• 3 Tips for Smarter Business Reading | Sterling Performance | BNET –
• Top Business Books for 2008 | Sterling Performance | BNET –
• Developing a neighborhood watch for the Internet – Genius use of crowds, see how I can apply this to other issues.

The Power of Making Friends

I should set this up by saying two things. I’ve spent most of my life talking to strangers and I’ve rarely made significant friends. Recently, however, I’ve found that I’ve been making a lot more friends and I’ve started to feel a lot more enriched in my life. The turning point happened about two months ago when I realized why we’re friends in the first place.

For a long time I looked at friendship as a very categorized endeavor. I had friends that I played sports with and friends that I lived with. I had friends from classes and friends that were geographically isolated from each other. Very few of my friends interacted with any of my other friends. In fact, I actively tried to keep them separate as if they might contaminate each other. And then, two months ago, the lightbulb clicked. Friendship is the exact opposite. It’s about sharing and connecting. The real power of friendship is trust.

I’m starting to believe that friendship is the thing that allows our society to work in the first place. Without it we’d all be running in forests trying to hunt down animals all on our own. To me, friendship allows us to separate the world into three parts. The unknown people, the people we trust, and the people we do not trust. The people we trust are the people with whom we can do business, work together for protection, celebrate, and enjoy our lives with. The enemies are those who we know will try to destroy us with every chance they have. They are few and far between. The unknowns are generally thought of as enemies because, even though enemies are few and far between, they have incredible power when they are true enemies. Friendship allows us to shine a light into the darkness of the unknown. The more friends we have, the further we can shine that light.

This concept or understanding is pretty basic to most people. For a long time I viewed people as either being pertinent to my life currently or of little value. So, I rarely kept track of anyone because I felt that it would be too long before they would have anything I needed and it would be hard for me to provide any value until that point. I’ve now started to realize that the power of friendship is a completely different phenomenon. It’s not about what you can do for me or what I can do for you, it’s about how we can work together to shine the light deeper into the unknowns of strangers, and how we can help each other find the resources we need to solve the problems we have, at exactly the moment we have them. The power is in our combined networks. It’s in sharing our trust.

If I trust you and you trust someone down the street, I will immediately have raised my trust level with the man down the street because he gets a little bit of your reputation applied to him. That is shining the light into the unknown. The guy down the street might also be a plumber and I would thus trust him more at a time of need (like when my water heater breaks) than I would a guy out of the yellow pages.

In the last few months I’ve been enjoying making friends for no other reason than to help each other shine lights into the unknown. I’ve connected researchers with business people whom they would never otherwise meet, allowing them to use my flashlight to connect to a resource they couldn’t see before. I’ve connected business people together. I’ve connected friends together. It’s almost like playing matchmaker, but without the risk. And it’s fun. The best part is that all the people I’ve met are now getting value from me even when I have no direct value to give because I’m sharing resources they wouldn’t have. I’m gaining their trust, becoming their friend, and then I’m sharing my friends. Without the sharing of friends, the world would be a very treacherous place.

Finally, remember that the value of a friend is the amount that you can trust them. If you’ve barely met someone, they cannot help you see very far yet. But as the person shares their beam and proves that they can help you find significant resources, you will trust them and gain more friendship with them. I sure am enjoying sharing my little flashlight in the world.

Note: Picture from Dan Wildman of the UK.

Bookmarks for November 9th through November 12th

These are my links for November 9th through November 12th:

• Let them fail, so someone else can do better –
• How This Crisis Could Make You A Fortune –
• In the Congo, history repeats itself more quickly than usual –
• Covering Their Arses (by Don Boudreaux) –
• Peak Oil: You Can Run, But You Can’t Hide From Higher Oil Prices –
• The West versus the Rest? –