On The Overspent American

I recently finished reading The Overspent American – Upscaling, Downshifting and the New Consumer – by Juliet B. Schor.

Below are key lessons in the form of excerpts that I found particularly insightful from this book in which Juliet “analyzes the crisis of the American consumer in a culture where spending has become the ultimate social act”:

1- “While I believe all Americans are deeply affected by consumerism, this book is directed to people…whose income afford comfortable lifestyle. I focus on more affluent consumers not because I believe that inequalities of consuming power are unimportant. Far from it. They are at the heart of the problem. But I believe that achieving an equitable standard of living for all Americans will require that those of us with more comfortable material lives transform our relationship to spending. I offer this book as a step in that direction.”

2- “This book is about why: About why so many middle-class Americans feel materially dissatisfied…How even a six-figure income can seem inadequate, and why this country saves less than virtually any other nation in the world. It is about the ways in which, for America’s middle classes, “spending becomes you,” about how it flatters, enhances, and defines people in often wonderful ways, but also how it takes over their lives…IT analyzes how standards of belonging socially have changes in recent decades, and how this change has introduced American to highly intensified spending pressures. And finally, it is about a growing backlash to the consumption culture, a movement of people who are downshifting – by working less, and living their consumer lives much more deliberately.”

3- “…Even though products carry well-recognized levels of prestige, are associated with particular kinds of people, or convey widely accepted messages, we cannot automatically infer the motivations of the consumers who buy them…There are other sources of meaning (beyond social inequalities). Gender, ethnicity, personal predisposition, and many other factors help structure the meanings and motivation attached to consuming.”

4- “First, for a significant number of branded and highly advertised products, there are no quality differences discernible to consumers when the labels are removed; and second, variation in prices typically exceeds variation in quality, with the difference being in part a status premium…The extra money we spend could arguably be better used in other ways – improving our public schools, boosting retirement savings, or providing drug treatment for the millions of people the country is locking up in an effort to protect commodities others have acquired. But unless we find a way to dissociate what we buy from who we think we are, redirecting those dollars will prove difficult indeed.”

5- “Today, in a world where being middle-class is not good enough for many people and indeed that social category seems like an endangered species, securing a place means going upscale. But when everyone is doing it, upscaling can mean simply keeping up. Even when we are aiming high, there’s a strong defensive component to our comparisons. We don’t want to fall behind or lose the place we’ve carved out for ourselves.”

6- “To maintain psychological comfort, most of us must transcend the strictures of the current consumption map…The first step is to decouple spending from our sense of worth, a connection basic to all hierarchical consumption maps. The second is to find a reference group for whom a low-cost lifestyle is socially acceptable.”

7- “I outline nine principles to help individuals, and the nation, get off the consumer escalator…1) Controlling desire…2) Creating a new consumer symbolism: making exclusivity uncool…3) Controlling ourselves: voluntary restraints on competitive consumption…4) Learning to share: both as a borrower and a lender be…5) Deconstruct the Commercial system: Becoming an Educated Consumer…6) Avoid “Retail Therapy”: Spending is Addictive…7) Decommercialize the Rituals…8) Making Time: Is work-and-spend working?…9) The need for a coordinate intervention.”

8- “It can hardly be possible that the dumbing-down of America has proceeded so far that it’s either consumerism or nothing. We remain a creative, resourceful, and caring nation. There’s still time left to find our way out of the mall.”

Regards,

Omar Halabieh

The OVerspent American

On The Money Game

I recently finished reading The Money Game by George Goodman (pseudonym Adam Smith).

This is a classic about the stock market and investing. George covers a breadth of topics in that area based on his insider experience. This includes the psychology of the investor (“you”), IT systems and their impact on the investing field, the professional money managers and their role in the Game etc. The concepts are introduced in an accessible, and often humorous style. While the author does not offer direct investing advice, he does expose what he calls “the biases” that exist in the market – that are essential to take into account to be successful together with good judgment.

George is very successful at immersing the reader into the culture, the psychology and way of thinking that dominates the financial markets and its participants. While this book is dated, most of the concepts discussed still apply to the financial industry today. A recommended read for anyone looking to gain more insight into the Stock Market.

Below are excerpts from the book that I found particularly insightful:

1) “If you are a successful Game player, it can be a fascinating, consuming, totally absorbing experience, in fact it has to be. It it is not totally absorbing, you are not likely to be among the most successful, because you are competing with those who do find it absorbing.”

2) “The irony is that this is a money game and money is the way we keep score. But the real object of the Game is not money, it is the playing of the Game itself. For the true players, you could take all the trophies away and substitute plastic beads or whale’s teeth; as long as there is a way to keep score, they will play.”

3) “In short, if you really know what’s going on, you don’t even have to know what’s going on to know what’s going on.”

4) “You must use your emotions in a useful way…Your emotions must support the goal you’re after…You must operate without anxiety.”

5) “The strongest emotions in the marketplace are greed and fear. In rising markets, you can almost feel the greed tide begin…the greed itch begins when you see stocks move that you don’t own.”

6) “If you know that the stock doesn’t know you own it, you are ahead of the game. You are ahead because you can change your mind and your actions without regard to what you did or thought yesterday.”

7) “Who makes the really big money? The inside stockholders of a company do, when the market capitalizes the earnings of that company.”

8) “What you want is the company which is about to do that (compounding earnings) over the next couple of years. And to do that, you not only have to know that the company is doing something right, but what it is doing right, and why these earnings are compounding.”

9) “What I have told you is a set of biases so you can make your own judgement.”

10) “It is an informal thesis of charting that there are roughly four stages of stock movement. These four are: 1) Accumulation: To make a perfect case, let us say the stock has been asleep for a long time, inactively trade. Then the volume picks up and probably so does the price. 2) Mark-up…Now the supply may be a bit thinner, and the stock is more pursued by buyers, so it moves up more steeply. 3) Distribution. The Smart People who bought the stock early are busy selling it to the Dumb People who are buying it late, and the result is more or less a standoff, depending on whose enthusiasm is greater. 4) Panic Liquidation. Everybody gets the hell out, Smart People, Dumb People, “everybody.” Since there is “no one” left to buy, the stock goes down.”

11) “Does this mean that charts can be ignored? Perhaps charts can be a useful tool even without inherent predictive qualities. A chart can give you an instant portrait of the character of a stock, whether it follows a minuet, a waltz, a twist, or the latest rock gyration. The chart can also sometimes tell you whether the character of the dancer seems to have changed.”

12) “The computer is going to sanctify charting. The Chartists are on their way.”

13) “The characteristics of performance are concentration and turnover. By concentration, as I said before, I mean limiting the number of issues. Limiting the number of issues means that attention is focused sharply on them, and the ones that do not perform well virtually beg to be dropped off…Furthermore, you are going to be scouting for the best six ideas, because if you find a really good one it may bump one of your other ones off the list. Turnover means how long you hold the stocks…All that turover has doubled the volume in the last couple of years, and the brokers are getting very rich.”

14) “The further we come along, the more apparent becomes the wisdom of the Master in describing the market as a game of musical chairs. The most brilliant and perceptive analysis you can do may sit there until someone else believes it too, for the object of the game is not to own some stock, like a faithful dog, which you have chosen, but to get to the piece of paper ahead of the crowd. Value is not only inherent in the stock, it has to be value that is appreciated by others…It follows that some sort of sense timing is necessary, and you either develop it, or you don’t.”

15) “The aspiration of the people are a noble thing and no one is against jobs. But it does seem easy to produce them with currency rather than productivity. Central governments soon learn the utility of a deficit. It is convenient to take the views of the economists who followed Keynes and spend money during recessions. There are even problems on that side of the equation, because even with the breadth of statistical reporting and with computer, speed, this kind of economics is still inexact, and the central government can find itself pressing the wrong lever at the wrong time.”

16) “The love of money as a possession – as distinguished from love of money as a means to the enjoyments and realities of life – will be recognized for what it is, a somewhat disgusting morbidity, one of those semi-criminal, semi-pathological propensities which one hands over with a shudder to the specialists in mental disease.”

Regards,

Omar Halabieh

The Money Game

On More Than You Know

I recently finished reading the book More Than You Know – Finding Financial Wisdom in Unconventional Places – by Michael J. Mauboussin.

The core premise of this book is best summarized by the author: “More Than You Know’s core premise is simple to explain but devilishly difficult to live: you will be better investor, executive, parent, friend – person – if you approach problems from a multidisciplinary perspectives”. He then details his approach: “While the essays cover a range of topics, I categorize them into four parts – investment philosophy, psychology of investing, innovation and competitive strategy, and science and complexity theory. Consider these compartments in a toolbox, each addressing a distinct facet of investing.”

Michael does an excellent job of explaining his multidisciplinary perspectives for investing in a very accessible and practical way – assuming very little prior knowledge. The separate essays are very focused and direct to the point, making this book very easy and relatively quick to ready. A refreshing and very interesting take on investing that can be extended to numerous other fields. A must read!

Below are key excerpts from the book that I found particularly insightful:

1- “Rubin – “It’s not that results don’t matter. They do. But judging solely on results is a serious deterrent to taking risks that may be necessary to making the right decision. Simply put, the way decisions are evaluated affects the way decisions are made.”

2- “I would argue that many of the performance challenges in the business stem from an unhealthy balance between the profession and the business. Many of the investment managers that do beat the market seem to have the profession at the core.”

3- “…The leading thinkers and practitioners from somewhat varied fields have converged on the same formula: focus not on the frequency of correctness but on the magnitude of correctness.”

4- “The lesson from the process of theory building is that sound theories reflect context. Too many investors cling to attribute-based approaches and wring their hands when the market doesn’t conform to what they think it should do.”

5- “Investors need to pay a great deal of attention to what influences their behavior. Three of Cialdini’s six tendencies are particularly relevant for investors: consistency and commitment, social validation, and scarcity.”

6- “A dominant idea in Western society is that we should separate emotion and rationality. Advances in science show that such a separation is not only impossible but also undesirable. Yet successful investing requires a clear sense of probabilities and payoffs. Investors who are aware of affect are likely to make better decisions over time.”

7- “In markets, a symbiotic relationship between positive and negative feedback generally prevails…But the evidence shows that positive feedback can dominate prices, if only for a short time.”

8- “So The issue is not whether individuals are irrational (they are) but whether they are irrational in the same way at the same time.”

9- “In effect, when the environment is uncertain, it helps to start with lots of alternatives (e.g., synaptic connections) and then select (via pruning) the ones that are best given the environment. The process is undoubtedly costly because lots of energy and resources necessarily go to waste, but it’s the best one going.”

10- “Chess master Bruce Pandolfini observes four behaviors that are consistent among chess champions and useful in thinking through the short-term/long-term debate. 1) Don’t look too far ahead…2) Develop options and continuously revise them based on the changing conditions…3) Know your competition…4) Seek small advantages.”

11- “Idea diversity allows you to find what Johnson calls “weak signals.” A weak signal may be the start of a trend away from the dominant path (such as new technology or development) or the right piece of information at the right time from an unexpected source.”

12- “In his 2001 letter to shareholders, Warren Buffett distinguishes between experience and exposure. Experience, of course, looks to the past and considers the probability of future outcomes based on occurrence of historical events. Exposure, on the other hand, considers the likelihood – and potential risk – of an event that history (especially recent history) may not reveal. Buffett argues that in 2001 the insurance industry assumed huge terrorism risk without commensurate premiums because it was focused on experience, not exposure.”

13- “If the stock market is a system that emerges from the interaction of many different investors, then reductionism – understanding individuals – does not give a good picture of how the market works. Investors and corporate executives who pay too much attention to individuals are trying to understand markets at the wrong level. An inappropriate perspective of the market can lead to poor judgments and value-destroying decisions.”

14- “The stock market has all of the characteristics of a complex adaptive system. Investors with different investment styles and time horizons (adaptive decision riles) trade with one another (aggregation), and we see fat-tail price distributions (nonlinearity) and imitation (feedback loops). An agent-based approach to understanding markets is gaining broader acceptance. But this better descriptive framework does not offer the neat solutions that the current economic models do.”

Regards,

Omar Halabieh

More Than You Know

On The Great Crash 1929

I recently finished reading The Great Crash 1929 by John Kenneth Galbraith.

As John best summarizes it: “The task of this book, as suggested on an early page, is only to tell what happened in 1929. IT is not to tell whether or when the misfortunes of 1929 will recur. One of the pregnant lessons of that year will by now be plain: it is that very specific and personal misfortune awaits those who presume to believe that the future is revealed to them. Yet, without undue risk, it may be possible to gain from our view of this useful year some insights into the future. We can distinguish, in particular, between misfortunes that could happen again and others which events, many of them in the aftermath of 1929, less improbable. And we can perhaps see a little of the form and magnitude of the remaining peril. ”

A great book that captures the environment and culture that lead up to the market collapse in 1929. The learnings are timeless and can easily apply to the financial crash of 2008 as they did back in 1929. A highly recommended read for anyone interested in finance, economics, investing and/or regulation.

Below are excerpts from the books that summarize key learnings:

1- “No one can doubt that the American people remain susceptible to the speculative mood – to the conviction that enterprise can be attended by unlimited rewards in which they, individually, were meant to share. A rising market can still bring the reality of riches. This, in turn, can draw more and more people to participate. The government preventatives and controls are ready. In the hands of a determined government their efficacy cannot be doubted. There are, however, a hundred reasons why a government will determine not to use them.”

2- “It follows that the only reward to ownership in which the boomtime owner has an interest is the increase in values. Could the right to the increased value be somehow divorced from the other and now unimportant fruits of possession and also from as many as possible of the burdens of ownership, this would be much welcomed by the speculator. Such an arrangement would enable him to concentrate on speculation which after all, is the business of a speculator. Such is the genius of capitalism that where a real demand exists it does not go long unfilled. In all great speculative orgies devices have appeared to enable the speculator so to concentrate on his business.”

3- “One of the oldest puzzles of politics is who is to regulate the regulators. But an equally baffling problem, which has never received the attention it deserves, is who is to make wise those who are required to have wisdom…For these people, however, every proposal to act raised the same intractable problem. The consequences of successful action seemed almost as terrible as the consequences of inaction, and they could be more horrible for those who took the action.”

4- “Between human beings there is a type of intercourse which proceeds not from knowledge, or even fro lack of knowledge, but from failure to know what isn’t know… Wisdom, itself, is often an abstraction associated not with fact or reality but with the man who asserts it and the manner of its assertion.”

5- “Mark Twain – Don’t part with your illusions; when they are done you may still exist, but you have ceased to live.”

6- “Thus viewed, the stock market is but a mirror which, perhaps as in this instance, somewhat belatedly, provides an image of the underlying or fundamental economic situation. Cause and effect run from the economy to the stock market, never the reverse.”

7- “Bagehot – Every great crisis reveals the excessive speculations of many houses which no one before suspected.”

8- “Moreover, regulatory bodies, like the people who comprise them, have a marked life cycle. In youth they are vigorous, aggressive, evangelistic, and even intolerant. Later they mellow, and in old age – after a matter of ten or fifteen years – they become, with some exceptions, either an arm of the industry they are regulating or senile.”

9- “Far more important than rate of interest and the supply of credit is the mood. Speculation on a large scale require pervasive sense of confidence and optimism and conviction that ordinary people were meant to be rich. People must also have faith in the good intentions and even in the benevolence of others, for it is by the agency of others that they will get rich…Savings must also be plentiful. Speculation, however it may rely on borrowed funds, must be nourished in part by those who participate…Finally, a speculative outbreak has a greater or less immunizing effect. The ensuing collapse automatically destroys the very mood speculation requires. It follows that an outbreak of speculation provides a reasonable assurance that another outbreak will not immediately occur.”

10- “There seems little question that in 1929, modifying a famous cliche, the economy was fundamentally unsound…five weaknesses seem to have had an especially intimate bearing on the ensuing disaster. They are: 1) The bad distribution of income, 2) The bad corporate structure, 3) The bad banking structure, 4) The dubious state of the foreign balance, 5) The poor state of economic intelligence.”

11- “Here, at least equally with communism, lies the threat to capitalism. It is what causes men who know that things are going quite wrong to say that things are fundamentally sound.”

Regards,

Omar Halabieh

The Great Crash 1929

Review – The Big Short: Michael Lewis

This book should be rated 6 stars if such rating existed. Michael Lewis manages to top his masterpiece Liar’s Poker with an even more thrilling account of the events that led to the recent financial crisis. Although most of us are aware of the fundamental cause of the crisis being the sub-prime mortgages, this book sheds light on the pivotal role that the rating agencies played in creating it. Michael presents the events from both angles, the entities that were long and the shorts who were betting on the melt-down of the financial system. Through reading this book, one does not only learn the events, but learns how to analyze like the financial managers on Wall-Street. This book can be viewed as an investor’s guide to irrational market. Michael does a great job at the end to relate this piece of work to Liar’s Poker and to show how what he talked about then, came to life now in the form of a crisis. One quote I particularly enjoyed is:

“The line between gambling and investing is artificial and thin. The soundest investment has the defining trait of a bet (you loosing all of your money in hopes of making a bit more), and the wildest speculation has the salient characteristic of an investment (you might get your money back with interest). Maybe the best definition of “investing” is “gambling with the offs in your favor.”

In short, if you wanted to read one book to truly understand the financial crisis, this should definitely be the one. Highly recommended!

Regards,

Omar Halabieh

On Financial Regulations

The aftermath of the financial crisis, has seen nothing short of a veritable crusade against the financial institutions around the world. The primary weapon used: financial regulations. Looking back however, financial regulations are not new and have been extensively used in the past. Yet, every financial crisis, including the most recent one, has eclipsed the ones in the past (minus the interventions).   One item that is completely missed is that regulations tend to focus almost exclusively on the supply side of the supply/demand curve. What they fail to address is the inherent demand that exists in the investment/consumer community. In numerous other applications, addressing the supply side without curbing the demand side has not led the required outcomes (look at drugs for instance).

In short, as long as the demand exists, innovations in new supplies (financial instruments) will emerge to satisfy them. The major question is, how can the demand be better managed, through regulation or other methods. This is a questions I continuously think about. Further comments to follow.

Regards,

Omar Halabieh

Disclosure: Long C and NYB.