Assorted links

by on July 8, 2014 at 12:53 pm in Uncategorized | Permalink

1. Claims about the brains of great traders.  Not what I would have said.

2. Data on long-term trends, visually presented.

3. Can Google hackers put a restaurant out of business?  And a simple critique of smart people (not really about Google, no slight intended).

4. Predictions for 2025, including flying cars.  And the public choice angles on smart guns, by Joseph Nocera.

5. David Warsh with various speculations on various Nobel Prizes.

6. Ryan Avent: we still don’t know what is up with productivity.

ummm July 8, 2014 at 1:09 pm

1. yea I read this somewhere else. The thing is, Buffet almost never sold. So the part of his brain that is flashing to ‘sell’ he must suppress. I believe that some people are born to be great traders, it’s not through the greedy/fearful rule.

msgkings July 8, 2014 at 3:06 pm

Also, Warren Buffett is not and never has aspired to be a ‘trader’.

charlie July 8, 2014 at 6:09 pm

Yes he was quite an effective trader prior to his move on Amex.

Then he learned that control is easier than trading.

Tax considerations are the largest part.

Brian Donohue July 8, 2014 at 6:47 pm

Wrong. Point to msgkings.

Andrew' July 8, 2014 at 7:21 pm

I’m not entirely sure. He started out learning the “cigar butt” approach from Ben Graham, seeking discarded “cigar butt” stocks to drag one last puff off of them. This implies selling after a dead cat bounce so-to-speak.

After that, apocryphally at least, he evolved to the Phil Fisher method involving pricing power and business moats. It was then that he added the part about holding, but only after buying at a discount, and only because he limited his initial purchases to companies with bulletproof fundamentals with track records measured in decades if not centuries, implying (though not guaranteeing) a durable business moat for many more decades (if not centuries).

Although he does now buy control, I think it is for capital allocation as he has stated that he wants businesses a ham sandwich can manage and he has also said he buys into good management and leaves them alone. But it
is often difficult to discern the exact truth of the Buffett mythology.

charlie July 8, 2014 at 7:43 pm

“The controls category (mostly Berkshire and HK) and the workouts category had a decent year, but the big gain was made in the generals – Generals – Relatively Undervalued. This comes as a surprise as in 1957, 1960 and 1962, it was the controls or the workout category that contributed the most to Buffett’s outperformance. The Generals – Relatively Undervalued category tends to correlate with the market performance.

Buffett did not disclose the investments in the Generals – Relatively Undervalued category in the letter, so a little guess work is required. Here is what he wrote:

“Our relative performance in this category was the best we have ever had – due to one holding which was our largest investment at yearend 1965 and also yearend 1966. This investment has substantially out-performed the general market for us during each year (1964, 1965, 1966) that we have held it. While any single year’s performance can be quite erratic, we think the probabilities are highly favorable for superior future performance over a three or four year period. The attractiveness and relative certainty of this particular security are what caused me to introduce Ground Rule 7 in November, 1965 to allow individual holdings of up to 40% of our net assets. We spend considerable effort continuously evaluating every facet of the company and constantly testing our hypothesis that this security is superior to alternative investment choices. Such constant evaluation and comparison at shifting prices is absolutely essential to our investment operation.

It would be much more pleasant (and indicate a more favorable future) to report that our results in the Generals -Relatively Undervalued category represented fifteen securities in ten industries, practically all of which outperformed the market. We simply don’t have that many good ideas. As mentioned above, new ideas are continually measured against present ideas and we will not make shifts if the effect is to downgrade expectable performance. This policy has resulted in limited activity in recent years when we have felt so strongly about the relative merits of our largest holding. Such a condition has meant that realized gains have been a much smaller portion of total performance than in earlier years when the flow of good ideas was more substantial.

The sort of concentration we have in this category is bound to produce wide swings in short term performance –some, most certainly, unpleasant. There have already been some of these applicable to shorter time spans than I use in reporting to partners. This is one reason I think frequent reporting to be foolish and potentially misleading in a long term oriented business such as ours.”

If that isn’t trading, I’m not sure what is.

Andrew' July 8, 2014 at 7:51 pm

He’s saying he has one (or a few) stock and he’s riding it.

So, I think the truth is in the middle.

Brian Donohue July 8, 2014 at 7:59 pm

@Andrew’ charlie, some good food for thought here. In my mind, though, a trader is someone who is buying something he intends to sell at 2:00, or by Thursday, or Labor Day at the latest.

This has never been Buffett’s MO. As far as I can tell, everything he buys, he buys for the stream of earnings it can generate. I’m not sure when his quote about investing as if the markets would be closed for 10 years came, but it was decades ago.

charlie, there are a couple lines in there that give a whiff of trading, but it’s mostly investing talk:

“While any single year’s performance can be quite erratic, we think the probabilities are highly favorable for superior future performance over a three or four year period.”

“This policy has resulted in limited activity in recent years when we have felt so strongly about the relative merits of our largest holding.”

“I think frequent reporting to be foolish and potentially misleading in a long term oriented business such as ours.”

charlie July 8, 2014 at 8:06 pm

You have to do straussian reads on Buffett.

As I said, he was effective. Not great. But until he was able to build up his AMEX position he wasn’t what you think he was.

But to get from 100K to 1M, and then to 100M requires some degree of trading.

Andrew' July 9, 2014 at 12:34 pm

My only feeling is Buffett should be studied carefully.

I also don’t quite look at it as that he wasn’t a trader (or that he was) as much as he rejected (or left behind, or augmented) “traderism” in favor of a positive sum investment theory.

Shane M July 8, 2014 at 9:36 pm

Agreed, Buffett is not the picture you’d associate w/ trader, but he does have a nose for identifying bubbles as well as good ability to buy during market weakness. He liquidated his first partnerships at a market peak due to not able to find good investments. He made an excellent bubble call in 2000. In late 2008 he made a good call on safe to start buying stocks again. He also understood overvaluation of housing well. I’m not built that way – I tend to not see bubbles until after the fact.

msgkings July 9, 2014 at 10:55 am

Agree 100% with what you wrote but that to me is a different skill than ‘trading’, which implies short term horizons. That’s the opposite of Buffett’s MO. We may be arguing semantics here, but we are commenting on the ‘brains of great traders’ and I think the article refers to the more traditional definition invloving lots of short term decisions. Buffett’s mastery is identifying long term over and undervaluation.

Andrew' July 9, 2014 at 12:36 pm

Paraphrasing what Munger said about Buffett and precise valuation equations: “He never actually did any.”

What he did was stack the deck so far in his favor that precision was superfluous. So, he was trading in the sense that he waited for the market to give him an opportunity rather than buying and then looking for opportunities to sell.

Shane M July 9, 2014 at 7:16 pm

I’m reading “Snowball”, and right now I’m reading the chapters on bear market of 1973/74. The market is garbage, investors are scared to death, and the story is Buffett is hustling to free up every scrap of money he can to buy into the market. I personally was scared during the financial crisis of 2008 – I couldn’t understand why valuations just kept falling. I spent my cash into the market early and it just kept falling – some companies selling at what I considered absurd levels, but I was out of cash and just taking losses until it finally bottomed. I’m trying to teach myself so I’ll be ready for the next panic, but I have to know that I’m not likely to respond as well as I’d hope because I don’t see them coming in advance.

Also – there’s a story that Soros also has a physiological reaction when market are too high – something like a twinge in his back if I recall properly (could be wrong).

Floccina July 15, 2014 at 5:26 pm

For me it helps to think that I am buying a stream of income (dividends + 1/2 of earnings not distributed + anticipated income growth). It helps me see falling stock prices as mostly positive and rising stock prices as partly negative.

Chris Weber July 8, 2014 at 1:13 pm

1. Claims about the brains of great traders. Not what I would have said.
What would you have said, Tyler?

Andrew' July 8, 2014 at 5:39 pm

Mood affiliation. There must be some herd pleasure of the people who enjoy being part of the hysteria or fear being left behind.

The Other Jim July 8, 2014 at 1:20 pm

Forget flying cars. Nobody reading this will ever commute to work in a driverless car.

Yankuba July 8, 2014 at 1:48 pm

I take that bet!

Steven Kopits July 8, 2014 at 3:23 pm

Me, too!

Andrew' July 8, 2014 at 5:33 pm

terms?

Andrew' July 8, 2014 at 5:36 pm

Double or nothing? I can almost assure you I will commute in a driverless flying car.

vanderleun July 8, 2014 at 6:22 pm

“I will commute in a driverless flying car…”

To your job as a worm farm.

Andrew' July 8, 2014 at 6:52 pm

terms?

Nick_L July 8, 2014 at 10:50 pm
Andrew' July 9, 2014 at 12:38 pm

I mean flying cars for realz. It is not going to look quite like the Moeller thing nor a scaled up quadrotor drone, but maybe something similar.

collin July 8, 2014 at 1:29 pm

What are your thoughts on long term trends? I don’t disagree with the 2025 but think most of them are 2050 trends.

I know solar is growing like gangbusters in California but it has a long way to go to the biggest energy source in the world.

vanderleun July 8, 2014 at 6:23 pm

Actually, solar is already the largest energy source in the world. Has been for about six billion years. Wake up.

Ray Lopez July 8, 2014 at 2:10 pm

@# 5 – Romer knows what I know: Intellectual Property protection, that is, “monopoly of ideas”, drives growth. It’s not enough to simply hope some Good Samaritan gives up the fruit of his intellectual effort for a mere pat on the back from society. True, these people exist, and progress is achieved through their selfless efforts. But giving somebody a monopoly for inventing something is also a driver of growth.

5. David Warsh with various speculations on various Nobel Prizes.
As usual, the arguments of both men were intricately related to other on-going debates in technical economics. Lucas, a University of Chicago professor, was at pains to preserve, for convenience’s sake, the assumption of perfect competition. Romer, educated at both Chicago and MIT and by then teaching at the University of Rochester, was intent on writing intellectual property into the act, employing the sixty-year-old convention of monopolistic competition. Pure competition “spillovers,” meaning, roughly, the gains you reap from watching your neighbors, animated the first models that Romer and Lucas produced. Romer’s second – and final – model depended on income streams that arose from new processes and new goods. The University of Chicago hired Romer; after a year, he moved to California where his wife had obtained a better job.

It seems clear that Romer won the debate. Aghion, then at MIT, and Howitt, then at the University of Western Ontario, quickly buttressed the case for viewing growth through the lens of monopolistic competition, but without producing the same clean convention as Romer’s “non-rival goods,” that is, know-how that can be possessed by more than one person at the same time. Helpman and Grossman obtained the same result.

Cliff July 8, 2014 at 4:38 pm

Both Romer and you are clueless about IP

CD July 8, 2014 at 2:15 pm

Re #3, the nature of search has hurt small businesses for some years. There’s a bunch of predatory business listing sites which swamp genuine small-biz sites so that the can be very hard to find.

Hadn’t realized how easy it is to alter Google’s map data.

So you have to pay a specialist to protect your online profile. Does this raise barriers to entry if you’re trying to start out as a locksmith, plumber, caterer, restaurateur – the kind of small, local, service-heavy business that folks traditionally started if they had skills and drive but not a great deal of capital?

Andrew' July 8, 2014 at 6:23 pm

I’ve noticed a few bad roads on the interwebz. Small business is one, Medical issues is another one. It is weird how Google Fail seems to cluster around discrete industries.

Bob July 8, 2014 at 2:17 pm

1. The interesting part would be to know if said investors were already identified as good before the testing happened, or if we are just seeing the obvious: The people that lucked out with their predictions of a crash did better.

If you are afraid and leave the market way too early, you will not do better, but you will be listening to the same signals. Then everyone is an equally good trader and all that

londenio July 8, 2014 at 2:19 pm

3.b Academia has a similar problem: The ability to rationalize any opinion. Lunch conversations are often more frustrating than interesting. I don’t know if this is a characteristic of smart people in general, but a certain kind of people who also happen to be fairly smart.

mpowell July 8, 2014 at 5:43 pm

Maybe the problem is people who are not as smart as they think they are?

Urso July 8, 2014 at 6:07 pm

Stupid people also rationalize their every opinion; they’re just terrible at it.

ChrisA July 9, 2014 at 1:39 am

This is another version of the knowledge problem. Smart people are often but now always good at rhetoric. Rhetoric is the art of presenting plausible arguments for any particular position. Knowledge is what is actually proven to work, rhetoric is someone’s opinion about what might work. In government, academia and large corporations (like Google) people good at rhetoric can thrive at the expense of people good at knowledge because there is rent to be had. In competition for rent rhetoric is the skill you want not knowledge. Its obvious but people doling out the rent (the managers, the board, the politicians) give it to the people who have the best arguments for dealing with a particular problem or in other words who are good at rhetoric, which is not necessarily the people who have the best solution. This is why we should always try to allocate resources through markets and as little as possible through smart people decisions. Simply put markets are an evolutionary strategy way of finding out what ideas are good, and killing off bad ideas.

Art Vandelay July 8, 2014 at 2:44 pm

There is nothing controversial about the prize in 2004. Warsh is just mad about being wrong.

Steven Kopits July 8, 2014 at 3:25 pm

As regards productivity: You do realize that the oil and gas business vaporized $3 trillion to hold the oil supply steady after 2005, right? You think $3 trillion in dead weight costs might be enough to nudge that global needle?

John July 8, 2014 at 3:55 pm

3. Bertanga’s restaurant was “… in a wealthy subdivision of northern Virginia where a lot of government employees live on these estates and houses with two- or three-acre lots …”

While I finished the article I couldn’t mentally get past that sentence. What was the point in his lawyer making that statement, that way? It’s ruining my day.

anon July 8, 2014 at 5:42 pm

3. Can Google hackers put a restaurant out of business?

No. It was the ho-hum review on Tyler’s dining blog.

https://tylercowensethnicdiningguide.com/?p=459

Mark Thorson July 8, 2014 at 4:12 pm

Meanwhile, Chinese scientists have used MRI to discover the location of the brain’s corruption center.

http://www.scmp.com/news/china/article/1545137/corruption-all-mind

Hopefully, this will lead to an operation to surgically correct wayward government officials and party members.

JWatts July 8, 2014 at 5:19 pm

“4. Predictions for 2025, including flying cars. ”

There are several pretty doubtful predictions in this article.

“SOLAR POWER IS THE LARGEST SOURCE OF ENERGY ON THE PLANET”

Ummm, yeah this is completely garbage. Assuming their not counting biomass, hydro and wind as solar, theirs not a chance of this happening. Indeed, there’s not even a decent chance that solar will be the biggest source of electricity. There’s still no cost effect storage mechanism for solar power.

“In 2025, the researchers imagine an agricultural industry that grows its crops at high densities indoors using low-energy lighting systems. ”

The world isn’t going to switch millions of acres of crops to indoor growing in the next 11 years. This is the kind of prediction that’s been touted routinely since the 1950′s. And it’s been wrong every time.

“ELECTRIC AIR TRANSPORTATION – “micro-commercial aircraft” could serve as taxis. ”

We don’t have micro-commercial aircraft as common taxis with IC engines, and liquid fuel has a far better power to weight ratio than electric batteries. So this prediction is nonsensical.

“a significant investment in and testing of quantum teleportation will be underway using other forms of matter,””

Quantum teleportation refers to quantum information! It has nothing to do with teleporting matter.

About the author: “John Upton is a freelance journalist with an ecology background.” Since when did ecology become a buzzword for scientifically illiterate?

JWatts July 8, 2014 at 5:20 pm

Wow, I managed to misuse “their” wrong twice in the same sentence. Edit function anyone?

Finch July 8, 2014 at 5:48 pm

I predict that in 2025 autocorrect will fix the common usage question of “there” versus “their” for you.

Andrew' July 8, 2014 at 5:35 pm

“There’s still no cost effect storage mechanism for solar power.”

There is. Molten salt. I don’t think there is anything magic about the salt part. It’s just storing concentrated thermal solar heat to run the steam turbine at night.

NPW July 8, 2014 at 6:19 pm

By 2025 we might have a solar cell that converts to electricity at a rate that significantly beats Carnot. If we depend on molten salt, that won’t happen.

Andrew' July 8, 2014 at 6:51 pm

The man asked for storage!

JWatts July 8, 2014 at 9:59 pm

I don’t believe molten salt is cost effective. Assuming no subsidies of course.

Andrew' July 9, 2014 at 12:39 pm

It’s pretty close, and I don’t want to split hairs about the implicit subsidies that petroleum receives.

DK July 8, 2014 at 11:18 pm

#4 – all rubbish, from A to Z

Axa July 9, 2014 at 7:20 am

#2: data does not support the dystopian future narrative, I reject it ;)

Willitts July 9, 2014 at 11:28 am

3. How did this restaurant get business before Google?

Tom July 10, 2014 at 1:31 pm

#3 — why are there still socialists? Because they have >>an ability to convincingly rationalize nearly anything.<<

Smart folk all know how to lie to themselves, so as to believe their own lies. (See Barbara Brandon on her cheating husband Nathaniel & Ayn Rand ).

Once folk have an emotional conclusion, they use their rational mind to come up with rational reasons for that conclusion — while thinking those reasons are why they had the conclusion, when that conclusion was already formed (blink?) emotionally.
Emotional conclusion first, smart rationalization as "reasons" second.

The other issue with really smart folk, not mentioned in the article, is that they often have their egos involved with their "logical conclusions". This is especially in contrast to those not-stupid folk who just want to "win" / get rich. They have predictions and world views, but are most interested in making their business successful / selling more of what they sell, so if effective business is contrary to their predictions, they give up their predictions in order to get richer. Smart academics often hate this about businessmen.

Ryan July 12, 2014 at 8:42 am

6: Everyone is looking to technology to think about this productivity puzzle, but technology is not a sufficient condition for aggregate productivity growth. There is a literature; most aggregate productivity growth is accounted for by reallocation–entry/exit and factor flows–rather than within-business growth. See http://updatedpriors.blogspot.com/2014/07/productivity-and-reallocation.html

A productivity problem is a reallocation problem, and vice versa.

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