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.