Thoughts on hedging

December 30th, 2009

From July 10, 2009.  This is a comment relative to a post on Aleph Blog.  I held posting the comment here, so I could think this out more, but in the end I like the train of thought as it was and haven’t edited it much…

In the end, ownership is about the strategic selection of risks, calculated risks, where the likely rewards outweigh the risks. If the likely rewards don’t outweigh the risks then ownership (“investment”) is not a good choice. As Ben Graham put it, thorough analysis, security of principal and a reasonable return are the essential ingredients. Complexity bedevils analysis; hedging tends to involve concealment of risks to principal; financial intermediation (e.g. with a counterparty) requires sharing the expected return. The odds of mis-estimating risk become much higher.

On a more philosophical plane: I would hate to live in a world where everyone was “hedged” or “insured” and thought they had no risk, and yet would earn some kind of return. A world of prudent risk-takers, willing to put actual capital on the line because they’ve done their homework and willing to work to make their commitments work out, is better than a world of “hedged” risk-averse “free lunch” seekers who just want some counterparty to make everything all better for them if they turn out to be wrong.

There’s a moral hazard aspect to insurance — think about how popular the high-hazard “extreme” sports are, now that everyone feels entitled to having someone else pay for their wrecks. There’s also the problem that your average individual, regardless of means, is just not sufficiently sophisticated financially to make proper use of these “hedging” tools. We live in a nation where much of the population cannot do something as simple and obvious as paying off their credit cards in full each month! This applies all the way up to the highest levels of business and government — Representatives, Senators and even national presidential candidates are up to their eyeballs in debt that apparently is not in their financial interest. Should we really be turning the Wall Street marketing mafia loose with new “financial innovations”, on such ignorant prey?

My intuition tells me that it would be better for society if people who aren’t comfortable owning a particular asset were encouraged (“invisble hand” style) to stop owning it, NOT for them to maintain “ownership” but with “insurance”. Shiller and other advocates of hedging tools seem to be living in the pre-crash mentality, where financial complexity seemed like a good thing, and counterparty risks could be ignored. Such is not the case now. With the number of publicly filing businesses down about 1/3, and the number issuing “going concern” warnings rising dramatically, it’s flawed logic to assume that “insurance” (as a generic concept) is “guaranteed”. Would you sell a future on your home to the next AIG? The next Countrywide? The next Lehman Brothers? In the absence of financial transparency, how would you know?  Particularly with respect to off-balance-sheet (and allegedly “hedged”) risk exposures, there’s no way to tell that your counterparty of choice won’t blow up in the next 10 years (or whatever time horizon). In such an environment, hedging makes little sense from a Graham-ian investment perspective, because upon thorough analysis the risks are quite likely too high.

Posted in Ethical Investing, Nature of the Squid | 1 Comment »

Live Long and Prosper!

December 28th, 2009

Time investing is more critical to meeting one’s goals than financial investing. Time cannot be “saved”, it’s more easily “wasted” than money (since only inaction is needed), and it’s darned difficult to “earn more” of it. While one can usually work (or, for those with investment income, wait) to get more money, it’s a harsh truth that one’s time on this world – and the quality of that time – is generally much more limited.

So it was interesting to open the print version of Newsweek back on June 22, 2009, and read “Can You Cheat Death?  No, but you can negotiate…”. These are things which increase/decrease one’s life expectancy, in years:

  • +10 Years – if you have a blood relative who has lived to 95 or older.
  • +5 Years – if you regularly play puzzles like Scrabble or Sudoku (keep your mind healthy & young!)
  • +5 Years – if you are a married man (stay married!) or +5.2 years if you are a woman (married or not, women tend to outlive men)
  • +5 Years – if you take 81 mg of aspirin a day
  • +3 years – if you eat 5 servings of fruits/veggies each day
  • +2 years – if you floss daily
  • +2 years – if you eat nuts regularly
  • +1.7 years – if you go to church regularly
  • -0.5 years – if you drink more than 5 cups of coffee each day
  • -1 years – if you get less than 6-8 hours of sleep each night
  • -1 years – if you have a family history of diabetes
  • -2.5 years – if you are outdoors a lot and do not wear sunscreen
  • -5 years – if you are slowly putting on weight
  • -5 years – if you frequently feel stressed out
  • -5 years – if you eat red meat more than twice a week
  • -5 years – if you have less than 12 years of education
  • -7 years – risky sexual behavior
  • -15 years – smoking
  • -15 years – using IV drugs

No doubt some of these will not “add” cumulatively – otherwise married churchgoing, fruit-vegetable-and-nut-eating Sudoko-players with long-lived relatives who floss and take aspirin daily would have life expectancies over 100 years!

Other items above may not be “primary causes” of increased life expectancy in and of themselves, but they get credit because correlate with other things that lead to longer lifespans (higher income, better social support networks…).

The list also highlights some behaviors that are destructive to lifespan; most of these are also financially-destructive behaviors as well!  I suspect that even the humble act of “burning the midnight oil” (and thus not getting at least 6-8 hours sleep) is both financially and time-destructive. Superficially, staying awake longer and sleeping less provides more time (and a chance to earn more money) up front, but the resulting sleep deprivation reduces quality of life (less valuable time), leads to poor decision-making (wasted time), and can impair one’s productivity at work (reduced future income).  And then there’s the year of lost life expectancy cited by Newsweek, to boot!

Posted in Time Investing | 1 Comment »

What is the Squid?

December 2nd, 2009

The original “Great Vampire Squid” reference was by Matt Taibbi, in “The Great American Bubble Machine“, printed in Rolling Stone in July, 2009.

Here at DoNotFeedTheSquid, I take a broader view, but let’s start with the original:

“The first thing you need to know about Goldman Sachs is that it’s everywhere. The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money. In fact, the history of the recent financial crisis, which doubles as a history of the rapid decline and fall of the suddenly swindled dry American empire, reads like a Who’s Who of Goldman Sachs graduates.”

The broader view taken here is that the Squid is a collective parasite, consisting of any person or organization (not just some parts of Goldman Sachs) which siphons human time and natural resources away from truly productive enterprises. (* This definition may evolve as we delve further, but it’s a good place to start…)

Unfortunately the examples are all too numerous. The Squid includes:

  • Failed financial and industrial corporations which squander billions of taxpayer dollars while refusing to reform their worst practices and unwise incentive structures.
  • Politicians, media, and their followers which glorify sensationalized trivia, while neglecting to study and understand the real news. (Meanwhile, bloggers eat their lunches, and historians prepare to excoriate them for nonfeasance or “failure to act properly when required to do so”.)
  • “Consumers” of all kinds, who fail to think before buying, and consequently let the squid feed on them unimpeded.
  • “Investors” of all kinds, who settle for too little and fail to demand quality products from the financial sector. (We can start with the fraud-ridden mortgage system and crappy 401(k) plans with high fees, but the list is much longer!)
  • And so on…

Part of the problem is that “We have met the Squid, and they are Us!” The Squid is not so much an organization, or a person, as it is a mindset, paradigm, or worldview. It’s a worldview which tolerates fraud, tolerates incompetence, tolerates inefficiency and waste. It’s a worldview which many of us (this blogger included) fell into during the long credit boom, when prosperity seemed boundless because money and credit were abundant… but those days are now over.

Many of us, perhaps nearly all of us who grew up during the Long Boom, were raised to believe in a system that worked for all. But we now see that the system worked far better for some than for most, and that during the Lost Decade of 2000-2009, declining incomes relative to inflation actually robbed the many to pay the few.

The Squid brought us wealth inequality and far too many individuals who feel that anything goes as long as no one catches them. As a result of this and other shortcomings, that system is now broken… and yet those most responsible for its failure have not been held accountable.

Here at Do Not Feed The Squid, the goal is to break the faulty mindset, to crack the broken paradigm, and to restore a more productive worldview. We feed the squid whenever we fail to think realistically about the human systems we have created, and let them run amok at our shared expense. We must learn from the recent failures, and fix the systems involved, but it is difficult to do so while the flawed mindset remains dominant!

I myself have much to learn, and can only dimly see the direction to go, not the destination to be reached. But I hope others will join me on this journey, and we will be able to make faster progress together. Hence doing this as a blog!

Readers may also be interested in my other blog, Investing for Sustainable Gains, which will focus more specifically on individual investing ideas. Do Not Feed The Squid is a more philosophical look at the broader national crisis.

Posted in Nature of the Squid, Site Purpose, Squid Sightings, Victories Over the Squid | 1 Comment »

No unemployment claims relief yet…

July 16th, 2009

The graph shows the Weekly Initial Unemployment Claims, Non-seasonally adjusted, from the Department of Labor.

Claims have remained elevated since the market panic last fall.  There was a “green shoots” trend up until June, but in fact claims are now trending up again in July 2009.

Similar brief surges are notable in the data for July 2007 and July 2008, so there may be some basis for believing that the current surge is only a seasonal transient.  But these are not normal economic times, and the seasonal adjustment process is correspondingly less useful.  The reader is encouraged to judge for him- or herself the significance of the current numbers.Initial Weekly Unemployment Claims, N.S.A., July 16 release

Posted in UE Claims | 1 Comment »

A blog is born

July 4th, 2009

Investing for Sustainable Gains is launched!  The i4sg.com goal is to help busy people manage time and money to meet personal goals efficiently, independently, and with less risk of catastrophic loss.

Posted in Site Purpose | 1 Comment »

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