Inventing the Future

"The best way to predict the future is to invent it."

Alan Curtis Kay, An American computer scientist, known for his early pioneering work on object-oriented programming and windowing graphical user interface design.

Speech at Harvard 1943

The empires of the future are the empires of the mind.

By Winston Churchill, a British Prime Minister 1940-1945

Creating a Discipline Part II

The best way to go about risk tolerance is to look at yourself from the outside in. Take a moment to answer the following questions:

1. What is my age and family status (at what point will I need this money) ?
2. Is the money subject to penalties upon withdrawal ? (IRAs, pensions, annuities, etc.)
3. What are my tax considerations regarding this portfolio ?
4. What is the likelihood that I can replace this money if I lose some or all of it ?
5. What is my experience with investing on my own ?
6. How much time am I willing to put into this process on an ongoing basis ?
7. Do I have access to the tools that I need in order to manage and monitor my investments ?
8. Who else should be involved in the decision-making process ?

When you have these questions answered, utilize them to develop a paragraph or two about your investment goals. This self-assessment statement will help you stay focused and committed to your investment goals. Yes, this means that you should take out a pen and paper and actually write them down.

Creating a Discipline Part I

Risk management, Asset allocation, and Research

Let us make something clear from the start: a discipline is a process that is ever evolving; one that is designed to help enhance market returns and limit risk. Disciplines can be used on their own as devices to filter stocks or in conjunction with each other, to find investments that work in concert within a portfolio. A discipline should not be used as an excuse to blindly follow strategies that may have worked over the previous 12 months. It is not a process that is sold to you by a stockbroker intending to help keep you out of the investment process altogether.

Remember a Aesop fable about the goose and the golden egg? It is the story of a poor farmer who one day visited the nest of his prized goose, finding at her side a glittering, yellow egg. Convinced that it must have been a trick, he was about to throw it away before he quickly changed his mind…but he didn’t. He decided to take the egg home for analysis. To his delight, he discovered that the egg was pure gold. The farmer became fabulously rich by gathering one golden egg every day from the nest of his special goose.

As he grew richer, he became greedier and more impatient. Hoping to secure all the gold at once, he killed the goose and opened her, only to find nothing inside. What can be learned from this story is that growth is a daily grind composed of successes, failures, lost opportunities, progress, and change. Thinking that wealth can be attained in one fell swoop is dangerous and often results in losing a fortune.

The next task is to find out about your overall investment preferences. A risk tolerance assessment is a good place to start. Best defined as the amount of psychological pain you are willing to endure from your investments.

For example, if your risk preference is high, you might feel fairly comfortable investing in options contracts or other investments that are very volatile. The preference for lower risk would lead you toward more conservative investments that do not tend to have large fluctuations in value. Some also call this your “sleep factor.”

Psychology of Misjudgment

How would economics not be behavioral ? If it isn't behavioral, what the hell is it ?

By Charlie Munger

Munger and Circles of Competence

Charlie Munger’s Investment Evaluation Process

“The number one idea is to view a stock as an ownership of the business and to judge the staying quality of the business in terms of its competitive advantage. Look for more value in terms of discounted future cash-fl ow than you are paying for. Move only when you have an advantage. It’s very basic. You have to understand the odds and have the discipline to bet only when the odds are in your favor. We just keep our heads down and handle the headwinds and tailwinds as best we can, and take the result after a period of years.”

As we’ve noted, Charlie doesn’t make a lot of investments. His approach is perhaps best summarized by Thomas Watson Sr., the founder of IBM: “I’m no genius. I’m smart in spots, and I stay around those spots.” If Charlie knows anything, he knows his “spots”: his carefully identified circles of competence. To stay within these circles, he first applies a basic, overall screen, designed to limit his investment field to only “simple, understandable candidates.” As he says, “We have three baskets for investing: yes, no, and too tough to understand.”

To identify potential “yes” candidates, Charlie looks for an easy to understand, dominant business franchise that can sustain itself and thrive in all market environments. Understandably, few companies survive this first cut. Many investor favorites such as pharmaceuticals and technology, for example, go straight to the “too tough to understand” basket. Heavily promoted “deals” and IPOs earn immediate “no’s.” Those that do survive this first winnowing are subjected to the screens and filters of Charlie’s mental model approach.

The process is intense and Darwinian, but also efficient. Charlie detests “placer mining,” the process of sifting through piles of sand for specks of gold. Instead, he applies his “Big Ideas from the Big Disciplines” to find the large, unrecognized nuggets of gold that sometimes lie in plain sight on the ground. Throughout his exhaustive evaluation, Charlie is no slave to a database: He takes into account all relevant aspects, both internal and external to the company.

Charles Thomas Munger (born January 1, 1924, Omaha, Nebraska) is Vice-Chairman of Berkshire Hathaway Corporation, the diversified investment corporation chaired by investor Warren Buffett.

Like Buffett, Munger is a native of Omaha, Nebraska. After studies in mathematics at the University of Michigan, and service in the U.S. Army Air Corps as a meteorologist, trained at Caltech, he entered Harvard Law School without an undergraduate degree.

The Structure of the International Financial

It is become evident time and again that when events become too complex and move too rapidly as appears to be the case today, human beings become demonstrably less able to cope.

By Alan Greenspan, the Chairman of the Federal Reserve 1987-2006