On Bad Investments and Marathons

This week, The New York Times launched Upshot , described as “a plainspoken guide to the news” and in essence, similar to two other explanatory new sites that have recently launched (Vox.com and FiveThirtyEight.com). My favorite piece so far on Upshot is Justin Wolfers’s “What Good Marathons and Bad Investments Have in Common” (because it combines two of my interests: finance and running):

In the usual analysis, economists suggest it’s worth putting in effort as long as the marginal benefit from doing so exceeds the corresponding marginal cost of that effort. The fact that so many people think it worth the effort to run a 2:59 or 3:59 marathon rather than a 3:01 or 4:01 suggests that achieving goals brings a psychological benefit, and that missing them yields the costly sting of failure.

But in other domains, this discontinuity between meeting a goal and being forced to confront a loss can lead to bad economic decisions. Because losses are psychologically painful, we sometimes strain too hard to avoid them.

For instance, when you sell your house, your goal may be to get at least what you paid for it. But this simple goal has led to disastrous decisions for those who bought homes in Florida or Nevada during the housing bubble. Too many homeowners set their selling prices with an eye on recouping past investments rather than on current market conditions, and as a result, their homes didn’t sell, deepening their financial distress.

Well worth the read in entirety.

The 2014 Annual Shareholder Letter from Warren Buffett

Fortune Magazine has a sneak peek into the annual shareholder letter than Warren Buffett will soon share with the Berkshire Hathaway shareholders. He shares two personal stories from his life and how the investment decisions have paid off over time. He echoes his wisdom in the following points:

  • You don’t need to be an expert in order to achieve satisfactory investment returns. But if you aren’t, you must recognize your limitations and follow a course certain to work reasonably well. Keep things simple and don’t swing for the fences. When promised quick profits, respond with a quick “no.”

  • Focus on the future productivity of the asset you are considering. If you don’t feel comfortable making a rough estimate of the asset’s future earnings, just forget it and move on. No one has the ability to evaluate every investment possibility. But omniscience isn’t necessary; you only need to understand the actions you undertake.

  • If you instead focus on the prospective price change of a contemplated purchase, you are speculating. There is nothing improper about that. I know, however, that I am unable to speculate successfully, and I am skeptical of those who claim sustained success at doing so. Half of all coin-flippers will win their first toss; none of those winners has an expectation of profit if he continues to play the game. And the fact that a given asset has appreciated in the recent past is never a reason to buy it.

  • With my two small investments, I thought only of what the properties would produce and cared not at all about their daily valuations. Games are won by players who focus on the playing field — not by those whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays.

  • Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important. (When I hear TV commentators glibly opine on what the market will do next, I am reminded of Mickey Mantle’s scathing comment: “You don’t know how easy this game is until you get into that broadcasting booth.”)

Read the rest here.

NANEX: Nightmare on Elm Street for HFT Traders

A thoughtful headline and a very good article about the small firm NANEX in this week’s Bloomberg piece:

Staring at four computer monitors, Eric Scott Hunsader, the founder of market-data provider Nanex LLC, looks for hints of illicit trading hidden in psychedelic images of triangles dancing with dots that represent quotes to buy and sell U.S. stocks broken down by the millisecond.

Charts of trading produced by Hunsader’s eight-person firm have captivated everyone from regulators to art gallery owners. One stunt involved a computerized piano piece mimicking quotes for an exchange-traded fund. He infuriates some traders, who say Nanex draws unwarranted conclusions and spreads conspiracy theories.

To Hunsader, the images created from market feeds are evidence of high-frequency trading firms exploiting market rules to turn a profit in a lawless environment. Though others in the industry see his reports and charts as propaganda, Nanex’s interpretations are helping to drive the public debate about the fundamental fairness of the modern stock market.

I’ve blogged about the importance of NANEX’s post on the blog in the past, particularly this excellent post titled “Einstein and The Great Fed Robbery.”

Why care about NANEX is doing? Because:

To illustrate computerized trading to the general public, Nanex has turned trading data into animated videos, with triangles and dots representing tens of thousands of orders dashing between exchanges. One video he posted on YouTube showed a 50-millisecond period in which quotes for Nokia Oyj dashed around the market at a rate of 22,000 per second. The video, published on Oct. 9, has been viewed more than 6,400 times.

He programmed a computer to play piano notes corresponding to different bids and offers for a popular exchange-traded fund, resulting in a manic staccato composition even when slowed down. It was meant to highlight what Hunsader says is the absurdity of modern computerized trading.

Worth reading the entire piece here.

Spend Money on TWTR or Spend Time on Twitter

I was really excited about the IPO of Twitter today. This is one company/service that I have used consistently over the last 5+ years, and I expect to continue using it for the foreseeable future. Which is why I really like Felix Salmon’s advice on how you can invest in Twitter without spending the cash:

So how is the individual investor supposed to navigate these treacherous waters? It’s actually incredibly easy. And it works like this. Twitter’s profits, if and when they ever appear, are going to be some fraction of its revenues. Its revenues, in turn, are going to be some fraction of the value it provides to its users. I have personally already extracted many thousands of dollars in value out of Twitter, over the past five years, and it hasn’t cost me a penny. On an ROI basis, I’m doing unbelievably well — and my returns are only going to keep on growing into the future.

Here’s my advice, then: take the amount of money you were thinking of investing in Twitter, and divide it by the rate at which you value your own time. So, if you were going to invest $5,000 and you value your time at $50 per hour, then you’d end up with a figure of 100 hours. Then, instead of spending the $5,000 on Twitter stock, spend 100 hours on Twitter: the cost is the same. The value you get from being on Twitter — from interacting with people you admire, from learning new things, from being able to express yourself so easily and concisely — will be much greater than the value you’d ever get from buying $5,000 of Twitter stock. And you’ll still have $5,000 left over to do whatever you want with, whether it’s putting it into some other investment or spending it on something awesome — a holiday, perhaps, or a gift to a friend, or even some fine wine.

I estimate my time is worth $100/hour and I wanted to invest $1,000 into Twitter. So that’s 10 hours I will be spending on Twitter in the next few weeks.

(As an aside: my limit buy order at $30/share didn’t go through this morning as TWTR opened at an astronomical $45.10/share).

On the Wealth Disparity in Russia

The Wall Street Journal highlights the incredible wealth disparity in Russia:

In the days of the Soviet Union, the country boasted that all its citizens shared the wealth equally, but a new report has found that a mere 20 years after the end of Communism, wealth disparity has soared with 35% of the country’s entire wealth now in the hands of just 110 people.

This is a wild statistic:

The study discovered that in Russia there is one billionaire for every $11 billion in household wealth. In the rest of the world, there is one for every $170 billion.

And so is this comparison with the United States:

Overall, 93.7% of Russia’s adult population has less than $10,000 in wealth, according to the report; 5.6% has between $10,000 and $100,000; 0.6% has between $100,000 and $1 million; and 0.1% — or about 84,000 people — has over $1 million. In the U.S., according to the report, 30.7% of the adult population has less than $10,000; 33% has between $10,000 and $100,000; 30.7% has between $100,000 and $1 million; and 5.5% — or 1.3 million people — has over $1 million.

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(hat tip: Annie Lowrey)

The Story of How Twitter was Founded

Nick Bilton pens a fascinating piece in The New York Times on the origins of Twitter and the roles Jack Dorsey, Evan WIlliams, and Noah Glass played from the company’s creation to becoming one of the top social media sites in the world.

On Jack Dorsey’s luck in discovering Ev Williams in a coffee shop:

In 2005, Jack Dorsey was a 29-year-old New York University dropout who sometimes wore a T-shirt with his phone number on the front and a nose ring. After a three-month stint writing code for an Alcatraz boat-tour outfit, he was living in a tiny San Francisco apartment. He had recently been turned down for a job at Camper, the shoe store.

His luck changed one morning as he was sitting at Caffe Centro off South Park. As Dorsey looked up from his laptop, punk rock blaring through his earphones, he noticed a man about his age. Evan Williams, then 33, was a minor celebrity on the San Francisco tech scene. A few years earlier, he sold the Web-diary service he co-founded, Blogger, a word he popularized, to Google for several million dollars. Now Williams was using some of his Blogger money to finance a new company, Odeo, that made podcasts. Odeo was co-founded by his neighbor and friend, Noah Glass. Its dingy loft headquarters happened to be located around the corner, a block from South Park. Williams had stopped in and ordered a coffee.

He sent a resume, got hired immediately, and the rest, as they say, is history. The idea for Twitter came a bit later, after the company Dorsey was working for, Odeo, became obsolete when Apple unveiled podcasts on iTunes:

One night in late February 2006, around 2 a.m., Dorsey sat in Glass’s parked car as rain poured down on the windshield. The two were sobering up after a night of drinking vodka and Red Bull, but the conversation, as usual, was about Odeo. Dorsey blurted out that he was planning his exit strategy. “I’m going to quit tech and become a fashion designer,” Glass recalls him saying. He also wanted to sail around the world. Glass pushed back: He couldn’t really want to leave the business entirely, could he? “Tell me what else you’re interested in,” he said. Dorsey mentioned a Web site that people could use to share their current status — the music they were listening to or where they were. Dorsey envisioned that people would use it to broadcast the simplest details about themselves — like “going to park,” “in bed” and so forth.

On how the name Twitter was born:

Soon, the question of a name came up. Williams jokingly suggested calling the project “Friendstalker,” which was ruled out as too creepy. Glass became obsessive, flipping through a physical dictionary, almost word by word, looking for the right name. One late afternoon, alone in his apartment, he reached over to his cellphone and turned it to silent, which caused it to vibrate. He quickly considered the name “Vibrate,” which he nixed, but it led him to the word “twitch.” He dismissed that too, but he continued through the “Tw” section of the dictionary: twist, twit, twitch, twitcher, twitchy . . . and then, there it was. He read the definition aloud. “The light chirping sound made by certain birds.” This is it, he thought. “Agitation or excitement; flutter.” Twitter.

One of Twitter’s early problems was the question of who was leading the company? Williams or Dorsey?

Dorsey raced home to try to figure out a plan for his resignation, but the Twitter board instead offered him a three-month window to fix the site and its issues. Not much changed, however, even as text bills mounted, and the site continued to crash. Before the three months were up, Dorsey recalled, Sabet and Wilson took him to a breakfast at the Clift hotel and told him that they were replacing him as C.E.O. with Williams. Dorsey sat before a bowl of uneaten yogurt and granola as he was offered stock, a $200,000 severance and a face-saving role as the company’s “silent” chairman. No one in the industry had to know that he was fired. (Investors would not want to be seen as pitting one founder against another anyway.) But Dorsey had no voting rights at the company. He was, essentially, out.

On Ev Williams ignoring the advice that it’s bad to hire your friends in a start-up:

He [Williams] saw his success as the result of a lot of hard work and also a fair bit of luck, and he wanted to give the people he knew the opportunity to be a part of it. He hired his sister, to stock the kitchens at Twitter; his wife, Sara, was hired to design the new offices; and he employed numerous friends from Google. Among them was Dick Costolo, who had recently sold his start-up for $100 million. After they bumped into each other at a party in 2009, Williams asked him to be Twitter’s chief operating officer. On his first day, Costolo, a former improv comedian, thumbed his first tweet: “First full day as Twitter COO tomorrow,” he wrote. “Task #1: undermine CEO, consolidate power.”

In the end, this is a familiar story in Silicon Valley:

In Silicon Valley, most companies have their own Twitter story: a co-founder, always a friend, and often the person with the big idea behind the company, who is pushed out by another, hungrier co-founder. 

Twitter is my favorite social network, so I highly recommended reading this piece in entirety.

Why Not to Invest in Futures Funds

If you or your family has investments in so-called futures funds, you might want to pull out your money out of them immediately. David Evans, writing in Bloomberg, has a big piece on how these futures funds have been a complete cash drain on those who unwisely chose to invest in them. While traditional hedge funds charge a 2 and 20 fee (2% fees, 20% of profits), these futures funds charge as as much as 9 percent in total fees each year (which is astronomical):

Investors who kept their money in Spectrum Technical for that decade, however, reaped none of those returns — not one penny. Every bit of those profits — and more — was consumed by $498.7 million in commissions, expenses and fees paid to fund managers and Morgan Stanley.

After all of that was deducted, investors ended up losing $8.3 million over 10 years. Had those Morgan Stanley investors placed their money instead in a low-fee index mutual fund, such as Vanguard Group Inc.’s 500 Index Fund, they would have reaped a net cumulative return of 96 percent in the same period.

The “powerful argument” for managed futures turned out to be good for brokers and fund managers but not so good for investors.

In the $337 billion managed-futures market, return-robbing fees like those are common. According to data filed with the U.S. Securities and Exchange Commission and compiled by Bloomberg, 89 percent of the $11.51 billion of gains in 63 managed-futures funds went to fees, commissions and expenses during the decade from Jan. 1, 2003, to Dec. 31, 2012.

Fees: $1.5 Billion

The funds held $13.65 billion of investor money at the end of last year, according to SEC filings. Twenty-nine of those funds left investors with losses.

What’s more, it seems many of these futures funds escape transparency:

Like hedge funds, managed-futures funds haven’t been required to file with the SEC as a matter of course. However, an SEC rule has mandated that any partnership with more than 500 investors and $10 million in assets — even a hedge fund — must file quarterly and annual reports.

The SEC has no category listing managed-futures funds, as it does for mutual funds or corporate filings. Bloomberg Markets culled through thousands of filings in several categories, including one called “SIC 6221 Unknown,” to identify 63 managed-futures funds that reported to the SEC.

Even sophisticated investors should stay away from these managed funds.