Saturday, December 6, 2014

The Million Future Nows

This morning, I read Linda Tirado's "Why Poor People Stay Poor" in Slate. She argues that "saving money costs money" (this is the actual subtitle of the article) and the poor don't have the luxury of making good decisions because virtually all their spending happens as an emergency. Essentially, the poor are too poor to shop for good deals.

Tirado is right about the mechanics of poverty, but she treats it as a given, as an exogenous phenomenon that happens to us, over which we have no control. She's wrong.

Tirado's knows she can't get ahead of expenses because there's no emergency buffer, no runway. But she dismisses building the runway. She acknowledges that her day-to-day decisions keep her poor, but she doesn't do anything differently. Saving, she says, is for the rich.
"When I have a few extra dollars to spend, I can’t afford to think about next month—my present day situation is generally too tight to allow me that luxury. I’ve got kids who are interested in their quality of life right now, not 10 years from now."
That's the trap. She has it exactly backwards: she can't afford not to think about next month, because next month won't be any better unless she does. Yes, we care about quality of life now, but now is almost over. Next month and the month after that, we will care about our life in a different now. But unless we do something today that will make the future nows better, they will suck just as much. Tirado choses to make the current now a little better at the expense of the future. These decisions add up:
"If the good toaster is 30 bucks right now, and the crappiest toaster of them all is 10, it doesn’t matter how many times I have to replace it. Ten bucks it is, because I don’t have any extra tens."
She's wrong, because it does matter how many times she'll have to replace the toaster. It matters a lot! She denies having agency and digs herself deeper. Must she buy the toaster right now? Is it possible to toast bread on a pan rather than spending your last tenner on crap? Can this purchase wait until a more favorable time? She says no. She understands her total toaster expenditure will be greater but doesn't make a different choice. Why?

There's a tendency to view our current lifestyle as the absolute bare minimum, that we can't possibly live on any less than what we make now. This is independent of level of income. A young professional who "can afford" to go out to dinner and drinks every night but has no savings is no less vulnerable than Tirado. And it may seem as impossible for them to not go out as it is for Tirado to live without a toaster. Without a runway, changes in our incomes are catastrophic. We may have higher quality of life than Tirano, but unless our answer to "how long can you live your lifestyle if you lost your job" isn't "pretty damn long," we are vulnerable.
"It is impossible to be good with money when you don’t have any. Full stop. If I’m saving my spare five bucks a week, in the best-case scenario I will have saved $260 a year. ... If you deny yourself even small luxuries, that’s the fortune you’ll amass."
This is Tirado being an idiot. "$260 is so small, I can't care about saving it." She complains of lacking any financial flexibility, but here she is, pissing away a chance at it. Can we assume $260 would actually make a big difference to her right now? Didn't she know she'd need it when she chose not to save it? It's possible the memory of those past "small luxuries" makes her happier than a bit of financial flexibility would, but I doubt it.
"Of course you will never manage to actually save it; you’ll get sick at least one day and miss work and dip into it for rent. Gas will spike and you’ll need it to get to work. You’ll get a tear in your work pants that you can’t patch."
This is a fatal flaw in Tirado's relationship with money. This is how she keeps herself in the cycle. This is her locking herself into poverty. Anticipated emergencies somehow translate into "why bother saving " rather than "save now so I can buy pants on sale, not when I tear my only pair." She is literally saying  that she'd like her next expense to be another emergency.

Tirado makes choices that ensure she doesn't have a runway, then attributes later bad choices to not having a runway. She understands how it works but is unwilling to take action that can make things better.

It sucks to be poor, and it sucks to be vulnerable. I've been there and I have sympathy for Tirado, her family's life sounds legitimately hard. But she's not making it easier when her in-the-moment choices shortchange the future. $260 a year is not a lot, but it's 8.6 quality toasters.

Tirado talks about money-saving strategies (buying in bulk, proper vehicle maintenance) as luxuries of the rich. But if she were just $260 wealthier, would she not be able to buy air filters for her car and a bunch of cereal for her kids? Would that not get her on the right track, where she's buying a $30 toaster once and not a $10 one over and over?

Being too poor to save money is like being too fat to exercise or too busy to learn time management. Tirado is right, it's easier to continue doing well once you're already doing well. But that's an argument for doing whatever it takes to get on the right track now, not against it. The work and pain of now will soon be in the past anyway, but they determine how much you enjoy (or hate) your future nows.

Tirado connects causes and effects, except those of actions over which she has direct control. She isn't willing to make the "now" suck a little more even if that means improving a million future nows for her and her family. And this isn't just her, and it's not just low-income folks. When we borrow for a vacation, or smoke a pack of cigarettes, or simply lay around in front of the TV, we are in some way borrowing from our future selves. This is human nature. And we have to draw the line somewhere, at some point we have to let ourselves relax and enjoy rather than building maximally optimal futures for ourselves. But it doesn't sound like Tirado is at that point, and it doesn't sound like she gets enough joy out of her small luxuries and crappy toasters to justify keeping herself on perpetual brink.

Thursday, March 6, 2014

Bitcoin is Very Vulnerable to Inflation

I am not an expert in Bitcoin, but I studied economics enough to know that its promise of inflation-proof store of value is obviously false. 

The claim is well known: no more than 21 million Bitcoins can exist. Unlike regular currency, more of which can be printed at any time, Bitcoin must become inflation-proof once no units can be added.

The problem is, inflation doesn't just occur when "more dollars are printed." Inflation happens when "too many units of any currency chase too few assets." These are the same in a single-currency world: if we can only use dollars, only printing more dollars can dilute their value. Add another currency and this changes: if shops in America accept Euros, the dollar price of everything rises though no new dollars are printed.

Bitcoin is inflation-proof if its the only game in town. Ironically, its existence proves that anyone can start a currency. We already see alternatives like Litecoin with non-trivial market capitalization. These and new currencies are accepted, and compete with Bitcoin for purchasing assets. This competition erodes the value of Bitcoins even if no more are mined.

Consider cryptos as a single currency. End of Bitcoin mining doesn't halt addition of other currency units. Inflation occurs anyway. Litecoin alone has a market capitalization of over 5% that of Bitcoin, today. Created out of thin air, these coins mean Bitcoin's purchasing power is theoretically 5% less than it would be otherwise.

Bitcoin is interesting and vulnerability to inflation doesn't necessarily invalidate its entire premise. I love hearing  Andre De Castro speak passionately about the blockchain changing the world. It may be an interesting mechanism of exchange. I just would not rely on it as an inflation-proof store of value. Continuing growth of competing currencies seem at least as likely as the government printing more dollars.

Saturday, December 7, 2013

Why I won't do a startup and (probably) neither should you.

One of the great benefits of business school is meeting entrepreneurial people. I admire their spirit but the odds of success are against them. My friends will outperform the average: b-school teaches planning and marketing, areas most owners try to wing. They will have richer networks with better access to VCs and partners. If I had to bet on someone doing well in business, it'd be my cohort. But I won't do it myself in the near future.

Defining success objectively.
A successful business earns more than the owner can make elsewhere, though most people don't think that way. Is a cupcake shop making $100k successful? Depends on the owner. If his alternative is a $65k factory job, yes. If he left a $250k legal job to do it, no: the business destroys $150k of wealth every year. Yikes! 

I suspect that someone who can run a successful business can do very well at a job. In a bit, I'll explain why I think, on average, we should expect a job to pay better than entrepreneurship but of course, money isn't the only important thing.

Lifestyle businesses.
These businesses are started with the understanding that they will not make the owner rich. Instead, they theoretically afford a quality of life that cannot be matched in the corporate world. I have no problem with someone going this route, but it doesn't make sense for me: my lifestyle would not be improved by working more hours for less money at greater risk. The value equation is different for different people: someone may not need money as much but value flexibility greatly, or simply abhor the idea of working for someone else. For them, the tradeoff may be worth it. For me, in my current situation, it is not.

Corporate can be fun.
An enjoyable work environment is one where I get to engage with smart people doing cool things. My job provides such an environment. If it didn't, it'd still be likely easier to find one that does than launching a new venture. If you have the skills to run your own business, you probably have the skills to be hired by a great firm.

Value gets us paid.
This can be a post of its own, but in a nutshell there's reason we expect to earn more in a firm than on our own: economy of scale. A larger firm is more efficient (that's why almost everything is made by large firms) which makes employees of these firms more productive. This may be counterintuitive, but it's right: Google's 10-thousandth programmer has more impact on the world than the founder of an average tech startup, and will earn more.

The bottom line.
I have no reason to expect to do better or be happier as an entrepreneur than an employee. Although the siren song of running my own show is alluring, it seems to be the high risk / low reward option. Is your equation different? I'd like to hear about it.

Think about it, then get on my Twitter.

Matches, Bonfires, and the Disposability of Startups

VC funding is a milestone for a startup, but entrepreneurs must understand that funding is not a vote of confidence in ultimate success.

VCs hope to find a company that sets the world on fire. The metaphor is not accidental: just as a match starts a bonfire by lighting other matter, a startup's wild success is contingent upon igniting an opportunity outside of itself.

A VC's portfolio is his box of matches. He doesn't mind going through a bunch to get a kindle. As long as there are enough, one will eventually work. When the fire's burning, matches spent lighting it don't matter. The VC is warm.

The VC will do due diligence to avoid obviously damaged "matches", but it's a numbers game beyond that. Sequia's would break even by investing in 359 complete failures along with Google. You'd buy a box of 45 matches to ensure one campfire. A VC will buy hunderds of companies to ensure one Google-sized return.

An entrepreneur must understand that a VC investment is a vote of confidence that a business might succeed, not that it will: every match has a chance to start the big fire, few do. It's important to get this, because the entrepreneur is a Jack London character - a single match separates life and death.

Follow me on Twitter to stay warm.

Sunday, December 1, 2013

Why I don't trade stocks and (probably) neither should you.

This post is a more thought out version of my response to friends asking what stocks they should buy. The short answer is: none. Unless you have a sophisticated investment strategy (in which case you aren't turning to me for advice) you should invest the bulk of your funds in low-cost index funds.

This statement is neither profound nor new, yet lots of smart people I know trade at least occasionally. To begin, let's define the criteria under which this behavior is sensible:

Stock picking only makes sense if we expect to consistently outperform the market averages (approximated by broad index funds). Not only do we have to beat the average, we must do it by a wide enough margin to cover higher trading costs along with the opportunity cost of our time. In other words, the answer to "do we believe that our stock selection ability is significantly above average?" has to be a resounding, objectively justified "yes." 

This is where most of us should stop, because we have no reason to make this claim. This is where I personally stop. Despite a decade of working in capital markets, holding the CFA designation and being half-way through the MBA program at Stern, I know that, short of insider information, I have no reason to expect to outperform the market. Chances are, nether do you. 

But chances also are you aren't exactly convinced, so let's dive in.

"It's going to go up!" (unless it doesn't)
We buy an asset because we expect its price to increase. We might decide this based on gut instinct or research. We might evaluate the company's products and management and claim its prospects to be good. One way or another, we decide the stock must rise.

Imagine Yves buys the stock today. His purchase raises the price up a bit (supply and demand) so the next buyer will pay a bit more. The buyer after that trades a bit higher still, etc. Eventually, the price rises higher than is "reasonable" even given the company's rosy prospects. Cecil, who buys at this price, should expect to lose money.

The problem: how do we tell if we are Yves or Cecil?  There's no way. In fact, current prices reflect consensus, so the very act of buying is more aggressive than average and therefore likely to be a mistake. Unless we see something no one else does (and have good reason to believe that no one else sees it), there's no reason to expect any asset to go up. It's already "up." And unfortunately, unless we are  trading on insider information, everyone has already seen what we see.

So again, we should really stop here because there's no reason to expect a stock to rise. But you probably still aren't convinced. So let's look at 3 common justifications for trading.

"The stock is cheap now because everyone's over-reacting" (unless they aren't)
A common one is "buying the dip." Negative news comes out and the stock price tumbles. We decide that everyone's overly freaked out and the company's prospects are really not impacted. So we buy and wait for the stock to recover.

Unfortunately, even if we are right, there's no mechanism for forcing the price back to its previous level. Or maybe it was overpriced and the bad news sent it back to a realistic valuation. Or maybe its still overpriced. Or perhaps the news is that bad. We just can't tell.

Here's the price chart for Citi Group from 2007 to today. Lots of dips. Trading them would have been disastrous - though lots of people did just that. Any of those dips looked, at the time, like the bottom. Only the ones in early 2009 and 2011 were, but alas we can only recognize that in hindsight.

Did anything really change at Citi since 2007? It's in the same lines of business, going after the same set of customers. If anything, it's probably leaner and more efficient than it was back then. You can say the business environment changed, but we could have anticipated that. Citi faces the same prospects at $52 as it did at $520. And at 97 cents. If the same basic company can trade at exponentially different prices, does it make sense to bank on dip correction?

IPOs always go up (except when they don't)
If we can't rely on dips, can we trust the conventional wisdom that getting in on an IPO is a sure way to make money? Sometimes that's true, sometimes not. Many stocks go up on IPO and then crash. Many stocks don't go up on IPO but rise later. Which way the will next IPO go? 

We don't know, but we can guess based on how and why IPOs happen. Originally IPOs were meant to raise capital, but Google, LinkedIn, Facebook, etc. didn't IPO out of desperation for money. They sold shares as a way for founders and early investors to cash out. Put yourself in the shoes of a pre-IPO investor going through a "pop": your stock IPOs at $10, and closes at $20. That's great for everyone who's not you, since you sold your shares for half of what someone was willing to pay. You'd never intentionally let that happen. IPOs are priced by people with the most insider information and an interest in getting a high IPO price at the start. So why would we expect a "pop?"

It's a good company (yeah, but might be a crappy stock)
If we cannot speculate on IPOs, why not invest in stable companies? A popular version of this is the practical grandma who invested only in firms whose products she used. We like a company. We love its products. We see no way for it to go down in flames and we expect others feel the same way (ie no chance of a panicked sell-off.) Why wouldn't we buy this stock?

It goes back to pricing. Everyone else likes the company too. Chances are its stock is already bid up high. Also, our imagination for seeing a company crash and burn (or die a slow death) is, empirically, pretty bad. GM was a stable company that sold lots of products. Then one day, the same GM was viewed as saddled with labor costs and unable to design a reliable or efficient car. So we aren't safe investing in "good" companies. And if we were safe, there'd be no money in it.

Bottom Line
There are many versions of the story investors tell to justify their trades: the stock must go up because the company is good, or the news is overblown, or it's an IPO guaranteed to pop. Unfortunately, it's not enough for us to be right (even if we are). Everyone else needs to be wrong in order for us to profit.

So I am leaving you with this: every time we trade, someone trades the other side. Are we smarter than them? What if they are right and we are wrong? Personally, I like to visualize my counterparty as Goldman Sachs. If Goldman's as eager to sell a stock as I am to buy it, shouldn't I just not trade?

Like this? Follow my Twitter.

Monday, June 3, 2013

Empower your good employees, damnit!

This experience cost me $300. It cost Sprint several thousand.

I was recently smacked with an early termination fee on one of my lines. The details are not important, suffice it to say that everyone I spoke with at Sprint agrees that the fee should be reversed.

But no one is allowed to do it.

Sprint clearly has great employees. I spoke to three about this incident, and everyone (including managers in Retention):
  • Understood my (somewhat complicated) scenario.
  • Understood what the solution should look like.
  • Worked creatively to identify options.
  • Had great customer support skills - made me feel they cared
  • Understood that the company's and my interests were aligned.
  • Had no way of helping me
These people were not new on the job. They were not on probation. In fact, they were some of the top customer support staff Sprint has: Retention staff is charged with dissuading customers from leaving as they call to cancel their service. Only the best reps are allowed to join the department, and only the best of them become managers.

Why does Sprint believe that procedure is "smarter" than the judgement of its best employees?

At the end of the day, this isn't about me and my $300. It's about an organization that shot itself in the foot by not trusting their employees to do their jobs. Unfortunately it's not uncommon. Many organizations claim that their people are their main asset, but far fewer dare get out of those people's way.

Monday, January 7, 2013

Career Advice from the Weight Room

2012 was a good year for fitness. While I am by no means a great athlete, I am stronger, leaner and faster than a year ago. Getting into shape is not that different from growth in any other area such as career - it requires commitment, discipline, time management, learning (including through failure), feedback, research, trial and error, etc. What makes the gym a good laboratory for process improvement is that it's impossible to blame lack of progress on anyone but yourself. Your results tell you whether your approach needs tweaking or not.

With that said, here are the top 5 things I learned at the gym that helped me in my career.

Orchestrate failure

We learn more from overcoming failure than from direct success. Yet few people try to put themselves in situations where they fail. In fact, it takes a certain amount of "out of the box" thinking to imagine how to do that. So I look at what other people do that I don't, and try it. When it doesn't work, I try to learn from that failure and more often than not, this knowledge helps me achieve something I am working towards already.

In the office, we all engage in a range of activities we are expert at, but the truth is that for most of us, the bulk of our career growth will not come from getting even better at the thing we are already good at. Consider a solid C++ developer. How much can they elevate their career by learning more C++? Now what if they started a Node.js project for fun in their spare time? Sure they will find it hard and screw up a lot, but they will realize much greater benefits too. Or even better, consider a technical person who hates public speaking and never does it. They won't get better at it until they try, fail, and learn from their mistakes. Find something you are bad at and do it. 

Listen to the pain

Some say "no pain no gain," other says "if it hurts, don't do it." But neither conventional wisdom makes sense to me. Pain is feedback, to be understood and dealt with rather than ignored. In the gym, pain often reveals something that we don't know - incorrect form, insufficient stretching, weak muscles - whatever. Working through the pain will not only slow you down but can injure you in a serious way. I learned that the best way to deal with pain is to listen and understand it. Asking myself why my right shoulder hurt while benching started me on a path to research, to physical therapy, to a whole new upper body stretch routine, and in the end not only can I bench significantly more, my improved range of motion makes everything from pullups to yoga better.

In the office, some things hurt too. Maybe it's dealing with certain types of people, maybe it's certain activities. Something that always been "painful" for me is organization - while my projects were great strategically, I tended to ignore little things and paperwork. I won't go into what I did about that and how it improved my strategic impact - that's a whole post onto its own - the point is that by reflecting on what's hurting us, we can start to address significant obstacles to our overall performance.

Don't compete with anyone but yourself

There are guys my age at the gym with a nearly two decade head start on their workout. Some of them can make it to the gym more often than I can, some of them have access to better nutrition and more sleep than I can realistically get. Bottom line is, I will never be in the shape they are. For a competitive person like me, this could be discouraging to say the least. But it's also the wrong way to think about it - instead I compete with myself had I not put in the effort. Am I much stronger that I was a year ago? Absolutely. That keeps me going.

People often get discouraged by not being good at something. To go with the earlier example, they watch a great speaker and think "he's talented, I'll never be like that, it's not my thing." And they are right, most of us will never be able to deliver the keynote or speak to the state of the union in front of millions of people. But more realistically, how great would it be if you could run your team meeting a little better or captivate your client just a bit more? Chances are you can make a big impact to yourself without becoming the best at something. Then reflect on your progress and motivate yourself to go further.

Be polite and patient

This is definitely something I should have figured out much earlier, but better late than never. I noticed that the guys at the gym who go the most and are in the best shape are also the nicer guys. They are the ones who will ask politely if you are using a piece of equipment you're standing near, will let you use the water fountain first, whatever. You'd think the ones who "own" the gym would act like it but it's quite the opposite - it's the amateurs who do their reps way too fast, grunt way too much, and have shitty form who will act like dicks.Competence and manners just go together.

The application to the office (and every other aspect of your life) is obvious.

You need a coach

A trainer's job isn't to motivate you. No one can motivate you except for yourself. A trainer's job is to point things out to you that you don't see and can't realize for yourself. In my case, it's form and posture. Turns out that for most of the last three decades, I was walking incorrectly. It was subtle and it's not something I could have recognized for myself. Once my trainer pointed this out to me, it opened up a whole new world.

In the office, we could be blessed with many coaches or none. I find that engaging my manager and my peers is a good way to learn what I can't see about myself. I was also lucky that my company has provided me sessions with a management coach. The bottom line is - if you don't have people in your life who can tell you what you are missing, you need to find them.

I hope these help. Happy and successful 2013 everyone!