Predictably Powerful
Wednesday, September 26, 2012 at 11amBy John Friedman
From high school math to college science we go . . .
I was a psych major. That had more to do with the teachers in the psych department than the psych topic itself (one great professor could make your entire college stay a good one, especially at a small school like Grinnell). Over the years, though, the psych-head I grew during my college years has stood me in very good and useful stead.
Many people have a fairly uninformed view of what psych is all about. They think it’s about therapy, and assume that psych majors are shrinks in the making. Some are; many are not.
Others (e.g. me) see psych as the science of human capability. Wikipedia’s entry on psychology, for instance, starts out like this:
Psychology is an academic and applied discipline that involves the scientific study of mental functions and behaviors.[1][2] Psychology has the immediate goal of understanding individuals and groups by both establishing general principles and researching specific cases,[3][4] and by many accounts it ultimately aims to benefit society.
I could quibble with the Wikipedia definition because it does not identify the types of actors whose behavior and mental functions are the focus of psychology, with the quibble stemming from my understanding of psych as being about human beings, so that, to the extent non-human beings are ever part of psychological study, they are present primarily to further illuminate the capabilities of human beings.
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Personally, Psych 101 had me at perception: what was a teenager in the 70s (you know, the period that was the real 60s for a lot of folks, with all its attendant personalized psych experiments) supposed to do when learning about how everything s/he knew was filtered through the very fallible peripheral nervous system and sensory apparatus, and then fermented and fomented and otherwise de- and re-arranged within the very fallible and mysterious central nervous system, only to then ultimately arrive at the consciousness, which would, in turn, do with it what it would and have its way with it, willy nilly?
After all, we’ve known, dating all the way back to some experiments in the 1890s, that, if you put on special prism glasses that turn everything you see upside-down, then, after a week or so of constant wear, your brain will, all by itself, turn everything right-side up again — your brain will override the prisms and flip-the-flip (though today it’s safe to say that it’s a bit more complicated than that).
Once you’ve accepted that the brain can right the wrong — can rightside-up the upside-down — you’ve opened the door to a whole lot of questioning and self-doubt. As in: what else might the brain be doing between the out-there and the in-here?
* * *
Psych had some answers to that question, all having to do with the word science in the definitions set out above, for it was psychology’s [some-would-say-sorry] task to try to take that zaniest of all phenomenon — human behavior — and understand it in a scientific way, i.e., to make it predictable and replicatable.
Now that’s powerful: anyone who can repeatedly predict how humans will behave in a given situation will be able to accomplish much through other humans. People running for president will be able to predict how people will respond to what they say and do. People who already are president will be able to skillfully guide the country towards a more perfect union. Product managers will be able to design products that people will buy. Economists will be able to tell us how to get the economy back on track. Money managers will buy low and sell high (standard financial planner joke: tell me when you’re gonna die, and tell me what the stock market is going to do between now and then, and I’ll write you a great plan).
And if you can predict how humans will behave, that also means you can predict how they feel, right? Because a feeling is just another sort of behavior, right?
So spouses will be able to help each other be happier and happier and happier. And ultimately, and to bring this back to you you you: if you get very good at predicting how you will feel about something, you’ll be able to help yourself be happier and happier.
That’s power. And that’s power that really matters.
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The negative also holds true. People whose predictions tend to be mostly wrong de-power themselves. David Cameron, Prime Minister of Britain, predicted that austerity would be a good thing for the UK. By most measures, it was not, and that failed prediction has cost Cameron a lot of power.
Most famously from the past decade, if you predict that you’ll be greeted as liberators and you are not, you will lose some power (though you can argue that you were, in fact, right). If you do that often enough, and then couple it with statements that badly mischaracterize the present (in effect, being a very bad swing-and-a-miss at a very easy-to-predict, very-near-term future) and do that often enough and, in doing so, make obviously false predictions about the future, well, then, an outside observer might predict that you’ve quite possibly set up a decades-long diminishing of power.
Time will tell whether the outside observer’s prediction is accurate.
Because, upside-down glasses or no, there is a hard-cold reality out there (math realities, for instance), and if you ignore them, you do so at your own risk.
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Interesting Number Sets Constantly Coming Out for the Next Six Weeks, and How to Use ‘Em
Tuesday, September 25, 2012 at 2pmBy John Friedman
Ralph Fielding is the guy who took the ever-lovin’ math right outta me. Ralph was my math teacher in 1970-something, when I was a freshman in high school. It might have been Geometry — I don’t remember the exact topic.
What I *do* remember is that Ralph had an odd mouth and was a bit of an odd character, and that, when I was done with his class, I was done with math. Done done. I never took another math class in high school or college.
That’s too bad because decades later I came to know that there is something I very much love about numbers (I’m pretty sure it’s their “this is absolutely true” nature) — decades to get back in touch with my inner math-head, to enjoy seeing what groups of numbers have to say about the way the universe is built, at the very foundational level.
* * *
Right now we as a country are doing our once-every-fourth-year, new-numbers-coming-out-all-the-time, run-up to what most folks believe is a very important, and ultimately very numeric event — a nationwide vote for President.
For those who think that the Billy Bean brand of baseball is all about how baseball generates tons of numbers every day, from which much power and mastery can be derived if well understood, gosh a’mighty have I got a number set for you!
* * *
People who know me as a math-head and presidential election junkie (why all the drug references in this realm?) are asking me these days what’s going on with the election. For them I have a few sites to suggest, like ah so:
FiveThirtyEight.com
The grand-daddy, grand-mammy and rampaging-offspring-hoard of elections number-crunching sites is FiveThirtyEight.com (caution: New York Times, semi-permeable paywall membrane awaits you when clicking on that link). Nate Silver, its founder, is a Billy Bean sort of number-cruncher who swings both ways — as a sports number-cruncher, and as a polls number-cruncher.
Nate compiles lots of polls, in real time, and has a massive piece of software that he designed which figures out what the polls, when smartly aggregated have to say, and then outputs some predictions. Here smartly aggregated means accounting for, e.g., each pollster’s biases and past performance, the correlations among all the states’ voting patterns, the effects of economic metrics announcements such as monthly jobs numbers, etc., etc., etc.),
Today,for instance, Nate has Obama with a 77.7% likelihood of winning, and forecasts that Obama will receive 309.3 electoral votes (270 are needed, out of 538, with this latter number accounting for the name of Nate’s site).
As time passes, and the election gets closer, predictions necessarily gain accuracy (clients of mine hopefully recognize this as a Reverse Cone of Possibilities). So whatever Nate says will happen the day before the election usually does happen the following day. Four years ago his final predictions got the electoral vote count correct with one exception (he had Indiana going for McCain) and all Senate elections correct.
RealClearPolitics.
That’s the first place I look at each day. The second, which is great for an up-to-date list of current polls, is at Real Clear Politics. This is a mostly conservative-leaning site (see the articles on the front page — I am pretty sure they would agree with that characterization) which has lots of intriguing subsites (e.g. RealClearScience, etc.) which appear to be very well done. They also have some great state-by-state tools, such as a handy-dandy electoral map tool.
ElectoralVote.com
For a simple, fresh-each-day, few-minute-long read, ElectoralVote.com is a great place to go. It currently sees Obama getting 328 electoral votes.
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More Sites.
Those are the three sites my math-head/political-junkie self wants to look at each day for the next six weeks. These are also good to look in on from time to time:
- Intrade (where people bet real money on, among other things, the outcome of the presidential election — based in Ireland because you can’t build that here) (today it shows Obama with a 72.5% chance of winning)
- Princeton Election Consortium (using a “meta-margin” analysis — a margin of the margin analysis) (today it shows Obama with a roughly 5% meta-margin)
- Votamatic (don’t let its vegematic name throw you off — there is lots of good info to be found here) (today it shows Obama getting 341 electoral votes)
- RAND American Life Panel (uber-L.A.-think-tank/business consultancy using unusual longitudinal approach to predictions) (today it shows considerably more than a 95% likelihood that Obama will win)
So, gang, if you want to get in touch with your inner math-head, while also smartening-up about a very important, very real political phenomenon, these are great places to start.
And maybe, just maybe, if you dig a little deeper in there and read about methodologies, you’ll catch a glimpse of some of the marvel of the universe that is math — which, here, allows us to measure huge, complex phenomena, within a fairly tight arc of accuracy, by smartly aggregating some handfuls of thousands of observations and then knowing, from just those few parts, something very real about the whole — though something at least a tad short of a perfect representation of the whole.
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Friedman’s Law of the First Thing, as Applied to Investing: Market Caps
Monday, September 24, 2012 at 11amBy John Friedman
Investing, I’ve been known to say, is not, for most people, the key to financial health — probably not even in the Top 5 determinants of financial health (briefly: Numero Uno is savings rate, Numero Dos is making-a-living happiness, Numero Tres is having a feeling of currently being in control, Numero Cuatro is having a feeling of long-term security, and Numero Cinco is, for good measure . . . savings rate) (in which I include dissavings rates for people who have that sort of financial life — where they are spending down their stored money — including the very well-off and folks in their later years).
And then maybe, just maybe, somewhere in the next cinco comes investing prowess (which I mostly think of as avoiding silly loss).
But investing is a big, sizzley, gossipy sort of topic, and gosh knows that the FSIC — thje Financial Services Industrial Complex — wants it to be that way, and I am happy to oblige with my thoughts on it, with today’s piece focusing on Friedman’s Law of the First Thing as applied to investing.
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Friedman’s Law of the First Thing holds that everyone should know, at least, the first thing about each aspect of their financial life. As a corollary, it also holds that, for some people, that’s all they should know.
For taxes, that means understanding what marginal rates are all about. For estate planning, that means understanding what living trusts are all about. For bond investing, it means understanding why The Vice Versa Rule works (and not just knowing that, for some reason, bond prices and interest rates move in opposite directions, all things being equal).
And, the topic for today’s piece, for stock investing, Friedman’s Law of the First Thing means understanding market caps.
* * *
If you look up the term market capitalization in Investopedia, things get pretty wonky pretty fast. For instance, the definition includes the phrase, “outstanding shares” within the first ten words of the definition — a nonstarter for a lot of folks, sufficient to thwart the learning process entirely.
I prefer this definition: a company’s market cap is a rough approximation of how much it would cost you to buy the company, lock, stock ‘n barrel. True, if you were to buy the company by buying all of the shares of its stock (as opposed to buying all of its assets and liabilities and such), then market cap has a whole lot to do with (a) how many shares of stock in the company there are out there, and (b) the price at what each person holding those shares would be willing to sell those shares to you, but, true also, you needn’t go there.
Instead, you need only ask, How much would it cost for me to buy this company?
[Aside for the curious or the particular: In actuality, if you want to buy the whole dern thing, it’ll just about always cost you something more than the market cap figures you’ll see out there on sites like Yahoo Finance. If you’re curious about why that is, you can start on Wikipedia’s article on Control Premium, after which you can spend some good number of years studying corporate finance, and then go on to work at a company in the business of buying and selling companies in toto (not to be confused with Toto too). But that would be well beyond knowing The First Thing.]
* * *
For many folks, the emotions surrounding the size of a company’s market cap are similar to those surrounding the size of most things: braggadocio can come into play, and while big is good, incredibly big is something else entirely.
Right now market caps are in the news again because Apple is reaching market caps entirely heretofore unheard of.
On Yahoo Finance today Apple’s market cap appears as $643 billion. As best I know, that is a global all-time record; a company, measured in this way, has never been more valuable (I leave it to the true wonks to calculate after-inflation equivalencies to see whether, say, Rockefeller’s Standard Oil had a relatively larger market cap) (note: most folks rank articles in Motley Fool as not all that wonky; I did not review that linked-to article to see whether it looked to be wonky-well-done or not).
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A lot of hyperbole and fudge-factor can come into market cap analysis. One thing is clear, though: in a day-to-day investing context, you can do fairly clean Apples to AAPLs (sorry, could not resist) comparisons among companies, at least for market-cap bragging rights and market-cap comparos.
For instance, here is a table of market caps I scraped from Wikipedia that is a tad out of date (speaking of which, though I love love love WordPress, I find its table function to be . . . 1990s at best) but which can make for some great comparos:
| Company | In Billions of $ |
| ————- | ——————- |
| Apple Inc. | 546.1 |
| Exxon Mobil | 400.1 |
| PetroChina | 257.7 |
| Microsoft | 257.0 |
| Walmart | 235.9 |
| IBM | 225.6 |
| General Electric | 220.8 |
| China Mobile | 219.5 |
| Royal Dutch Shell | 217.0 |
| Industrial and Commercial Bank of China | 211.2 |
So what’d’ya say? Shall we go shopping?
For instance, if you combine Microsoft’s market cap with PetroChina’s, you get ballpark-close to the market cap of Apple. Which would you rather buy? All of Apple, or all of Microsoft plus all of PetroChina?
Or, using current Yahoo Finance market cap numbers, here are some other sizzley sorts of companies to consider, and to then use for some comparos:
Facebook‘s market cap: $44 billion
Intel‘s market cap: $113 billion
Google‘s market cap: $244 billion (to emphasize the apples and oranges issue, note that the Wikipedia table set out above did not include Google, even though its market cap would be high enough right now to be on that table — the moral of the story being to make sure that you are always comparing apples and apples when doing comparos, e.g., using the same source for the market cap info, and using it at the same time, and, even then, knowing that things are approximate and fudge-factor’y).
Groupon‘s market cap: $3.3 billion
LinkedIn‘s market cap: $13 billion (Me: Wow. I knew LNKD was doing well, but that is a mighty big market cap)
Zynga‘s market cap: $2.3 billion
Trulia‘s market cap: $160 million — that’s million, with an m (Trulia went public last week, a/k/a it IPO’ed last week, i.e., it sold shares to the general public for the first time) (Me: Wow. That is a low market cap compared to what we’ve been seeing other Internet company’s go out at)
So which would you rather buy: three and a half LinkedIns or one Facebook? That is the ratio of their market caps, roughly.
And how about two Intels versus one Google? Google’s market cap is about two times greater than Intel’s.
Or how ’bout 400 Trulias versus one Apple? That’s a whole lot of Trulii.
* * *
So what does this have to do with being a good investor?
If you want to invest in stocks (as opposed to investing in baskets of stocks, i.e., mutual funds, or the modernized version of mutual funds, ETFs, as you do in 401k plans and as many smart investors do for all their investing), it’s important to understand that a stock price is the result of millions of decisions over time reached, jointly, between sellers owning little slices of a company (called the company’s “shares”) and buyers looking to buy those shares. They haggle and head-fake and swoon and swerve, putting on airs and doing more than a little game-playing — to arrive at a price where they can do a deal.
And all those decisions are, each business day, aggregated over all the shares of the company. When you take that price and apply it to all the shares of the company, you get something close to a real-life price for the whole company (remember: the control premium takes the price higher just about always).
So do you want to try to make decisions that choose one side or the other among all those millions of decision-makers — making a decision about whether the buyer or the seller is, at any given time, doing the right thing? And, if so, how comfortable are you that that right-thing will do you well over the time period over which you want to own (or not own) the stock?
That is what investing — at least at its most fundamental level — is all about (pun intended).
The other sort of investing — technical investing rather than fundamental investing — couldn’t care less about market caps. Instead it looks at lines and graphs and pretty pictures, from which it divines the future, tea-leaf-like.
But technical investing is not a First-Thing topic. Indeed, technical investing is a topic that no one should spend much time on, if any, until they have well taken care of the Numero Uno through Numero Cinco determinants of financial health.
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Space Shuttles and Scarcity: It Takes a Willing Country
Friday, September 21, 2012 at 11amBy John Friedman
The Bay Area just wonk bonkers watching the Space Shuttle Endeavor, as it flew over, low, atop a modified 747, on its way to its final resting place in Southern California.
We don’t build those things any more. Or fly them into low outer space. I think that’s a shame (though it might just be that Endeavor buzz hitting me . . . ).
Now, I’m not an expert at space policy (for expertise and good reads on space, I recommend The Bad Astronomer, Phil Plait, at Bad Astronomy) (and to him I give credit for the idea of using playful made-up replacement labels to mean “click on this to make it bigger,” today’s version of which is, “Click to encontinentenate“).
So my non-expert understanding of our space industry is that (a) we are looking at privatizing and for-profiting more and more of our program, and (b) we hit “pause” on our NASA programs sometime in the last several decades and, as a result, (c) today we are experiencing a lull in our space program, with no peopled [sic: manned] flight to the moon or beyond until at least 2025 (landing on an asteroid), but with (d) at least one big-dreamer, named Bas Lansdorp, planning on entrepreneuring his way to building a permanent settlement of humans on Mars by 2023.
That’s a far, far cry from what it once was.
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I believe that our — America’s — financial wherewithal is not vastly different from what it was 30 and 40 years ago, when we were still dreaming and building big. True, we’ve lost some of our first-mover advantage (which for us truly was an advantage) and have now been leapfrogged by some more recent entrants (e.g. China), just as we leapfrogged others when we first entered (e.g. the UK).
Rather, I think the baby is drowning in the bathtub (that’s an important reference, so, if you are like most folks and therefore find that reference meaningless, please, if you want to click on but one link in this piece, that’s the one to click on).
Building big is typically a collectivist activity. Plain and simple.
I wish the best of luck to Bas on going it alone, but I suspect that establishing a human-populated base on Mars is a bigger task than any one person can accomplish (with hats off to Elon Musk for accomplishing something in space that is big, but not nearly as big as, say, going to the Moon, Alice, to the Moon . . . or to Mars, Alice, to Mars, for that matter).
Rather, it takes a country — and a strong, willing and willful country at that — to go to the Moon or to Mars.
* * *
I view this space-lull as one of many scarcities we all are contending with now. It ain’t fun.
For instance (I hate sounding like an old geezer when saying this, but say it I must): when I was young and a student at University of California (in the 80s for law and the 90s for MBAing), it was affordable. It wasn’t free, but you could do it.
That’s gone, probably forever.
Nowadays many, many students get screwed (royally and utterly screwed) by private for-profit schools and end up with tens of thousands of dollars of debt (or more) and no job to show for it.
That’s what an MBA would call a Bad Return on Investment, to say the least. And a real transfer of wealth.
* * *
The big question, then, is whether the scarcity is unavoidable, or self-generated. I am not sure. But even if your answer is, Some of each, why, then, all I can say is, Stop It! Stop generating even an iota of scarcity.
Scarcity is, after all, a very real thing. There’s only so much of anything in the world.
So, just as I believe that you (and all of us, for that matter) should be extra kind and gentle towards yourself (because the world is, by and large, predisposed to not be all that kind and gentle towards you, so why pitch in and help?), so, too, do I believe that we should all be extra careful not to increase the scarcity in the world (because there is already plenty of it to go around).
Add, yes, if that last parenthetical made your head hurt, well, then, you definitely read it as it was intended!
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Today’s Phishing Report: Knowing the All-Important Hover Function
Thursday, September 20, 2012 at 11amBy John Friedman
Janie Clark and Stacey Cook write to tell me that my HDTV order has shipped.
But — oh no! — they went and shipped my HDTV (I want my HDTV!) to the wrong addresses (499 S paolo St, Appartments [sic] 5B ,S Maria, DC [sic]/ United States and 259 11th Dr [sic] , App. 2A / S Paolo, WA [sic]/ United States). And Janie and Stacey have weird email addresses (bearishi991@omahahen.org and digestingxqf722@bernina.co.il, respectively)
And — oh no oh no oh no! — come to think of it, I didn’t even order an HDTV. What to do?
* * *
If I’m not smart, I’ll trust these emails to be what they purport to be, and I’ll dig a little deeper into them, i.e., I’ll click on the links in the emails.
The problem with doing that is that every link in these emails — every single one — is disguised, so that each link in these emails — every single one — will, if I click on it, take me to a place to which I do not wish to be taken. In this particular instance, the Janie email wants to take me to a website called samaricart.com and Stacey’s email wants to take me to a website called greetingstext.com — even though the emails make it look like the links will take me to Amazon’s website, at amazon.com.
No good, no doubt, awaits those who go to samaricart.com or greetingstext.com.
Don’t go there!
If you did — if you did click on one of the links that look to be a link to Amazon.com, you would instead be linked to samaricart.com or greetingstext.com, and then the scoundrels running those sites would know who you are — at least a little bit. At minimum, they’ll know where you are located on the Internet (because, to serve up the web page that you’d be looking at on your computer, they have to send the information about what the web page looks like, etc., to you, so they would know your address on the Internet). And, then, once you’re on their scoundrel-site, all sorts of other evil things could befall you and your computer.
Don’t go there!
* * *
So how do I know this? How do I know that the links inside these phishing expedition emails will take me to a place at which I don’t want to be?
To know this, I simply used the very lovely “hover” function that’s built into most email readers. Take the Thunderbird email reader, for instance, which I use for retrieving and then reading email sent to my non-business email accounts (which tend to be spammed more than my business accounts because I’ve been vewwwwry careful about keeping my business email accounts as pristine as possible — a topic for another posting — and less careful about the non-business accounts).
To hover in Thunderbird I simply place — hover — the mouse pointer (that’s the pointer I move around by moving the mouse around) on top of the link, but without clicking the mouse. Above all, when you hover you must not click.
When I do this, the actual destination of the link shows up in the left-most part of Thunderbird’s status bar — that’s the area at the bottom of the window in which I have TBird loaded. So when I hover over a link, I look in the bottom left hand corner of the window inside of which I’m reading email, and, lo’ and behold, thar she blows — there I see the Internet address to which I’ll be transported if I were to click on the link over which I am hovering. Cool, eh?
* * *
Email clients vary about how this works and what shows where. On the email client that Apple builds into iPads, iPods, iPhones, etc. (I think it’s called Mail), for instance, you do the same thing by holding your finger down on top of the link, for a few seconds, at which point a notification will scroll up from the bottom showing you where the link will take you, and giving you a few choices about what to do with the link (open it, copy it, etc.).
If you do this on your iWhatever, and you then see a link to some unfamiliar place, just lift up your finger and go look at something else; you will have successfully avoided being phished.
* * *
To protect yourself online, please know the hover function of the program in which you read email, and, if you ever see an email from someone you don’t know or from a business with which you didn’t biz, you are, for-pretty-sure, being phished, and you should, at-most, use the hover function to smarten yourself up about how some scoundrels out there are trying to hurt you.
And do stay away from San Paolo, DC, United States. It t’ain’t safe there.
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