Category Archives: Uncategorized

Profiting from Innovation

Source: Marginal Revolution, May 2018

we merge individual income data, firm-level data, patenting data, and IQ data in Finland over the period 1988–2012 to analyze the returns to invention for inventors and their coworkers or stakeholders within the same firm. We find that:

(i) inventors collect only 8 percent of the total private return from invention;

(ii) entrepreneurs get over 44 percent of the total gains;

(iii) bluecollar workers get about 26 percent of the gains and the rest goes to white-collar workers. Moreover, entrepreneurs start with significant negative returns prior to the patent application, but their returns subsequently become highly positive.

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Be Interesting by Being Interested

Source: INC.com, date indeterminate

there’s one prerequisite to kick-start your deliberate system on the way to a great conversation: “It really helps to think, ‘What are my intentions as I go into this conversation?’ Whatever is top-of-mind for you will shape what your brain decides to notice,” says Webb.

“If you do that, you’re less likely to notice the things that are annoying, or the awkwardness that you feel. And you’re much more likely to notice the nugget of super-interestingness that is in that person. That is a fantastic foundation for rapport,” states Webb.

1. Be interested in the other person
Webb says we need to be determined to find something interesting about the other person, something that you may have heard in the conversation that may be a fascinating fact or idea that you can follow up on with interesting questions of your own.

This means activating the genuine curiosity within you.

Several studies suggest that curious people have better relationships, connect better, and enjoy socializing more. In fact, other people are more easily attracted and feel socially closer to individuals that display curiosity.

George Mason University psychologist Todd Kashdan, author of Curious?, states in Greater Good that “being interested is more important in cultivating a relationship and maintaining a relationship than being interesting; that’s what gets the dialogue going. It’s the secret juice of relationships.”

2. Focus on the rewards, not the threats
Webb says one limitation in our brain is that it’s constantly scanning the immediate surroundings for “rewards to discover and possible threats to defend against.”

If your brain is only focused on the threats (a defensive mechanism), you’re taking on negative stress in the moment, which makes you dumber. Webb says, “Being nervous about someone that you’re meeting is potentially going to make you less intelligent and less interesting.”

On the flip side, the brain finds self-worth and social standing the most rewarding. Even if you’re nervous, Webb says being determined to find something interesting or fascinating in the conversation “gets your brain more focused on rewards than threats.”

3. Ask genuine questions
It’s not a secret: People love to talk about themselves. So let them. By drawing attention to them and their story, you ultimately become the interesting one (with some serious active listening skills involved, of course). Here’s Webb:

What’s interesting now is that the science is coming in and explaining, “Why is it that someone thinks you’re so amazing when you ask them a question about their views on a topic? Why do people love that so much?” It’s inherently rewarding for their brains. That is a great association for them to have [about you,] that you’re a curious and open-minded person.

When asking questions, quality counts. If you’re starting with the quintessential (and boring) conversational starters “What do you do?” and “Where are you from?” (which Webb says don’t get to people’s motivations or emotions), make sure to follow up with much more compelling questions and real attention-grabbers: “Oh, what made you choose to live there?” and “What is it that you most like about the job that you do?

Structural Differences between Diamond and Graphite

Source: Scientific American,

Both diamond and graphite are made entirely out of carbon, as is the more recently discovered buckminsterfullerene (a discrete soccer-ball-shaped molecule containing carbon 60 atoms). The way the carbon atoms are arranged in space, however, is different for the three materials, making them allotropes of carbon. The differing properties of carbon and diamond arise from their distinct crystal structures.

Additional Resource: Socratic.org, Sep 2017

Diamond and graphite are both allotropes of carbon. Allotropes are basically different forms of the same element.

The only difference is the structure and arrangement of how the carbon atoms are oriented.

graphite is arranged in a sheet-like arrangement and when used in pencils, sheets of graphite are removed when writing.

As for diamonds, they are arranged in a geometric, 3D shape. This is the reason why they are considered the hardest, natural compound.

Using Intangibles Instead of Earnings to Estimate LTV

Source: CFAPubs, 2017

Companies with a sustained competitive advantage are the ones to invest in. And how is a competitive advantage gained and sustained? Primarily by having and successfully deploying strategic assets, which share the following three attributes:

  1. They generate net benefits (e.g., a growing
    customer base or retail outlets with increasing
    same-store sales).
  2. They are rare, in limited supply (e.g., wireless
    spectrum or airline landing rights).
  3. They are difficult to imitate for competitors (e.g.,
    patents underlying leading drugs or key oil and
    gas properties).

Erosion of strategic assets, often hidden from investors, inevitably leads to loss of competitive advantage, even though reported earnings and sales typically rise for a while. Recall Dell: Its main strategic asset—the originally unique “build-to-order” business model, which differentiated Dell from its competitors and led to its prominence in the 1990s— was gradually imitated by its competitors. Failing to generate or acquire new strategic assets, Dell lost its competitive advantage in the early 2000s while still reporting increasing earnings (until 2005).15 When investors finally realized Dell’s loss of competitiveness, they naturally dumped the stock, leading to a collapse of market value in 2005–2006.

We assert that a shift of focus for security analysis and valuation is called for—from the prediction of earnings or related accounting measures to a comprehensive evaluation of an enterprise’s competitive advantage through a careful consideration of its operating strategic assets and their deployment.

2000 years of Economic History – 1 slide

Source: Zero Hedge, Sep 2017

by showing the changing share of the global economy for each country from 1 AD until now, it compares economic productivity over a mind-boggling time period.

Big-O notation

Source: Quora, Jan 2009

The simplest definition I can give for Big-O notation is this:

Big-O notation is a relative representation of the complexity of an algorithm.

There are some important and deliberately chosen words in that sentence:

  • relative: you can only compare apples to apples. You can’t compare an algorithm to do arithmetic multiplication to an algorithm that sorts a list of integers. But a comparison of two algorithms to do arithmetic operations (one multiplication, one addition) will tell you something meaningful;
  • representation: Big-O (in its simplest form) reduces the comparison between algorithms to a single variable. That variable is chosen based on observations or assumptions. For example, sorting algorithms are typically compared based on comparison operations (comparing two nodes to determine their relative ordering). This assumes that comparison is expensive. But what if comparison is cheap but swapping is expensive? It changes the comparison; and
  • complexity: if it takes me one second to sort 10,000 elements how long will it take me to sort one million? Complexity in this instance is a relative measure to something else.

Related Resource: Big O cheat sheet, date indeterminate

Bitcoin: Asset, Currency, Commodity, or Collectible

Source: Musings on Markets, Oct 2017

every investment that I will look at has to fall into one of the following four groupings:

  1. Cash Generating Asset: An asset generates or is expected to generate cash flows in the future. A business that you own is definitely an asset, as is a claim on the cash flows on that business. Those claims can be either contractually set (bonds or debt), residual (equity or stock) or even contingent (options). What assets share in common is that these cash flows can be valued, and assets with high cash flows and less risk should be valued more than assets with lower cash flows and more risk. At the same time, assets can also be priced, relative to each other, by scaling the price that you pay to a common metric. With stocks, this takes the form of comparing pricing multiples (PE ratio, EV/EBITDA, Price to Book or Value/Sales) across similar companies to form pricing judgments of which stocks are cheap and which ones are expensive.
  2. Commodity: A commodity derives its value from its use as raw material to meet a fundamental need, whether it be energy, food or shelter. While that value can be estimated by looking at the demand for and supply of the commodity, there are long lag and lead times in both that make that valuation process much more difficult than for an asset. Consequently, commodities tend to be priced, often relative to their own history, with normalized oil, coal wheat or iron ore prices being computed by averaging prices across long cycles.
  3. Currency: A currency is a medium of exchange that you use to denominate cash flows and is a store of purchasing power, if you choose to not invest. Standing alone, currencies have no cash flows and  cannot be valued, but they can be priced against other currencies. In the long term, currencies that are accepted more widely as a medium of exchange and that hold their purchasing power better over time should see their prices rise, relative to currencies that don’t have those characteristics. In the short term, though, other forces including governments trying to manipulate exchange rates can dominate. Using a more conventional currency example, you can see this in a graph of the US $ against seven fiat currencies, where over the long term (1995-2017), you can see the Swiss Franc and the Chinese Yuan increasing in price, relative to the $, and the Mexican Peso, Brazilian Real, Indian Rupee and British Pound, dropping in price, again relative to the $.
  4. Collectible: A collectible has no cash flows and is not a medium of exchange but it can sometimes have aesthetic value (as is the case with a master painting or a sculpture) or an emotional attachment (a baseball card or team jersey). A collectible cannot be valued since it too generates no cash flows but it can be priced, based upon how other people perceive its desirability and the scarcity of the collectible.  

Investing versus Trading

The key is that cash generating assets can be both valued and priced, commodities can be priced much more easily than valued, and currencies and collectibles can only be priced. So what? I have written before about the divide between investing and trading and it is worth revisiting that contrast. To invest in something, you need to assess its value, compare to the price, and then act on that comparison, buying if the price is less than value and selling if it is greater. Trading is a much simpler exercise, where you price something, make a judgment on whether that price will go up or down in the next time period and then make a pricing bet. While you can be successful at either, the skill sets and tool kits that you use are different for investing and trading, and what makes for a good investor is different from the ingredients needed for good trading. The table below captures the difference between trading (the pricing game) and investing (the value game).
 
The Pricing Game
The Value Game
Underlying philosophy
The price is the only real number that you can act on. No one knows what the value of an asset is and estimating it is of little use.
Every asset has a fair or true value. You can estimate that value, albeit with error, and price has to converge on value (eventually).
To play the game
You try to guess which direction the price will move in the next period(s) and trade ahead of the movement. To win the game, you have to be right more often than wrong about direction and to exit before the winds shift.
You try to estimate the value of an asset, and if it is under(over) value, you buy (sell) the asset. To win the game, you have to be right about value (for the most part) and the market price has to move to that value
Key drivers
Price is determined by demand & supply, which in turn are affected by mood and momentum.
Value is determined by cash flows, growth and risk.
Information effect
Incremental information (news, stories, rumors) that shifts the mood will move the price, even if it has no real consequences for long term value.
Only information that alter cash flows, growth and risk in a material way can affect value.
Tools of the game (1) Technical indicators, (2) Price Charts (3) Investor Psychology (1) Ratio analysis, (2) DCF Valuation (3) Accounting Research
Time horizon
Can be very short term (minutes) to mildly short term (weeks, months).
Long term
Key skill
Be able to gauge market mood/momentum shifts earlier than the rest of the market.
Be able to “value” assets, given uncertainty.
Key personality traits
      (1) Market amnesia (2) Quick Acting (3) Gambling Instincts
      (1) Faith in “value” (2) Faith in markets (3) Patience (4) Immunity from peer pressure
Biggest Danger(s)
Momentum shifts can occur quickly, wiping out months of profits in a few hours.
The price may not converge on value, even if your value is “right”.
Added bonus
Capacity to move prices (with lots of money and lots of followers).
Can provide the catalyst that can move price to value.
Most Delusional Player
A trader who thinks he is trading based on value.
A value investor who thinks he can reason with markets.

What is Bitcoin?

The first step towards a serious debate on bitcoin then has to be deciding whether it is an asset, a currency, a commodity or collectible. Bitcoin is not an asset, since it does not generate cash flows standing alone for those who hold it (until you sell it).  It is not a commodity, because it is not raw material that can be used in the production of something useful. The only exception that I can think off is that if it becomes a necessary component of smart contracts, it could take on the role of a commodity; that may be ethereum’s saving grace, since it has been marketed less as a currency and more as a smart contracting lubricant.  The choice then becomes whether it is a currency or a collectible, with its supporters tilting towards the former and its detractors the latter. I argued in my last post that Bitcoin is a currency, but it is not a good one yet, insofar as it has only limited acceptance as a medium of exchange and it is too volatile to be a store of value. Looking forward, there are three possible paths that I see for Bitcoin as a currency, from best case to worst case.
  1. The Global Digital Currency: In the best case scenario, Bitcoin gains wide acceptance in transactions across the world, becoming a widely used global digital currency. For this to happen, it has to become more stable (relative to other currencies), central banks and governments around the world have to accept its use (or at least not actively try to impede it) and the aura of mystery around it has to fade. If that happens, it could compete with fiat currencies and given the algorithm set limits on its creation, its high price could be justified.
  2. Gold for Millennials: In this scenario, Bitcoin becomes a haven for those who do not trust central banks, governments and fiat currencies. In short, it takes on the role that gold has, historically, for those who have lost trust in or fear centralized authority. It is interesting that the language of Bitcoin is filled with mining terminology, since it suggests that intentionally or otherwise, the creators of Bitcoin shared this vision. In fact, the hard cap on Bitcoin of 21 million is more compatible with this scenario than the first one. If this scenario unfolds, and Bitcoin shows the same staying power as gold, it will behave like gold does, rising during crises and dropping in more sanguine time periods.  
  3. The 21st Century Tulip Bulb: In this, the worst case scenario, Bitcoin is like a shooting star, attracting more money as it soars, from those who see it as a source of easy profits, but just as quickly flares out as these traders move on to something new and different (which could be a different and better designed digital currency), leaving Bitcoin holders with memories of what might have been. If this happens, Bitcoin could very well become the equivalent of Tulip Bulbs, a speculative asset that saw its prices soar in the sixteen hundreds in Holland, before collapsing in the aftermath.

Reality Checks

Combining the section where I classified investments into assets, commodities, currencies and collectibles with the one where I argued that Bitcoin is a “young” currency allows me to draw the following conclusions:
  1. Bitcoin is not an asset class: To those who are carving out a portion of their portfolios for Bitcoin, be clear about why you are doing it. It is not because you want to a diversified portfolio and hold all asset classes, it is because you want to use your trading skills on Bitcoin to supercharge your portfolio returns. Lest you view this as a swipe at cryptocurrencies, I would hasten to add that fiat currencies (like the US dollar, Euro or Yen) are not asset classes either.
  2. You cannot value Bitcoin, you can only price it: This follows from the acceptance that Bitcoin is a currency, not an asset or a commodity. Any one who claims to value Bitcoin either has a very different definition of value than I do or is just making up stuff as he or she goes along.
  3. It will be judged as a currency: In the long term, the price that you attach to Bitcoin will depend on how well it will performs as a currency. If it is accepted widely as a medium of exchange and is stable enough to be a store of value, it should command a high price. If it becomes gold-like, a fringe currency that investors flee to during crises, its price will be lower. Worse, if it is a transient currency that loses all purchasing power, as it is replaced by something new and different, it will crash and burn.
  4. You don’t invest in Bitcoin, you trade it: Since you cannot value Bitcoin, you don’t have a critical ingredient that you need to be an investor. You can trade Bitcoin and become wealthy doing so, but it is because you are a good trader.
  5. Good trader ingredients: To be a successful trader in Bitcoin, you need to recognize that moves in its price will have little do with fundamentals, everything to do with mood and momentum and big price shifts can happen on incremental information.