The Future of SOlar

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The Third Industrial Revolution and a Zero Marginal Cost Society (Jeremy Rifkin) | DLD16

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An Investing Principles Checklist - From Charles t. Munger

“No wise pilot, no matter how great his talent and experience, fails to use his checklist.“

 

 

 

 

 

  •  Risk – All investment evaluations should begin by measuring risk, especially reputational

o   Incorporate and appropriate margin of safety

o   Avoid dealing with people of questionable character

o   Insist upon proper compensations for risk assumed

o   Always beware of inflation and interest rate exposure

o   Avoid big mistakes; shun permanent capital loss

 

  •   Independences – “Only in fairy tales are emperors told they are naked”

o   Objectivity and rationally require independence of thought

o   Remember that just because other people agree or disagree with you doesn’t make you right or wrong – the only thing that matters is the correctness of you analysis and judgement

o   Mimicking the herd invites regression to the mean (merely average performance)

 

  •   Preparation – “The only way to win is to work, work, work, work , and hope to have a few insights”

o   Develop into a lifelong self-learner through voracious reading; cultivate curiosity and strive to become a little wiser every day

o   More important than the will to win is the will to prepare

o   Develop fluency in mental models from the major academic disciplines

o   If you want to get smart, the question you have to keep is asking is “why, why, why?”

 

  • Intellectual humility – Acknowledging what you don’t know is the dawning of wisdom

o   Stay within a well-defined circle of competence

o   Identify and reconcile disconfirming evidence

o   Resist the craving for false precision, false certainty, etc.

o   Above all, never fool yourself, and remember that you are the easier person to fool

 

  •   Analytical rigor – Use of the scientific method an checklists minimize errors and omissions

o   Determine value apart from price; progress apart from activity; wealth apart from size

o   It is better to remember the obvious than to grasp the esoteric

o   Be a business analyst, not a market, macroeconomics or security analyst

o   Consider totality of risk and effect; look always at potential second order and higher level effects

o   Think forward and backwards – Invert, always invert

 

  • Proper allocation of capital is an investor’s number one job

o   Remember that highest and best use is always measured by the next best use (opportunity costs)

o   Good ideas are rare –when the odds are greatly in your favour, bet (allocate) heavily

o   Don’t fall in love with an investment – be situation-dependent and opportunity driven

 

  •  Patience – Resist the natural human bias to act

o   “Compound interest is the eighth wonder of the world “ (Einstein); never interrupt it unnecessarily

o   Avoid unnecessary transactional taxes and frictional costs; never take action for its own sake

o   Be alert for the arrival of luck

o   Enjoy the process along with proceeds, because the process is where you life

 

  •   Decisiveness- When proper circumstances present themselves, act with decisiveness and conviction

o   Be fearful when others are greedy, and greedy when others are fearful

o   Opportunity does not come often, so seize it when it does

o   Opportunity meeting the prepared mind: that’s the game

 

  • Change – Life with change and accept unremovable complexity

o   Recognize and adapt to the true nature of the world around you; don’t expect it to adapt to you

o   Continually challenge and willingly amend your “best-loved-ideas”

o   Recognize reality even when you don’t like it – especially when you don’t like

 

  • Focus – Keep things simple and remember what you set out to do

o   Remember that reputation and integrity are your most valuable assets – and can be lost in a heartbeat

o   Guard against the effects of hubris and boredom

o   Don’t overlook the obvious by downing in minutiae

o   Be careful to exclude unneeded information or slop: “A small leak can sink a great ship”

o   Face your big troubles don’t sweep them under the rig

 

In the end it comes down to Charlie’s most basic guiding principles, his fundamental philosophy of life: Preparation. Discipline. Patience. Decisiveness. Each attribute is in turn lost without the other, but together they form the dynamic critical mass for a cascading positive effects for which Munger is famous (the “lollapalooza”).

 

  

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Charles T. Munger's Psychological Checklist For Investing and life in General

Summary of Charles T. Munger’s psychology checklist taken from “Poor Charlie’s Almanack”. We should develop mental checklists for investing or at least go through them before important decisions. This one is highly relevant to life in general.

 

1)    Reward and Punishment  - Get the incentives right (Management consulting report this problem needs more management consulting). First action should always be to write down the incentives of everybody involved. If the equation does not workout change it. Incentives are despite being taught in each business school, often underestimated in real life.

 

2)    Like Loving Tendency - like and love being liked, positive feedback bias towards the loved ones. Ignore faults of and comply with wishes of, the object of affection, to favour people, products and actions merely associated with the object of affection, to distorts other facts to facilitated love.

 

3)    Dislike Hating Tendency - Often used in politics to “channel” the hatreds and disliking of individuals and groups into nonlethal patterns including elections. Politics is the art of marshalling hatreds. Often relevant on family level (property law).

 

4)    Doubt-Avoidance Tendency - The brain of man is programmed with a tendency to quickly remove doubt by reaching a decision. Which is often supported by puzzlement and stress (used as well in religion).

 

5)    Inconsistent Avoiding Tendency - Easy to prevent habits than to avoid them. It’s difficult for us to change something which we already programmed into our brain. “An ounce of prevention is worth a pound of cure”. Developing good habits and avoid the bad ones from the beginning.

 

6)    Curiosity Tendency- Curiosity can be strong motivation and lead to better performance, education needs to embrace this.

 

7)    Kantian Fairness Tendency – Human have a natural understanding for fairness, sort of “golden rule” everybody is aware of according to Kant.

 

8)    Envy/Jealousy Tendency – Natural tendency in humans, to compare. “It’s not greed that drives the world but envy.”

 

9)    Reciprocation Tendency - Small courtesy, car sales man cup of coffee for $500 extra dollars, ask for a small favor to gain relationship advantage.

 

10)Influence –from-Mere-Association Tendency- Associate highest price with highest quality. Even trivial associations work, Coke ads of happy life, military bands play impressive music etc. Some of the most important miscalculations come from what is accidentally associated with one’s past success, or one’s liking and loving, or one’s disliking and hating, which includes a natural hatred for bad news.

 

11)Simple, Pain-Avoiding Psychological Denial - If something is painful to admit, an easy way is just too simply deny it. E.g. drug addicted often trick themselves. Stay away from any conduct at all like do drift into chemical dependency.

 

12)Excessive Self-Regard Tendency - We all commonly observe the excessive self-regard of man. He mostly misappraisals himself on the high side, like ninety percent of Swedish drives that judge themselves to be above average. Also once you own something you value it more also called “endowment effect”. Example is also the overinfluence by face-to-face impression for a job candidate who is a marvelous “presenter” often causes great danger under modern executive-search practice.

 

13)Overoptimism Tendency - “What a man wishes, that also will he believe”. Excess of optimism is standard approach for us even when we are already doing well. One antidote to foolish optimism is trained, habitual use of simple probability math of Fermat and Pascal. The mental rules of thumb that evolution gives us to deal with risk are not adequate.

 

14)Deprival-Superreaction Tendency - Man values overvalues not losing to gaining. Or if man almost get something he greatly wants and has it jerked away from him in the last moment, he will react much as if he had long owned the reward and had it jerked away. Man also often compare to what is near instead of what really matters. For instance a man with $10m in his brokerage account will often be extremely irritated by the accidental loss of $100 out of the $300 in his wallet. Am man ordinarily reacts with irrational intensity to even a small loss, or threated loss, of property, love friendship, dominated territory, opportunity, status, or any valued thing. As a natural result, bureaucratic infighting over the threatened loss of dominated territory often causes immense damage to an institution as a whole. This factor, among others accounts for much of the wisdom of Jack Welch’s long fight against bureaucratic ills at General Electric.

 

15)Social-Proof Tendency - Compliance behaviour and management errors result out of social proof tendencies, most easily triggered under puzzlement or stress, and particularly when both exist. Because both bad and good behaviour are made contagious by Social-Proof Tendency, it is highly important that human societies 1) stop any bad behaviour before it spreads and 2) Forster and display all good behaviour. If only one lesson is to be chosen this would be learn how to ignore the examples from others when they are wrong, because few things are more worth having.

 

16)Contrast Misreaction Tendency - The eyes contrast in what is seen registered. Moreover, as perception goes, so goes cognition. Few psychological tendencies do more damage. Small scale damages involve buying an overpriced $1000 leather dashboard merely because the price is so low compared to his concurrent purchase of a $65000 car. Large-scale damages often ruin lives, as when a wonderful woman having terrible parents marries a man who would be judged satisfactory only in comparison to her parents. Salesman deliberately shows the customer three awful houses at ridiculously high prices. Then he shows him a merely bad house at a price only moderately too high. And, boom the broker makes an easy sale. Other example, to make an ordinary price seem low, the vendor will advertise an ordinary price as reduction. Even when people know this sort of manipulation, it will often work to trigger buying. It also demonstrated that being aware of psychological ploys is not a perfect defense.

 

17)Stress Influence Tendency - More social confirmatory decision under stress. People might turn complete personality after break down (Palov experiments), every person can be broken. A break down can change a personality completely.

 

18)Availability- Misweighting Tendency - Theories and stories that can be easy remembered have a higher weight for us, and therefore are more likely to be seen as true. Good example for this in finance is the CAPM.

 

19)Use-It-Or-Lose-It-Tendency - Over time educations narrows down to the field in which knowledge is applied. One needs systematic checklist of skills and constant training of important theoretical frameworks to keep a general toolbox for solving problems, and don’t become the man with the hammer who treats every problem with the same solution.

 

20)Drug-Misinfluence Tendency - Avoid problem from the beginning, can result in “Simple, Pain-Avoiding Psychological Denial.”

 

21)Senescene-Misinfluence Tendency - Continues learning and practice will slow down aging of mental abilities.

 

22)Authority-Misinfluence Tendency -  Higher authority can result in blind following of orders, reason for many catastrophes. Warren Buffet is always quite like a mouse around his pilots.

 

23)Twaddle Tendency – Tendency to focus on unimportant stuff.

 

24)Reason-Respecting Tendency - Why is the most important question for any task. Reason can lead to strong motivation but is often also misused to manipulate people. “Why?” is a sort of Rosetta stone opening up the major potentially of mental life.

 

25)Lollapalooza Tendency - Bringing pressure to bear form various psychological tendencies at the same time. Extreme consequences from confluences of psychological tendencies acting in favor of a particular outcome. One of the key reasons for the success of the Milgram experiment often not considered in psychological textbooks.

 

 

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A Lesson on Elementary, Worldly Wisdom As It relates to Investment Management & Business - Charles Munger

This is best piece on investment I have been reading for a long time.

 

“Indeed, the average result has to be the average result. By definition, everybody can’t beat the market. As I always say, the iron rule of life is that only 20% of people can be in the top fifth. That’s just the way it is. So the answer is that it’s partly efficient and partly inefficient.

And, by the way, I have a name for people who went to extreme efficient market theory – which is “bonkers”. It was an intellectually consistent theory that enabled them to do pretty mathematics. So I understand its seductiveness to people with large mathematical gifts. I just had a difficulty in that the fundamental assumption did not tie properly to reality.

Again, to the man with the hammer, every problem looks like a nail. If you’re good at manipulating higher mathematics in a consistent way, why not make an assumption which enables you to use your tool?

The model I like–to sort of simplify the notion of what goes on in a market for common stocks – is the pari-mutuel system at the racetrack. If you stop to think about it, a pari-mutuel system is a market. Everybody goes there and bets and the odds change based on what’s bet. That’s what happens in the stock market.

It’s not a bit easy of course, 50% will end up in the bottom half and 70% will end up in the bottom 70%. But some people will have an advantage. And its fairly low transaction cost operation, they will get better than average results in stock picking.

It’s not given to human beings to have such a talent that they can just know everything about everything all the time. But it is given to human beings who work hard at it – who look and sift the world for mispriced be – that they occasionally find one.


And the wise ones bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time, they don’t. It’s just that simple.


That is a very simple concept. And to me it’s obviously right –based on experience not only from the pari-mutuel system, but everywhere else.” 

 

Below the link to his full document:

http://old.ycombinator.com/munger.html

 

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Why Tesla's battery will Disrupt the whole energy Market

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Start with Why

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Flash boys and High Frequency Trading

High Frequency Trading (HTF) can become a quite expensive hidden tax for your pension fund: 

 

"By December 19, 2013, the people newly installed on top of Goldman Sach's stock market operations, Ron Mogan and Brian Levin wanted to change the way market worked. They truly believed that the market at the heat of the world's largest economy had grown to complex, and was likely to experience some catastrophic failure. But they also were trying to put an end to a game they could never win or control (high frequency trading). And so they'd flipped a switch, and set lots of their customer's stock market orders to IEX. When they did this they started a process that, if allowed to play out, would take billions from Wall Street and return it to investors. It would also create fairness.

 

A big wall street bank was a complex environment. There were people inside Goldman Sachs less then pleased by what Levin and Morgan had done. And after December 19 the firm had retreated, just a little bit. It was hard even for Brad Katsuyama to know why. Was it changing its collective mind? Had it underestimated the cost of being a first mover. Was it too much to ask Goldman Sachs to look up from short-term profit and study the landscape down the road. It was possible that even Goldman Sachs did not know the answers to those questions. Whatever the answer, something Brian Levine had said still made a lot of sense. "There will be a lot of resistance" he'd said. "There will be a lot of resistance. Because a tremendous infrastructure has been built up around this." It’s worth performing Goldman Sachs-like costs benefit analysis of this infrastructure, from the point of view of the economy it is meant to serve. The benefit: Stock market prices adjust to new information a few milliseconds faster than they otherwise might. The costs make a longer list. One obvious cost is the instability introduced into the system when its primary goal is no longer stability but speed. Another is the incalculable billions collected by financial intermediaries. That money is a tax on investment paid by for the economy; and more than productive enterprise must pay for capital, the less productive enterprises, there will be. Another costs, harder to measure was the influence of all this money exerted, not just on the political processes but on people's decisions about what to do with their lives. The more money to be made by gaming the financial markets -and create narratives to explain to themselves why a life spend gaming financial markets is a purposeful life. And then there is maybe the greatest costs of all: Once the very smart people paid huge sums of money to exploit the flaws in the financial system, the have the spectacularly destructive incentive to screw up the system even further, or to remain silent as they watch it being screwed up by others. 

The costs, in the end, is a tangled-up financial system. Untangling it requires acts of commercial heroism- and even then the fix might not work. There was simply too much to easy money to be made by the elites if the system worked badly than it worked well. The whole culture had to want change. "We know how to cure this", as Brad had put it. "It's just a matter of whether the patient wants to be treated".

 

 

Here the link to the new founded IEX stock exchange (Its story is captured in the book Flashboys) making life of high frequency traders a bit more difficult and reducing the hidden costs of the system for pension funds and other institutional investors.

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Limits to Growth, the 30 Year Update

The necessity of talking the industrial world to its next stage of evolution is not a disaster – it is an amazing opportunity. How to seize the opportunity, how to bring into a world that is not only sustainable, functional, and equitable but also deeply desirable is a question of leadership and ethics and vision, courage, properties not computer models. To speak of them we – the authors – need a chapter break here. We need to turn off our computers, put away our data and scenarios and reappear in chapter 8, where we will conclude with insights that have come as much from our hearts and our intuition as the have come from our scientific analysis…."

 

"It’s time to do some truth-telling on this issue. The world’s leaders do not know any better than anyone else how to bring about a sustainable society; most of them don’t even know it’s necessary to do so. A sustainability revolution requires each person to act as learning leader at some level, from family to community to nation to world. And it requires each of us to support leaders by allowing them to admit uncertainty, conduct honest experiments, and acknowledge mistakes. No one can be free to learn without patience and forgiveness. Finding the right balance between the apparent opposite urgency and patience, accountability, and forgiveness is a task that requires compassion, humility and, clearheadedness, honesty and that hardest of words, that seemingly scarcest of all resources-love."

 

“Not everything bears repetition, but truth does – especially when that truth is both denied by entrenched interests and verified by new information”

Herman E. Daly, former World Bank senior economist and Professor. School of Public Affairs University of Maryland.

 

Good video summarizing conclusions:

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Simon Sinek: Why good leaders make you feel safe

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William Janeway on Innovation

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Dynamic ESG investing and asset management

·         Outperformance of strong ESG companies in the healthcare sector   with  trust as an               obvious important factor

·         Dynamic models including social media sentiment analysis necessary to capture long             term and short term trends

·         Adjust strategy according to sentiment analysis

·         Dynamic ESG could provide a competitive advantage for a certain period of time in asset       management competition

·         As long as such articles are not posted in blogs (like this one)

 

A core issue to understand is that ESG is a lot about limiting the downside risk. Statistical methods (higher moments) and analyzing annual reports does not help to capture unknown events. ESG could potentially help to quantify some of the intangible factors (the character of the company).

 

I personally believe that we use to often heuristics as mental shortcuts in our thinking as shown by Daniel Kahneman (or pattern thinking, “How to Create a Mind”, Ray Kurzweil ). This results in undervaluing on average the impact of convex factors (because of convexity even less than average could still be a very successful strategy, see "Antifragile", Nassim Taleb), like climate change (or chain reactions, see “A Demon of our Own Design”,  Richard Bookstaber ) and do not act on it in real life or price them correctly in the investment world. Therefore, investing into convex factors (some of them can be captured with ESG analysis) outperforms over time. 

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John Eatwell on economics and finance

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Pervoskites and Solar

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Useful Business Insider chart

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Megaprojects and Risk: An Anatomy of Ambition, book review

Bent Flyvbjerg, Nils Bruzelius and Werner Rothengatter

 

“Never in the history of humankind have we built more or more expansive, infrastructure projects and never have such projects been more central to establishing what sociologist Zygmunt Bauman calls ‘independent from Space’ and Bill Gates ‘frictionless capitalism’. Yet when actual versus predicted performance of megaprojects are compared the picture is often dismal. We have documented in this book that:

  •  Cost overruns of 50% to 100% in real terms are common in megaprojects; overruns above 100% are not uncommon;
  • Demand forecast that are wrong by 20% to 70% compared with actual development are common;
  • The extend and magnitude of actual environmental impacts of projects are often very different from forecast impacts. Post auditing is neglected;
  • The substantial regional, national and sometimes international development effects commonly claimed by project promoters typically do not materialise, or they are so diffuse that researchers cannot detect them;
  •  Actual project viability typically does not correspond with forecast viability, the latter being brazenly over-optimistic.”

 

 

The aim is to decrease the risk of government, taxpayers and private investors being led- or misled, as often turns out the case – repeatedly to commit billions of dollars to underperforming projects.

 

 

Causes: more and bigger projects, lack of accountability in the decision making process, (“no skin in the game”), Promoters have actually been able to dodge risk and accountability. The tactical under-and overestimation of effects in the initial stages. Rent seeking behaviour and the associated ‘appraisal optimism’- are not in the interest of those whose money is put at risk, be the taxpayers or private investors. Nor are they in the interest of those concerned with environment, safety, democracy and the public interest.

 

 

Cures: 1)Risk and the accountability should be more centrally placed in megaproject decision making than is currently the case. Not only just better and more rational information, but also the right checks and balances are required to ensure accountability. New methodologies for risk management such as the most likely development analysis (MLD), break-even and worst case scenarios should be combined with the mentioned accountability.

 

2) Governments often play various roles such as promoters, guardian of public interests, which results in a conflict of interest in which accountability suffers. Borderlines of public and private involvement should be redrawn, shifting the risk form the public to the private sector and establishing a substantial clearer role for governments by means of arm’s length principal and shifting government involvement from project to promotion to formulation and auditing of public-interest objectives to be met by megaprojects.

There is little evidence that efficiency and democracy are trade-offs for megaproject decision making quite the opposite.

 

3) The authors propose, four basic instruments of accountability to be employed in megaproject decision making:

i) Transparency: Stakeholder involveme

nt and participation of the public sector. Against the convention argument that public participation slows down decision making and results into suboptimal decision making, mega projects that have tried to get by without publicness and participation have often into such heavy opposition that the decision making process were destabilised and second-best solution procedure and outcome forced upon actors and projects.

 

ii) Performance specification: The use of performance specification implies goal-driven approach to megaproject decision making, instead of the conventional technical solution driven one. The use of a performance specification approach means that as far as possible, all requirements with respect to a possible project are to be decided before considering various technical alternatives for the project before appraising it. Focus on the ends rather than the means. Forces stakeholder into a constructive role, and undermines the creditability of criticism directed at megaprojects simply because they happen to be megaprojects.

 

iii) Explicit formulation of regulatory regime, should be defined upfront as far as possible and will make governments carefully review issues and identify all costs before decisions are made. Furthermore, the choice of the regulatory regime will influence the risk of the project and both costs and risk should be central to any feasibility study and appraisals. Finally, if part of the financing of the project is to be mobilized (as proposed by the authors) from risk capital, this could only take place if the regulatory regime is set out, and risk which are of political nature are identified, and where relevant, as far as possible eliminated.

 

iv) Involvement of risk capital, by requiring that a substantial commitment in the form of risk capital is made, the ordinary citizen will be required to carry no, or only limited risk. Involvement of risk capital will ensure a high degree of involvement by the lenders during the final design construction and operation of a project and more effectively monitoring. As a consequence, better cost control can be expected. The authors propose two alternative models  for megaproject decision making. One based on the state-owned enterprise approach (SOE), the other on the build-operator transfer (BOT). Depending on the specific project one will be better than the other.

 

 

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Oxford Photovoltaics has the potential to revolutionize the whole industry

Oxford Photovoltaics is an Oxford University spin-out company that is developing a low cost, sustainable transparent solar cell coating that can be printed on building glass. Less toxic than traditional solar cells, it can be used on the glass facades of commercial buildings to convert sunlight to electricity. 

 

Here a few links with more information on the technology and a video from the founder:

http://www.theguardian.com/environment/2013/feb/12/printed-solar-glass-panels-oxford-photovoltaics

http://www.oxfordpv.com/oxford-pv-news/oxford-solar-cell-pioneer-named-as-only-uk-scientist-in-nature-s-top-10

https://www.innovateuk.org/-/the-future-of-solar-power-is-oxford-photovoltaics

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Hidden risks and better ways of investing

Nassim Taleb recently published a lecture on “tail risk”. Here the link to the document: http://www.fooledbyrandomness.com/FatTails.html

 

The cartoon on the front (see below) provides a good picture of what happens when you argue against the basic “gaussian” thinking of finance theory. Current portfolio theory is more and more moving towards risk parity strategies (which are  putting risk at their heart including other risk factors than volatility) such as the one proposed by AQR Capital management. The best people in finance are actually often betting against the theories taught in universities (and are probably still thankful that universities keep teaching it). Warren Buffet sold a huge amount of long term put options after the financial crisis to gain liquidity investing into undervalued securities. Doing this he was actually making money out of human psychology (people overpay for insurance and lotteries as well) and betting against the Black Scholes pricing mechanism for options, which is not the heuristic traders use, but which is still a wrong anchor value (based on “Gaussian” thinking) for many derivatives. A key message I took away from Taleb is that more complexity does not help to find a good solution. Simple heuristics could do a better job. For example building a simple heuristic to detect convexity could be enough for many problems rather than trying to use complex forecast mechanisms. The knowledge that something is convex should offer enough information to handle a problem differently (think about population growth, climate change and  technical process).

 

You do not have to be the smartest guy in the room for successful investing. More important is being aware of your own stupidity and betting on the fact that a lot of “smart people” will get it wrong.

 

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How to create a mind

Ray Kurzweil's TED talks provides the main idea of his new book how to create a mind. Intersting to think about what his scenario would mean for investing.

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Democratization and the European Union

A question I have been discussing recently is where are we heading with the EU?

 

Even if you are pro EU and agree with the general vision we need more debate on how the EU should look like and work in detail. We are moving into a world of more bureaucracy with anonymous decision makers without “skin in the game”.  I believe, if you ask the majority of European citizens how the exact decision making in the EU works and how much their national political governments (for which they vote) are influenced by EU level (for which most of them do not bother to vote) they will have a wrong picture of it. Is this a democratic system? An interesting way forward could be a more federal system with a creditable government at EU level. This would go in line with strengthening the EU parliament and increasing the government’s responsibility for actions. Furthermore, a good lesson from the US is that you can let states go bankrupt in a federal system and you have to do so.

 

 

Here an organisation that promotes European federalism: http://www.federalists.eu/uef/our-vision/

 

 

Finally, does it even make sense to promote the potentially best solution which is by itself a prisoner’s dilemma to implement?

 

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Energy Challenges & Opportunities of the 21st Century

Good discussion presented by the Churchill Club.

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Pay wars the future of mobile payments

Below a cool video from DB research on mobile payments.

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Momentum investing and 3d printing

Never ask anyone for their opinion, forecast or recommendation. Just ask them what they have- or don't have in their portfolio. Nassim Taleb (2013)

 

There you go..3d printing is a great story at the moment. In line with Schiller’s recent Noble stories drive markets. Or as Soros said there is no better investment than an emerging bubble (in the case you can limit your downside somehow and I personally prefer value but sometimes I have to do momentum). A good way to profit from emerging technologies without hours of research and extremely high risks (still high risks) are specific ETFs or indices.

Here a 3d printing index certificate offered by UBS: http://keyinvest-de.ubs.com/Produktdetails/DE000UBS13D0

 

I bought it roughly 2 months ago and made over 30% return so far. Therefore, it should be obvious why this article exists. Still success in the long run depends on limited downside mechanisms for such a strategy (just look at our Tesla exit below). 

 

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Innovation and the Green Economy

 

The slide speaks for itself. This "three-legged stool" message and the reflexive relationship of bubbles on innovation is the core take away from Janaway and his book.

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Mandelbrot “The (mis)behaviour of markets” and insights from multifractal models

In the following a few highlights from Mandelbrot’s book:

 “To me the greatest charm of the multifractal models is the economy. One simple set of rules can produce a great variety of behaviour, depending on the circumstances. By contrast, most financial academics are going through a love affair with another way of modelling market volatility. Its main inventor, Robert F. Engle shared a Nobel in 2003 for its development. It starts from the same facts I have been advancing in this book: Volatility clusters, due to dependence. To model that, it as already been mentioned that a set of statistical tools were developed; it is called GARCH, short for a model the cluster its starts with conventional Brownian model price variation.  When the volatility jumps, it plugs in new parameters to make the bell curve grow; when the volatility falls; it plugs in new parameters to shrink the curve. You might say the bell curve vibrates, to fit the circumstances. GARCH is, certainly, a handy abacus now used by many option traders and financial directors to model risk.  But it begs the question of what makes the bell curve vibrate. And as you try to work with the model, it becomes increasingly complicated. To say much with little: Such is the goal of good science. But most financial models say little with much. They input endless data, require many parameters, take long calculations. When the fail they are “fixed”. They are amended, qualified, particularized and complicated. Bit by bid, from a bad seed a big but sickly tree is build, with glue nails, screws, and scaffolding. That people lose money on these models should come as no great surprise.

The multifractal model, by contrast, begins with the unchanging, mathematicians would call them. Its economical and flexible and mimics the real thing […]  My hope is that, someday, the small seed of multifractal analysis can grow into a fruitful new way of managing the world’s money and economy.” Despite the message of power laws one of Mandelbrot main points is the importance of time.

Hey explains the general dependence of three underlying functions with a metaphor: “ The family starts with the parent. The father takes clock time and transforms it into trading time. The mother takes clock time and changes it into a price. Merged together, the baby takes the father’s trading-time and coverts it into a price by the rules the mother provides. Last step: Use the new baby generator to make a full fractal price chart.”

 

If one read carefully he is still critical towards the practical applications and a main argument is to invest more into fundamental research on markets. Fractal theory needs more researchers working on it.

 

Key findings:

-Volatility comes in cluster and can be mild, normal and wild. Standard models only account for the normal periods (stationary issue).

-Fractal models can be scaled and do not depend on finite higher moments.

-Contrary most money can be made in wild periods, timing matters prices cluster.

-Risk mgmt and portfolio models could use multifractal model for monte carlo simulations. (Or one could do it Taleb’s way and build “antifragile” portfolios benefiting from randomness.)

 

To conclude: “Since my youth I have been shamelessly disrespectful of received wisdom […] My understanding of economics comes not from abstract theory but from observation.”

 

Mandelbrot concludes his book with the following:

“One night of February 1, 1953, a very bad storm lashed the Dutch coast. It broke the famous see dikes, the country’s ancient and proud bulwark against disaster. More than 1,800 died. Dutch hydrologists found the flooding had pushed the benchmark water-level indicators, in Amsterdam to 3.85 over the average seemingly impossible. The dikes has had been thought to be safe enough from such a calamity; the conventional odds of so high a flood were thought to have been less than one in ten thousand. And yet, further research showed, an even greater inundation of four meters had been recorded only a few centuries earlier, in 1570. Naturally the pragmatic Dutch did not waste time arguing about the math. The cleaned up the damage and rebuild the dikes higher and stronger.

 

Such pragmatism is needed in financial theory. It is the Hippocratic Oath to “do no harm”. In finance, I believe the conventional models and their recent “fixes” violate that oath. They are not merely wrong; they are dangerously wrong. They are like a shipbuilder who assumes that gales are rare and hurricanes myth; so he builds his vessel for speed, capacity and comfort- giving little thought to stability and strength. To launch such ship across the ocean in typhoon season is to do serious harm. Like the weather markets are turbulent. We must learn to recognize that, and better cope."

 

 

 

 

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Why behavioural studies matter for new “smart” energy demand startups!

Its obvious that huge economic potential is hidden in energy efficiency and smart demand business models. Various private equity companies are at the forefront of this development and build an investment case on the potential role, which technical solutions will play. I would like to emphasize a “low hanging fruit” for future business models. Nudging has become a quite popular word in behavioural studies and for policy makers but despite the general theory a lot of it is about psycholgical details. Different ways of implementation can make a difference between success and failure. I believe that the following paper from Michelle Baddeley (Cambridge/UCL) is highly relevant for any regulator, consulting company and startup in the energy demand sector. Here the link: Energy, the Environment and Behaviour Change: A survey of insights from behavioural economics

 

Just a few highlights to illustrate the difference between idealistic opinions and reality:

-“The highest correlation with actual conservation behaviour was a person’s belief about whether or not their neighbours were doing it.”

-“Given bounded attention to social norms, social norms will only result in behaviour when norms are at the top of the mind.”

- Normative influence matter.

-Families and habits play a key role in society.

-Huge potential lies in the way “toxic” emissions have to be published.

-“Thaler and Sunstein suggest that a Greenhouse Gas Inventory requiring most significant emitters to disclose their emissions could have similar beneficial effects as the Toxic Release Inventory, particularly given the current salience of climate change problems in the public consciousness. Firms will also be affected by the actions of regulators, and this may generate strategic conflicts. When firms social motivations will interact with strategic considerations it introduces additional complexities, for example Shogren et al. (2010) assert that a regulators subsidy can interact negatively with social motives of a firm concerned about reputation. Selfish firms will make an optimal effort and socially oriented firms will be subsidised less than is optimal.” (Just think about the recent increase in EEG costs…)

 

Results: A range of policy tools is required, next to “pricing” energy and emissions. Frequent simple feedback and control is important (smart meter roll out, 80% by 2020 in the EU can play a key role here). Nudging can be used to overcome biases and can be combined with monetary incentives (as outlined by Stern et al 2009), but it is important that policies aim for long term behavioural change.

 

 

My own view is that despite the important insights above, the right way is "top down". We have to change the “vision and goal” of the system as first step. This would mean to internalize the environment and social costs into our measurement of economic success. The Chinese government has already announced that the environment will be its key priority over the next 5 years and it will obviously have strong reflexive influence on the shape of the world. It is time to redefine “economic success”.

 

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Principles for investing in markets

Ray Dalio’s Principles and some rules for investing:

1)      It isn’t easy for me to be confident that my opinions are right. In the markets you can do a huge amount of work and still be wrong.

2)      Bad opinions can be very costly. Most people come up with opinions and there is no cost to them. Not so in the markets. No matter how hard I work I cannot be really sure.

3)      The consensus is often wrong, so I have to be an independent thinking. To make any money you have to be right when they are wrong.

 

1)      I worked for what I wanted, not for what others wanted me to do. For that reason, I never had to do anything. All the work I ever did was just what I needed to do to get what I wanted.

2)      I came up with the best independent opinions I could muster to get what I wanted.

3)      I stress-tested my opinions by having the smartest people I could find to challenge them so I could find out where I was wrong. I never cared much about others’ conclusion- only for the reasoning that led to these conclusions. That reasoning had to make sense to me. Through this process I improved my chances of being right, and I learned a lot of great people.

4)      I remained wary about being overconfident, and figured out how to effectively deal with my not knowing. I dealt with my not knowing by either continuing to gather information until I reached the point that I could be confident or by eliminating my exposure to the risk of not knowing.

 

5)      I wrestled with my realities, reflecting on the consequences of my decisions, and learned and improved from this process.

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Great big picture video by Ray Dalio

Ray Dalios' video explains the summary of his paper in a more visual way. In my view this should be part of every undergraduate course and emphasizes again the importance of debt. It also points out where we are in the long term debt cycle. In addition, “Beautiful” deleveraging hmm...

 

Finally, a point which is missing and not easy to get as first glance is the influence of collateral on the amount of debt and on asset prices. Collateral allows optimistic agents to leverage even further and therefore optimists have a higher impact on prices, especially house prices (see Geanakoplos papers on the leverage cycle, or my own paper on “should the FED regulate the leverage cycle”).

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Debt cycles and how the economic machine works

I highly recommend the paper from Ray Dalio on debt cycles "how the economic machine works". Its clear written and goes deep. It is also easy to see where we are at the moment according to his debt cycles models. I will write in more details about his theories soon. Please do not hesitate to provide feedback and your opinion on it. Here the link to the article:

http://www.bwater.com/home/research--press/how-the-economic-machine-works.aspx

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The financial crisis a visualization

This graph only represents the limited perspective of the author and further underlying causes in the complex financial world could be missing. We must learn to be aware of our own fallibility.[1] The progress of knowledge is framed not just by what we know, but also by gaining a better understanding of what we cannot know.[2] This could be also a direction for the future.  Nassim Taleb argues that we need a system becoming stronger and not weaker from random shocks.

 

“Meanwhile, over the past few years, the world has gone the other way, upon the discovery of the Black Swan idea. Opportunists are now into predicting, predictioning, and predictionizing Black Swans witheven more complicated models coming from chaos-complexity-catastrophe-fractal theory. Yet, again the answer is simple: less is more; move the discourse to (anti) fragility.” (Taleb, 2012, pp. 138-139)

 

A way into this direction might come from Katharina Pistor arguing for the implementation of more natural firewalls coming out of the system[3] (including ideas from the Glass-Stegall act, Volcker rule). This process is still in development but might be more stable over the long run than a central regulation. Still beside the Rogoff and Reinhart analysis a further lesson is that government regulation with clear long term targets is difficult to implement.[4]  Additionally it is important to avoid reflexive influence of the financial markets on its own regulation[5], while still pursuing more global coordination among regulators. Regulation of the OTC market particularly new derivatives is an issue for further research, while currently the regulation of OTC markets is already in progress and could be combined with the purpose of creating ceilings[6]for leverage.[7] Finally the importance of behavioural aspects should not be underestimated and a simple solution here is that decision makers need more skin in the game.

 
You will find the full article below.


[1] As the German physicist Werner Heisenberg’s states in his uncertainty principal, the root of the problem was man’s examination of nature, which inevitable impacts the natural phenomena under examination so that the phenomena cannot be objectively understood. (Bookstaber, 2007, pp. 223-224)

[2] (Soros, 2008, p. 69) and (Bookstaber, 2007, p. 220)

[3] (Pistor K. , 2012)

[4] See  (El-Erian, 2013), (Taylor, 2011, p. 22)

[5] See (Soros, The New Paradigm of Financial Markets: The credit crisis 2008 and what it means, 2008)

[6] Contrary the provision of better liquidity buffers and supporting more leverage during crisis is also necessary and is a further issue (Geanakoplos J. , Solving the Present Crisis and Managing the Leverage Cycle, 2010, p. 123)

[7] See (FSA, 2012)

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Tado the new German "cloud" NEST version

Interesting pitch presenting Tado a cloud based intelligent thermostat working with regional weather forecasts and various other functions. 

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Facemash hedge funds strategy and politics

An unconventional hedge fund strategy is to evaluate the look of CEOs based on conventional success related superficial attributes. The CEO which fits into the attitudes we subconsciously relate to success such as; tall, leadership and dynamic looking person, might not be as good as somebody, who we subconsciously  relate to more unsuccessfully looking persons (such as a small woman). Therefore, invest into the companies with the “unsuccessful” looking CEOs. This might sound unsophisticated and stupid at first glance (and is in fact more a fun article), but our first impression is a strong initial anchor for our evaluation of a person. The strategy might be even more relevant in politics and is clearly a point for Merkel. Finally, even if we are aware of our values we  might act subconsciously different (see book “the winner effect”). 

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Principals by Ray Dalio

I came across an excellent piece by Ray Dalio (CEO of Bridgewater). The document can be found here: http://www.bwater.com/Uploads/FileManager/Principles/Bridgewater-Associates-Ray-Dalio-Principles.pdf

 

In relation to investing he wrote the following:

“So in 1975, after a quick two year stint on Wall Street after school,  I started Bridgewater. Soon after, I got married and began my family.

Through this time and till now I followed the same basic approach I used as a 12-year-old caddie trying to beat the market, i.e., by: 1) Working for what I wanted, not for what others wanted me to do; 2) coming up with the best independent opinions I could muster to move towards my goal; 3) stress-testing my opinions by having the smartest people I could find to challenge them so I could find out where I was wrong; 4) being wary about overconfidence, and good at not knowing; and 5) wrestling with reality, experiencing the results of my own decisions, and reflecting on what I did to produce them so that I could improve.”

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Lecture on (Anti)fragility by Nassim Taleb

Nassim Taleb published a lecture series on fat tails (volume 1) and (Anti)fragility (volume 2).

 

Here the link further articles related to the lectures will follow soon:

http://www.fooledbyrandomness.com/FatTails.html

 

I believe his core message to design systems, which can deal with randomness rather than trying to predict extrem events with complex models is crucial (especially for academics and policy makers). A cool example for such systems benefiting from random contributions in a positive way could be crowd based business models.

 

In terms of investing its very clear design strategies, benefiting from randomness rather than trying to forecast anything. You only have to know that a lot of people think they are smart and know the future, but they will get it wrong. Simply betting on the fact that a lot of people will get it wrong with limited downside is enough to become rich over time. It requires a long term horizon and investing into uncertainty, which is against basic human psychology…If you are interested in specific strategies let me know.

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Solar energy and the wisdom of Charlie Munger

Explains also why this website is called greeninvstmentclub...

Inspiring man. One insight related to the topic "cleantec" is that the solution to our most important problem can be found in the energy market, particularly solar energy.

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Jim Rogers on investments and Europe

Jim Rogers has skin in the game and is putting his own money where his mouth is, so it might be worth listening to him (see my previous article on Europe). The end of 2014 is still not there. On the other hand his former partner Soros argues that the real world is shaped by the interest of powerful people and (wrong) believes of them and investors can have a signifcant impact. Besides the interview inlcudes good investment ideas for the next years.

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Binary prediction true exposure and climate change

Taleb and Tetlock (2013) argue in their paper “On the difference between Binary Prediction and True Exposure” http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2284964, that we have to be aware of the difference between “binary” (only two possible outcomes) and “vanilla” (multiple outcomes) scenarios. Vanilla exposures are sensitive to Black Swan effects, model errors and prediction problems, while binary are more immune to them. Indeed we might see fewer fat tails events, but their impact will get stronger.  This is also an issue for climate change models and we have to be aware of our limited perspective if we argue the effects of climate change such as the discussion  around the Stern Review (http://en.wikipedia.org/wiki/Stern_Review).  

 

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Warren Buffet's tax suggestion

Warren Buffet touches on taxes one of  the key drives of inequality. 

 

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Hedged Momentum Strategies Outperform !!!

Kent Daniel holds a really interesting talk on momentum and how to improve a momentum strategy by hedging it during crisis. He also mentiones the in my own view ground-breaking paper from  Asness, Moskowitz, and Pedersen (2013) Value and Momentum Everywhere.

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A conversation with Bill Janeway: Doing Capitalism in the Innovation Economy

This 60min interview gives you the core ideas of his book. Worth watching. 

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Cradle to Cradle! Rethinking the world of economics….

The following article is based on the book "Cradle to Cradle" from Michael Braungrat and William McDonough.


https://en.wikipedia.org/wiki/Cradle-to-cradle_design

 

“The GDP as measure of progress emerged during an era when natural resources still seemed unlimited and “quality of life” meant high economic standards of living. But if prosperity is only judged by increased economic activity, then car accidents, hospital visits, illnesses (such as cancer) and toxic spills are all signs of prosperity. Loss of resources, cultural depletion, negative social and environmental effects , reduction of quality of life- these ills can all be taking place, an entire can be in decline, yet they are negated by a simplistic economic figure that says economic life is good. Countries all over the world are trying to boost their level of economic activity so they, too, can grab a share of the “progress” that measurements like the GDP propound. But in the race for economic progress, social activity, ecological impact, cultural activity and long term effects can be overlooked.”


According to Prof. Braungart “less bad” referring to more efficiency and more eco-friendly productions and a bit of social activities is not enough. We really have to understand the triple bottom line: profit, people, and planet in a holistic way. This means to include all goals right into the whole life cycle of the product. A successful story is the Swiss textile mill Roehner and its aesthetically unique fabric that is also environmental intelligent. Here a link to the case study: http://www.iehn.org/publications.case.rohner.php

 

In the following I will write down the key steps to get there according to the book (pp 165-186).

 

“Step 1 get free from known culprits

Do everything in an environmental and social friendly way right from the beginning. From the materials to the manufacturing to the product only use materials not harmful for our health and the environment (such as PVC, cadium, lead and  mercury). You do not need to worry about any regulations and will save costs in the long run, your employees will be happy to work in your factory (reduced health risks) and you will gain a long term competitive advantage, because the cost of “technical” and not truly recyclable waste will increase exponentially over the years to come.

Step 2 follow informed personal preferences and prefer ecological intelligence

Prefer respect, this is at the heart of eco-effective design. It is difficult quality to quantify: respect for those who make the product, for the community near where it is made, for those who handle and transport it and ultimately the customers. Prefer delight, celebration, and fun. Add the element of pleasure and delight. It’s very important for ecologically intelligent products to be at the forefront of human expression. They can express the best of design creativity, adding pleasure and delight to life. 

Step 3 create a passive positive list

Create a detailed inventory of the entire palette of materials used in a given product, and the substances it may give off in the course of its manufacture and use. What, if any, are their problematic or potentially problematic characteristics? Are they toxic? Effects on local and global communities?

"Passive positive" lists – lists of materials used categorised according to their safety level

The X List – substances that must be phased out, such as teratogenicmutageniccarcinogenic.

The Gray List – problematic substances that are not so urgently in need of phasing out

The P List – the "positive" list, substances actively defined as safe for use

Step 4 activate the positive list

Step 5 reinvest

Do more than designing for biological and technical cycles we are recasting the design assignment: not “design a car” but design a “nutrivehicle”. Instead of aiming to create cars with minimal or zero negative emission, imagine cars designed to release positive emissions and to generate other nutritious effects on the environment. The car’s engine is treated like a chemical plant modelled on a natural system. Put it even further design a new transportation infrastructure! The planet will be crawling with cars, and we need other options. Sounds fanciful? Of course, but remember the car itself was fanciful notion in a world of horse and carriage.

For example Nike is testing clean new rubber that will be a biological nutrient and could likewise have a revolutionary impact on the industry.

The final point has no absolute endpoint and the final product may be totally different as the one you began to work on. Transformation to an eco-effective vision doesn’t happen all at once and it requires plenty of trial and error- and time and effort.

Finally signal your intention and restore! Drive for “good growth” and not just economic growth.

 

Except intergenerational responsibility

In 1789 Thomas Jefferson wrote a letter to James Madision in which he argued that a federal bond should be repaid within one generation of the debt, because as he puts it, “The earth belongs…to the living…No man can by natural right oblige the lands he occupied, or the persons who succeeded him in that occupation, to the payments of debt contracted by him. For if he could, he might, during is own life, eat up the usufruct of the lands of several generations to come, and then lands would belong to the dead, and not the living.”  The context is different, but the logic is beautiful and timeless.  Ask: How can we support and  perpetuate the rights of all living things to share in a world of abundance? How can we love the children of all species- not just our own- for all time? Imagine what a world of prosperity and health in the future will look like, and begin designing for it right now. What would it mean to become, once again, native to this place, the Earth- the home of all our relations? This is going to take forever. But that’s the point.”


Criticism according to Wikipedia:

Experts in the field of environment protection have questioned the practicability of the concept. Friedrich Schmidt-Bleek, head of the German Wuppertal Institute called his assertion, that the "old" environmental movement had hindered innovation with its pessimist approach "pseudo-psychological humbug".

I can feel very nice on Michael's seat covers[22] in the airplane. Nevertheless I am still waiting for a detailed proposal for a design of the other 99.99 percent of the Airbus 380 after his principles.

In 2009 Schmidt-Bleek stated that it is out of the question that the concept can be realized on a bigger scale.[23]

Some claim that C2C certification may not be entirely sufficient in all eco-design approaches. Quantitative methodologies (LCAs) and more adapted tools (regarding the product type which is considered) could be used in tandem. The C2C concept ignores the use phase of a product. According to the Variants of Life Cycle Assessment the entire life cycle of a product or service has to be evaluated, not only the material itself. For many goods e.g. in transport, the use phase has is the most influence on the environmental footprint. E.g. the more lightweight a car or a plane the less fuel it consumes and consequently the less impact it has. Braungart fully ignores the use the phase.[24][25]

It is safe to say that every production step or resource-transformation step needs a certain amount of energy (Newton's second law). Even the highest Cradle to cradle certification requires only 50% of energy for production to come from solar sources.

The C2C concept foresees an own certification of its analysis[26] and therefore is in contradiction to international ISO standards 14040 and 14044 for Life Cycle Assessment whereas an independent and critical review is needed in order to obtain comparative and resilient results. Independent external review.[27]

 

What is your opinion? 

 

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Elon Musk: The mind behind Tesla, SpaceX, SolarCity ...

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Thanks for the ride Tesla Motors!

We sold TSLA with 190% ($98 per stock)  return after one year. Our valuation was around $46 per stock. To avoid the disposition bias I placed stop losses after the exponential growth started off and monitored it very closely. I was aware that it is definitely a mistake to sell winners to early and I prefer to hold stocks at least for 2 years. But the current price reflects momentum rather than value. Our valuation of $46 per stock was already based on the fact that Tesla is able to deliver according to its business plan. Let’s see may be George Soros reflexivity theorem works for TSLA. Good luck for the future Elon Musk! 

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"The The Power of Habit" a must read by Charles Duhigg

http://charlesduhigg.com/about/

 

Really good book on the power of habit in organisations and also in ourselves including interesting case studies especially Paul O’Neills Alcoa turnaround.

My favourite pages are pp. 272-274:

 

 

 “He wanted to become a painter, and then enrolled in medicine school, then left to join an expedition up the Amazon River. Then he quit that, as well. He chastised himself in in his diary for not being good at anything. What’s more he wasn’t certain if he could get better. In medical school, he had visited a hospital for the insane and had seen a man hurling himself against a wall. The patient, a doctor explained, suffered from hallucinations. James didn’t say that he often felt like he shared more in common with the patients than his fellow physicians.

“Today I about touched the bottom, and perceive plainly that I must face the choice with open eyes”, James wrote in his diary in 1870, when he was a twenty-eight years old. “Shall I frankly throw the morals business overboard, as one unsuited to my innate aptitudes?”

Is suicide, in other words a better choice? Two month later, James made a decision. Before doing anything rash, he would conduct a yearlong experiment.  He would spend 12 month believing that he had control over himself and his destiny, that he could become better, that he had the free will to change. There was no proof that it was true. But he would free himself to believe, all evidence to the contrary, that change was possible. “I think yesterday was a crisis in my life” he wrote in his diary. Regarding his ability to change, “ I will assume for the present until next year/ that it is no illusion. My first act of free will shall be to believe in free will.” Over the next year, he practiced every day. In his diary, he wrote as if his control over himself and his choices was never in question. He got married. He started  teaching in Harvard. He began spending time with Oliver Wendell Holmes Jr., who would go on to become a Supreme court justice, and  Charles Sanders Peirce, a pioneer in the study of semiotics, in a discussion group the called the Metaphysical Club. Two years after writing his diary entry, James sent a letter to the philosopher Charles Renouvier, who had expounded at length of free will. “I must not lose this opportunity of telling you of the admiration and gratitude which have been excited in me by the reading of your Essais” James wrote. “Thanks to you I  possess for the first time and intelligible and reasonable conception of freedom.. ..I can say that through that philosophy I am beginning to experience a rebirth of moral life; and I can assure you , sir, that this is no small thing.”

Later he would famously write that the will to believe is the most important ingredient in creating a belief in change. And that one of the most important methods for creating that belief  was habits. Habits, he noted, are what allow us to “do a thing with difficulty the first time, but soon do it more and more easily, and finally with sufficient practise, do it semi-mechanically, or with hardly any consciousness at all.” Once we choose who we want to be, people grow “ to the way in which they have been exercised, just as a sheet of paper or a coat , once creased or folded,  tends to forever afterwards into the same identical folds.”

If you believe you can change- if you can make it a habit- the change becomes  real. This is the real power of habits: the insights that your habits are what you choose them to be. Once the choice occurs- and becomes automatic- it’s not only real, it starts to seem inevitable, the thing, as James wrote, that bears “us irresistibly towards our destiny, whatever the latter  may be. The way we habitually think of our surroundings and ourselves create the worlds that each of us inhabit…the unthinking choices and invisible decisions that surround us every day- and which,  just by looking at them, become visible again.“ 

 

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Environmental, social, and governance (ESG) data: Can it enhance returns and reduce risks?

Deutsche Bank Asset Management has set up an interesting new think tank 'The Global Financial Institute'. I became especially interested in the following white paper:

 

https://www.dgfi.com/DGFI/White-Papers/Environmental-social-and-governance-(ESG)-data-Can-it-enhance-returns-and-reduce-risks

 

In line with my own view  long term strategic factors are: further social factors, trust and possible future costs and taxes on environmental issues.  The market (for example the CFA Institute) is not teaching the importance, but ESG factors are crucial for long term success and investments, because of that inefficiency  valid long term returns are still possible in the environmental field. On the other hand we have to be aware of cultural shifts, which could have a strong effect on the whole field.

 

"This white paper offers a strong outlook on the field of ESG investment and recommends its deeper consid­eration by any institutional or private asset owner or financial services institution. It should be common sense to consider cultural shifts in society when making investment decisions. The fact that standard professional finance degree programs have not really taught their students how to evaluate this information makes ESG investment all the more appealing, as it substantially reduces the competition for ESG investors. Hence, this type of investment is a low-competition, longer-term strategy that can enhance investment returns and reduce risks by capitalising on common sense insights into the business relevance of specific ESG factors."

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Bankruptcy the healthier solution for Europe?

One of my favourite comments on Europe comes out of Jim Rogers book Street Smarts (pp. 202-204)

After being highly critical about the intolerance to  not respecting the Maastricht Treaty and its well-grounded purpose he wrote the following:

“The new guys were no preoccupied with being reelected, the demand of which were not well served by ridiculous fantasies like fiscal discipline. Right now, under any regimen, it will be impossible for many countries to pay off their debts. Ever. It is not going to happen. So, accepting that, what should Europe do? My solution is one the market has been imposing for thousands of years. Let them default. Let them go bankrupt. The people who are in debt with them, either by lending to them or investing with them, will take losses, serious losses in some cases, but then, for example Greece can start over from a sound base. The country need not leave the Eurozone to do it. We in America have had states go bankrupt, countries, cities –Mississippi did not pull out of the United States because it went bankrupt. Neither did New York, nor did Detroit. They went through a period of pain, people lost money, wages went down, rents went down, haircuts went down, everything went down as people adjusted to the reality that they did not have any money, that they could no longer spend money they did not have, and that nobody would lend them any money. But they prevailed. And nowhere along the way did the US dollar disappear.

Unfortunately, politicians in Greece or somewhere else will see pulling out the euro as the easy solution. The hell with the euro, we will go back to the drachma! And that would be a mistake. They may be a burst of enthusiasm at the beginning. Everybody will have this new drachma, and things may look OK for a while. But the optimism will not last. A return to the drachma will just serve as a license for the government to print money, and for the Greeks to continue spending money that they do not have. The drachma will trade at such a low price that the country will enjoy a much improved balance of trade, but everybody’s net worth will have collapsed. Nobody will trust the currency, or the Greeks themselves. Nobody will lend them money. Nobody will invest there.

There is no scenario under consideration, there is no scenario possible, that alters the fact that over the next decades people are not going to be living great in Greece. And all those people who have loaned Greece money are going to take big losses. If Angela Merkel could get all of them into a room and say, “Okay, this bank is going to close, that bank is going to stay in business, this guy is out of a job…all you guys are going to take hits, but we are going to hold everything together, everybody’s saving are safe, checks will be clear, depositors money will be protected, we will ring-fence the banks, the system is not going to freeze up and close down”, it might be different. If the chancellor of Germany could do that, the market would buy it, because at the moment (February 2013) governments in Europe have enough money. And they have enough creditability. If it happens five years from now, she can drag them all in into a room, talk to them all day long, and nobody will notice. The problem will be so bad by then that you are looking at systematic failure- the market says the hell with all of you, and the whole system collapses.

And in my view that is exactly what will happen, because politicians do not have the brains or the courage to take the necessary steps. None of them is talking about bailing out the Greeks. It is all about bailing out the banks, bailing out the management of the banks, the stockholders of the banks, and the bondholders of the banks who invested in Greece. The people of Greece will suffer but the banks will survive: the CEOs will make their salaries, the shareholders will get their dividends, the bondholders will survive. Greeks will be out on the street unemployed. They will be there either way. The difference is that my way things will eventually get better, as has happened in Iceland since 2009; the other way everything gets worse.”

 

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John Cochrane: Function Matters Not Size

I came across an interesting paper from John H. Cochrane (University of Chicago) and his insights and opinions on financial markets. My own view has always been that it is important to make arbitrage easier. This is in line with most of the points from Cochrane. He also argues for more research on high frequency trading.


 “The social question for high-frequency trading- like all of finance, really is whether it screws up markets or makes them more efficient and “liquid”." 


Just a few highlights out of his paper below and here the link to it.


http://faculty.chicagobooth.edu/john.cochrane/research/papers/Cochrane_jep_function_size_final.pdf

 

 “The majority of TRIP’s [Total Return Investment Portfolio] assets are managed by external managers specializing in a specific asset class, geography, or strategy. These asset managers outperformed their respective benchmarks in every asset class, adding over 500 basis points of performance versus the strategic benchmark.” Five hundred basis points! Put that in your pipe and smoke it, effificient marketers. At least we know one active manager’s perception of what they get for their fees. These endowments’ approach to portfolio management is pretty much standard at endowments, nonprofits, sovereign wealth funds, family offifices, pension funds, and so forth—anywhere there is a big pot of money to invest. These investors pay a lot of attention to allocation among name-based buckets, as represented in the pie charts, “domestic equity,” “international equity,” “fixed income,” “absolute return,” “private equity,” and the like. Then, they allocate funds in the buckets to groups of fee-based active managers."


 “Remember, “efficiency" means that prices incorporate all available information, not that markets are clairvoyant. The definition of “efficiency” is widely misunderstood. I once told a newspaper reporter that I thought markets are pretty “efficient,” and he quoted me as saying markets are “self-regulating!”

 

"If information is not incorporated into market prices and to such an extent that simple strategies with big alphas can be published in the Journal of Finance, there are not enough arbitrageurs. If asset prices fall in “firesales,” only to rebound later, there are not enough buyers following the fire trucks. If credit constraints are impeding the flow of capital, there is a social benefit to loosening those constraints. The literature on short-selling is revealing on this point. Short sellers uncover far more financial fraud than the Securities and Exchange Commission”.

 

“Unless we adopt the arrogant view that what we don’t understand must be bad, it is clearly far too early to make pronouncements such as “There is likely too much high-cost, active asset management,” or “Society would be better off if the cost of this management be reduced.” Such statements are not supported by theory or evidence. Nor is their not-so subtle implication that resources devoted to greater regulation—by politicians and regulators no less naive than current investors, no less behaviorally-biased, armed with no better understanding than academic economists, and with much larger agency problems and institutional constraints—will improve matters. This proposition amounts to Samuel to Samuel Johnson’s dictum on second marriages, the triumph of hope over experience.”

 

Here also the link to his blog. I think it is worth reading.

http://johnhcochrane.blogspot.ie/

 

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The effective altruist

The effective altruist movement is mainly based in Oxford, Cambridge and St. Gallen and comes out of the student body.  From my own perspective it fits well with the arguments made by Peter Unger and Peter Singer.

 

Living High & Letting Die 

Our illusion of innocence

Peter Unger 

A small amount of money sent to charity like UNICEF will ensure that fewer poor children will die. Yet even when aware of this most people sent nothing. Peter Unger examines this all-too common example of letting die, generating a bold and controversial look at moral assessment.

 

From a psychological angle on can also connect it with Daniel Ariely's point, that we try to think good of ourselves and could make a "nugde" problem out of it, so people would spend a certain amount automatically. 

On the other hand a key issue is to become a multiplier and inspire others.  

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Polarstern - Cool new sustainable utility company

Interesting start up in terms of "green gas" in Germany. I like the community character, strong support from ambassadors. Each customer supports a project in Cambodia. This makes it "ethically to a nobrainer" to change. Its also a sign of the shift to come in the German energy market. 

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The Future of SOlar

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The Third Industrial Revolution and a Zero Marginal Cost Society (Jeremy Rifkin) | DLD16

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An Investing Principles Checklist - From Charles t. Munger

“No wise pilot, no matter how great his talent and experience, fails to use his checklist.“

 

 

 

 

 

  •  Risk – All investment evaluations should begin by measuring risk, especially reputational

o   Incorporate and appropriate margin of safety

o   Avoid dealing with people of questionable character

o   Insist upon proper compensations for risk assumed

o   Always beware of inflation and interest rate exposure

o   Avoid big mistakes; shun permanent capital loss

 

  •   Independences – “Only in fairy tales are emperors told they are naked”

o   Objectivity and rationally require independence of thought

o   Remember that just because other people agree or disagree with you doesn’t make you right or wrong – the only thing that matters is the correctness of you analysis and judgement

o   Mimicking the herd invites regression to the mean (merely average performance)

 

  •   Preparation – “The only way to win is to work, work, work, work , and hope to have a few insights”

o   Develop into a lifelong self-learner through voracious reading; cultivate curiosity and strive to become a little wiser every day

o   More important than the will to win is the will to prepare

o   Develop fluency in mental models from the major academic disciplines

o   If you want to get smart, the question you have to keep is asking is “why, why, why?”

 

  • Intellectual humility – Acknowledging what you don’t know is the dawning of wisdom

o   Stay within a well-defined circle of competence

o   Identify and reconcile disconfirming evidence

o   Resist the craving for false precision, false certainty, etc.

o   Above all, never fool yourself, and remember that you are the easier person to fool

 

  •   Analytical rigor – Use of the scientific method an checklists minimize errors and omissions

o   Determine value apart from price; progress apart from activity; wealth apart from size

o   It is better to remember the obvious than to grasp the esoteric

o   Be a business analyst, not a market, macroeconomics or security analyst

o   Consider totality of risk and effect; look always at potential second order and higher level effects

o   Think forward and backwards – Invert, always invert

 

  • Proper allocation of capital is an investor’s number one job

o   Remember that highest and best use is always measured by the next best use (opportunity costs)

o   Good ideas are rare –when the odds are greatly in your favour, bet (allocate) heavily

o   Don’t fall in love with an investment – be situation-dependent and opportunity driven

 

  •  Patience – Resist the natural human bias to act

o   “Compound interest is the eighth wonder of the world “ (Einstein); never interrupt it unnecessarily

o   Avoid unnecessary transactional taxes and frictional costs; never take action for its own sake

o   Be alert for the arrival of luck

o   Enjoy the process along with proceeds, because the process is where you life

 

  •   Decisiveness- When proper circumstances present themselves, act with decisiveness and conviction

o   Be fearful when others are greedy, and greedy when others are fearful

o   Opportunity does not come often, so seize it when it does

o   Opportunity meeting the prepared mind: that’s the game

 

  • Change – Life with change and accept unremovable complexity

o   Recognize and adapt to the true nature of the world around you; don’t expect it to adapt to you

o   Continually challenge and willingly amend your “best-loved-ideas”

o   Recognize reality even when you don’t like it – especially when you don’t like

 

  • Focus – Keep things simple and remember what you set out to do

o   Remember that reputation and integrity are your most valuable assets – and can be lost in a heartbeat

o   Guard against the effects of hubris and boredom

o   Don’t overlook the obvious by downing in minutiae

o   Be careful to exclude unneeded information or slop: “A small leak can sink a great ship”

o   Face your big troubles don’t sweep them under the rig

 

In the end it comes down to Charlie’s most basic guiding principles, his fundamental philosophy of life: Preparation. Discipline. Patience. Decisiveness. Each attribute is in turn lost without the other, but together they form the dynamic critical mass for a cascading positive effects for which Munger is famous (the “lollapalooza”).

 

  

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Charles T. Munger's Psychological Checklist For Investing and life in General

Summary of Charles T. Munger’s psychology checklist taken from “Poor Charlie’s Almanack”. We should develop mental checklists for investing or at least go through them before important decisions. This one is highly relevant to life in general.

 

1)    Reward and Punishment  - Get the incentives right (Management consulting report this problem needs more management consulting). First action should always be to write down the incentives of everybody involved. If the equation does not workout change it. Incentives are despite being taught in each business school, often underestimated in real life.

 

2)    Like Loving Tendency - like and love being liked, positive feedback bias towards the loved ones. Ignore faults of and comply with wishes of, the object of affection, to favour people, products and actions merely associated with the object of affection, to distorts other facts to facilitated love.

 

3)    Dislike Hating Tendency - Often used in politics to “channel” the hatreds and disliking of individuals and groups into nonlethal patterns including elections. Politics is the art of marshalling hatreds. Often relevant on family level (property law).

 

4)    Doubt-Avoidance Tendency - The brain of man is programmed with a tendency to quickly remove doubt by reaching a decision. Which is often supported by puzzlement and stress (used as well in religion).

 

5)    Inconsistent Avoiding Tendency - Easy to prevent habits than to avoid them. It’s difficult for us to change something which we already programmed into our brain. “An ounce of prevention is worth a pound of cure”. Developing good habits and avoid the bad ones from the beginning.

 

6)    Curiosity Tendency- Curiosity can be strong motivation and lead to better performance, education needs to embrace this.

 

7)    Kantian Fairness Tendency – Human have a natural understanding for fairness, sort of “golden rule” everybody is aware of according to Kant.

 

8)    Envy/Jealousy Tendency – Natural tendency in humans, to compare. “It’s not greed that drives the world but envy.”

 

9)    Reciprocation Tendency - Small courtesy, car sales man cup of coffee for $500 extra dollars, ask for a small favor to gain relationship advantage.

 

10)Influence –from-Mere-Association Tendency- Associate highest price with highest quality. Even trivial associations work, Coke ads of happy life, military bands play impressive music etc. Some of the most important miscalculations come from what is accidentally associated with one’s past success, or one’s liking and loving, or one’s disliking and hating, which includes a natural hatred for bad news.

 

11)Simple, Pain-Avoiding Psychological Denial - If something is painful to admit, an easy way is just too simply deny it. E.g. drug addicted often trick themselves. Stay away from any conduct at all like do drift into chemical dependency.

 

12)Excessive Self-Regard Tendency - We all commonly observe the excessive self-regard of man. He mostly misappraisals himself on the high side, like ninety percent of Swedish drives that judge themselves to be above average. Also once you own something you value it more also called “endowment effect”. Example is also the overinfluence by face-to-face impression for a job candidate who is a marvelous “presenter” often causes great danger under modern executive-search practice.

 

13)Overoptimism Tendency - “What a man wishes, that also will he believe”. Excess of optimism is standard approach for us even when we are already doing well. One antidote to foolish optimism is trained, habitual use of simple probability math of Fermat and Pascal. The mental rules of thumb that evolution gives us to deal with risk are not adequate.

 

14)Deprival-Superreaction Tendency - Man values overvalues not losing to gaining. Or if man almost get something he greatly wants and has it jerked away from him in the last moment, he will react much as if he had long owned the reward and had it jerked away. Man also often compare to what is near instead of what really matters. For instance a man with $10m in his brokerage account will often be extremely irritated by the accidental loss of $100 out of the $300 in his wallet. Am man ordinarily reacts with irrational intensity to even a small loss, or threated loss, of property, love friendship, dominated territory, opportunity, status, or any valued thing. As a natural result, bureaucratic infighting over the threatened loss of dominated territory often causes immense damage to an institution as a whole. This factor, among others accounts for much of the wisdom of Jack Welch’s long fight against bureaucratic ills at General Electric.

 

15)Social-Proof Tendency - Compliance behaviour and management errors result out of social proof tendencies, most easily triggered under puzzlement or stress, and particularly when both exist. Because both bad and good behaviour are made contagious by Social-Proof Tendency, it is highly important that human societies 1) stop any bad behaviour before it spreads and 2) Forster and display all good behaviour. If only one lesson is to be chosen this would be learn how to ignore the examples from others when they are wrong, because few things are more worth having.

 

16)Contrast Misreaction Tendency - The eyes contrast in what is seen registered. Moreover, as perception goes, so goes cognition. Few psychological tendencies do more damage. Small scale damages involve buying an overpriced $1000 leather dashboard merely because the price is so low compared to his concurrent purchase of a $65000 car. Large-scale damages often ruin lives, as when a wonderful woman having terrible parents marries a man who would be judged satisfactory only in comparison to her parents. Salesman deliberately shows the customer three awful houses at ridiculously high prices. Then he shows him a merely bad house at a price only moderately too high. And, boom the broker makes an easy sale. Other example, to make an ordinary price seem low, the vendor will advertise an ordinary price as reduction. Even when people know this sort of manipulation, it will often work to trigger buying. It also demonstrated that being aware of psychological ploys is not a perfect defense.

 

17)Stress Influence Tendency - More social confirmatory decision under stress. People might turn complete personality after break down (Palov experiments), every person can be broken. A break down can change a personality completely.

 

18)Availability- Misweighting Tendency - Theories and stories that can be easy remembered have a higher weight for us, and therefore are more likely to be seen as true. Good example for this in finance is the CAPM.

 

19)Use-It-Or-Lose-It-Tendency - Over time educations narrows down to the field in which knowledge is applied. One needs systematic checklist of skills and constant training of important theoretical frameworks to keep a general toolbox for solving problems, and don’t become the man with the hammer who treats every problem with the same solution.

 

20)Drug-Misinfluence Tendency - Avoid problem from the beginning, can result in “Simple, Pain-Avoiding Psychological Denial.”

 

21)Senescene-Misinfluence Tendency - Continues learning and practice will slow down aging of mental abilities.

 

22)Authority-Misinfluence Tendency -  Higher authority can result in blind following of orders, reason for many catastrophes. Warren Buffet is always quite like a mouse around his pilots.

 

23)Twaddle Tendency – Tendency to focus on unimportant stuff.

 

24)Reason-Respecting Tendency - Why is the most important question for any task. Reason can lead to strong motivation but is often also misused to manipulate people. “Why?” is a sort of Rosetta stone opening up the major potentially of mental life.

 

25)Lollapalooza Tendency - Bringing pressure to bear form various psychological tendencies at the same time. Extreme consequences from confluences of psychological tendencies acting in favor of a particular outcome. One of the key reasons for the success of the Milgram experiment often not considered in psychological textbooks.

 

 

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A Lesson on Elementary, Worldly Wisdom As It relates to Investment Management & Business - Charles Munger

This is best piece on investment I have been reading for a long time.

 

“Indeed, the average result has to be the average result. By definition, everybody can’t beat the market. As I always say, the iron rule of life is that only 20% of people can be in the top fifth. That’s just the way it is. So the answer is that it’s partly efficient and partly inefficient.

And, by the way, I have a name for people who went to extreme efficient market theory – which is “bonkers”. It was an intellectually consistent theory that enabled them to do pretty mathematics. So I understand its seductiveness to people with large mathematical gifts. I just had a difficulty in that the fundamental assumption did not tie properly to reality.

Again, to the man with the hammer, every problem looks like a nail. If you’re good at manipulating higher mathematics in a consistent way, why not make an assumption which enables you to use your tool?

The model I like–to sort of simplify the notion of what goes on in a market for common stocks – is the pari-mutuel system at the racetrack. If you stop to think about it, a pari-mutuel system is a market. Everybody goes there and bets and the odds change based on what’s bet. That’s what happens in the stock market.

It’s not a bit easy of course, 50% will end up in the bottom half and 70% will end up in the bottom 70%. But some people will have an advantage. And its fairly low transaction cost operation, they will get better than average results in stock picking.

It’s not given to human beings to have such a talent that they can just know everything about everything all the time. But it is given to human beings who work hard at it – who look and sift the world for mispriced be – that they occasionally find one.


And the wise ones bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time, they don’t. It’s just that simple.


That is a very simple concept. And to me it’s obviously right –based on experience not only from the pari-mutuel system, but everywhere else.” 

 

Below the link to his full document:

http://old.ycombinator.com/munger.html

 

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Why Tesla's battery will Disrupt the whole energy Market

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Start with Why

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Flash boys and High Frequency Trading

High Frequency Trading (HTF) can become a quite expensive hidden tax for your pension fund: 

 

"By December 19, 2013, the people newly installed on top of Goldman Sach's stock market operations, Ron Mogan and Brian Levin wanted to change the way market worked. They truly believed that the market at the heat of the world's largest economy had grown to complex, and was likely to experience some catastrophic failure. But they also were trying to put an end to a game they could never win or control (high frequency trading). And so they'd flipped a switch, and set lots of their customer's stock market orders to IEX. When they did this they started a process that, if allowed to play out, would take billions from Wall Street and return it to investors. It would also create fairness.

 

A big wall street bank was a complex environment. There were people inside Goldman Sachs less then pleased by what Levin and Morgan had done. And after December 19 the firm had retreated, just a little bit. It was hard even for Brad Katsuyama to know why. Was it changing its collective mind? Had it underestimated the cost of being a first mover. Was it too much to ask Goldman Sachs to look up from short-term profit and study the landscape down the road. It was possible that even Goldman Sachs did not know the answers to those questions. Whatever the answer, something Brian Levine had said still made a lot of sense. "There will be a lot of resistance" he'd said. "There will be a lot of resistance. Because a tremendous infrastructure has been built up around this." It’s worth performing Goldman Sachs-like costs benefit analysis of this infrastructure, from the point of view of the economy it is meant to serve. The benefit: Stock market prices adjust to new information a few milliseconds faster than they otherwise might. The costs make a longer list. One obvious cost is the instability introduced into the system when its primary goal is no longer stability but speed. Another is the incalculable billions collected by financial intermediaries. That money is a tax on investment paid by for the economy; and more than productive enterprise must pay for capital, the less productive enterprises, there will be. Another costs, harder to measure was the influence of all this money exerted, not just on the political processes but on people's decisions about what to do with their lives. The more money to be made by gaming the financial markets -and create narratives to explain to themselves why a life spend gaming financial markets is a purposeful life. And then there is maybe the greatest costs of all: Once the very smart people paid huge sums of money to exploit the flaws in the financial system, the have the spectacularly destructive incentive to screw up the system even further, or to remain silent as they watch it being screwed up by others. 

The costs, in the end, is a tangled-up financial system. Untangling it requires acts of commercial heroism- and even then the fix might not work. There was simply too much to easy money to be made by the elites if the system worked badly than it worked well. The whole culture had to want change. "We know how to cure this", as Brad had put it. "It's just a matter of whether the patient wants to be treated".

 

 

Here the link to the new founded IEX stock exchange (Its story is captured in the book Flashboys) making life of high frequency traders a bit more difficult and reducing the hidden costs of the system for pension funds and other institutional investors.

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Limits to Growth, the 30 Year Update

The necessity of talking the industrial world to its next stage of evolution is not a disaster – it is an amazing opportunity. How to seize the opportunity, how to bring into a world that is not only sustainable, functional, and equitable but also deeply desirable is a question of leadership and ethics and vision, courage, properties not computer models. To speak of them we – the authors – need a chapter break here. We need to turn off our computers, put away our data and scenarios and reappear in chapter 8, where we will conclude with insights that have come as much from our hearts and our intuition as the have come from our scientific analysis…."

 

"It’s time to do some truth-telling on this issue. The world’s leaders do not know any better than anyone else how to bring about a sustainable society; most of them don’t even know it’s necessary to do so. A sustainability revolution requires each person to act as learning leader at some level, from family to community to nation to world. And it requires each of us to support leaders by allowing them to admit uncertainty, conduct honest experiments, and acknowledge mistakes. No one can be free to learn without patience and forgiveness. Finding the right balance between the apparent opposite urgency and patience, accountability, and forgiveness is a task that requires compassion, humility and, clearheadedness, honesty and that hardest of words, that seemingly scarcest of all resources-love."

 

“Not everything bears repetition, but truth does – especially when that truth is both denied by entrenched interests and verified by new information”

Herman E. Daly, former World Bank senior economist and Professor. School of Public Affairs University of Maryland.

 

Good video summarizing conclusions:

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Simon Sinek: Why good leaders make you feel safe

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William Janeway on Innovation

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Dynamic ESG investing and asset management

·         Outperformance of strong ESG companies in the healthcare sector   with  trust as an               obvious important factor

·         Dynamic models including social media sentiment analysis necessary to capture long             term and short term trends

·         Adjust strategy according to sentiment analysis

·         Dynamic ESG could provide a competitive advantage for a certain period of time in asset       management competition

·         As long as such articles are not posted in blogs (like this one)

 

A core issue to understand is that ESG is a lot about limiting the downside risk. Statistical methods (higher moments) and analyzing annual reports does not help to capture unknown events. ESG could potentially help to quantify some of the intangible factors (the character of the company).

 

I personally believe that we use to often heuristics as mental shortcuts in our thinking as shown by Daniel Kahneman (or pattern thinking, “How to Create a Mind”, Ray Kurzweil ). This results in undervaluing on average the impact of convex factors (because of convexity even less than average could still be a very successful strategy, see "Antifragile", Nassim Taleb), like climate change (or chain reactions, see “A Demon of our Own Design”,  Richard Bookstaber ) and do not act on it in real life or price them correctly in the investment world. Therefore, investing into convex factors (some of them can be captured with ESG analysis) outperforms over time. 

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John Eatwell on economics and finance

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Pervoskites and Solar

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Useful Business Insider chart

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Megaprojects and Risk: An Anatomy of Ambition, book review

Bent Flyvbjerg, Nils Bruzelius and Werner Rothengatter

 

“Never in the history of humankind have we built more or more expansive, infrastructure projects and never have such projects been more central to establishing what sociologist Zygmunt Bauman calls ‘independent from Space’ and Bill Gates ‘frictionless capitalism’. Yet when actual versus predicted performance of megaprojects are compared the picture is often dismal. We have documented in this book that:

  •  Cost overruns of 50% to 100% in real terms are common in megaprojects; overruns above 100% are not uncommon;
  • Demand forecast that are wrong by 20% to 70% compared with actual development are common;
  • The extend and magnitude of actual environmental impacts of projects are often very different from forecast impacts. Post auditing is neglected;
  • The substantial regional, national and sometimes international development effects commonly claimed by project promoters typically do not materialise, or they are so diffuse that researchers cannot detect them;
  •  Actual project viability typically does not correspond with forecast viability, the latter being brazenly over-optimistic.”

 

 

The aim is to decrease the risk of government, taxpayers and private investors being led- or misled, as often turns out the case – repeatedly to commit billions of dollars to underperforming projects.

 

 

Causes: more and bigger projects, lack of accountability in the decision making process, (“no skin in the game”), Promoters have actually been able to dodge risk and accountability. The tactical under-and overestimation of effects in the initial stages. Rent seeking behaviour and the associated ‘appraisal optimism’- are not in the interest of those whose money is put at risk, be the taxpayers or private investors. Nor are they in the interest of those concerned with environment, safety, democracy and the public interest.

 

 

Cures: 1)Risk and the accountability should be more centrally placed in megaproject decision making than is currently the case. Not only just better and more rational information, but also the right checks and balances are required to ensure accountability. New methodologies for risk management such as the most likely development analysis (MLD), break-even and worst case scenarios should be combined with the mentioned accountability.

 

2) Governments often play various roles such as promoters, guardian of public interests, which results in a conflict of interest in which accountability suffers. Borderlines of public and private involvement should be redrawn, shifting the risk form the public to the private sector and establishing a substantial clearer role for governments by means of arm’s length principal and shifting government involvement from project to promotion to formulation and auditing of public-interest objectives to be met by megaprojects.

There is little evidence that efficiency and democracy are trade-offs for megaproject decision making quite the opposite.

 

3) The authors propose, four basic instruments of accountability to be employed in megaproject decision making:

i) Transparency: Stakeholder involveme

nt and participation of the public sector. Against the convention argument that public participation slows down decision making and results into suboptimal decision making, mega projects that have tried to get by without publicness and participation have often into such heavy opposition that the decision making process were destabilised and second-best solution procedure and outcome forced upon actors and projects.

 

ii) Performance specification: The use of performance specification implies goal-driven approach to megaproject decision making, instead of the conventional technical solution driven one. The use of a performance specification approach means that as far as possible, all requirements with respect to a possible project are to be decided before considering various technical alternatives for the project before appraising it. Focus on the ends rather than the means. Forces stakeholder into a constructive role, and undermines the creditability of criticism directed at megaprojects simply because they happen to be megaprojects.

 

iii) Explicit formulation of regulatory regime, should be defined upfront as far as possible and will make governments carefully review issues and identify all costs before decisions are made. Furthermore, the choice of the regulatory regime will influence the risk of the project and both costs and risk should be central to any feasibility study and appraisals. Finally, if part of the financing of the project is to be mobilized (as proposed by the authors) from risk capital, this could only take place if the regulatory regime is set out, and risk which are of political nature are identified, and where relevant, as far as possible eliminated.

 

iv) Involvement of risk capital, by requiring that a substantial commitment in the form of risk capital is made, the ordinary citizen will be required to carry no, or only limited risk. Involvement of risk capital will ensure a high degree of involvement by the lenders during the final design construction and operation of a project and more effectively monitoring. As a consequence, better cost control can be expected. The authors propose two alternative models  for megaproject decision making. One based on the state-owned enterprise approach (SOE), the other on the build-operator transfer (BOT). Depending on the specific project one will be better than the other.

 

 

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Oxford Photovoltaics has the potential to revolutionize the whole industry

Oxford Photovoltaics is an Oxford University spin-out company that is developing a low cost, sustainable transparent solar cell coating that can be printed on building glass. Less toxic than traditional solar cells, it can be used on the glass facades of commercial buildings to convert sunlight to electricity. 

 

Here a few links with more information on the technology and a video from the founder:

http://www.theguardian.com/environment/2013/feb/12/printed-solar-glass-panels-oxford-photovoltaics

http://www.oxfordpv.com/oxford-pv-news/oxford-solar-cell-pioneer-named-as-only-uk-scientist-in-nature-s-top-10

https://www.innovateuk.org/-/the-future-of-solar-power-is-oxford-photovoltaics

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Hidden risks and better ways of investing

Nassim Taleb recently published a lecture on “tail risk”. Here the link to the document: http://www.fooledbyrandomness.com/FatTails.html

 

The cartoon on the front (see below) provides a good picture of what happens when you argue against the basic “gaussian” thinking of finance theory. Current portfolio theory is more and more moving towards risk parity strategies (which are  putting risk at their heart including other risk factors than volatility) such as the one proposed by AQR Capital management. The best people in finance are actually often betting against the theories taught in universities (and are probably still thankful that universities keep teaching it). Warren Buffet sold a huge amount of long term put options after the financial crisis to gain liquidity investing into undervalued securities. Doing this he was actually making money out of human psychology (people overpay for insurance and lotteries as well) and betting against the Black Scholes pricing mechanism for options, which is not the heuristic traders use, but which is still a wrong anchor value (based on “Gaussian” thinking) for many derivatives. A key message I took away from Taleb is that more complexity does not help to find a good solution. Simple heuristics could do a better job. For example building a simple heuristic to detect convexity could be enough for many problems rather than trying to use complex forecast mechanisms. The knowledge that something is convex should offer enough information to handle a problem differently (think about population growth, climate change and  technical process).

 

You do not have to be the smartest guy in the room for successful investing. More important is being aware of your own stupidity and betting on the fact that a lot of “smart people” will get it wrong.

 

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How to create a mind

Ray Kurzweil's TED talks provides the main idea of his new book how to create a mind. Intersting to think about what his scenario would mean for investing.

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Democratization and the European Union

A question I have been discussing recently is where are we heading with the EU?

 

Even if you are pro EU and agree with the general vision we need more debate on how the EU should look like and work in detail. We are moving into a world of more bureaucracy with anonymous decision makers without “skin in the game”.  I believe, if you ask the majority of European citizens how the exact decision making in the EU works and how much their national political governments (for which they vote) are influenced by EU level (for which most of them do not bother to vote) they will have a wrong picture of it. Is this a democratic system? An interesting way forward could be a more federal system with a creditable government at EU level. This would go in line with strengthening the EU parliament and increasing the government’s responsibility for actions. Furthermore, a good lesson from the US is that you can let states go bankrupt in a federal system and you have to do so.

 

 

Here an organisation that promotes European federalism: http://www.federalists.eu/uef/our-vision/

 

 

Finally, does it even make sense to promote the potentially best solution which is by itself a prisoner’s dilemma to implement?

 

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Energy Challenges & Opportunities of the 21st Century

Good discussion presented by the Churchill Club.

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Pay wars the future of mobile payments

Below a cool video from DB research on mobile payments.

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Momentum investing and 3d printing

Never ask anyone for their opinion, forecast or recommendation. Just ask them what they have- or don't have in their portfolio. Nassim Taleb (2013)

 

There you go..3d printing is a great story at the moment. In line with Schiller’s recent Noble stories drive markets. Or as Soros said there is no better investment than an emerging bubble (in the case you can limit your downside somehow and I personally prefer value but sometimes I have to do momentum). A good way to profit from emerging technologies without hours of research and extremely high risks (still high risks) are specific ETFs or indices.

Here a 3d printing index certificate offered by UBS: http://keyinvest-de.ubs.com/Produktdetails/DE000UBS13D0

 

I bought it roughly 2 months ago and made over 30% return so far. Therefore, it should be obvious why this article exists. Still success in the long run depends on limited downside mechanisms for such a strategy (just look at our Tesla exit below). 

 

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Innovation and the Green Economy

 

The slide speaks for itself. This "three-legged stool" message and the reflexive relationship of bubbles on innovation is the core take away from Janaway and his book.

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Mandelbrot “The (mis)behaviour of markets” and insights from multifractal models

In the following a few highlights from Mandelbrot’s book:

 “To me the greatest charm of the multifractal models is the economy. One simple set of rules can produce a great variety of behaviour, depending on the circumstances. By contrast, most financial academics are going through a love affair with another way of modelling market volatility. Its main inventor, Robert F. Engle shared a Nobel in 2003 for its development. It starts from the same facts I have been advancing in this book: Volatility clusters, due to dependence. To model that, it as already been mentioned that a set of statistical tools were developed; it is called GARCH, short for a model the cluster its starts with conventional Brownian model price variation.  When the volatility jumps, it plugs in new parameters to make the bell curve grow; when the volatility falls; it plugs in new parameters to shrink the curve. You might say the bell curve vibrates, to fit the circumstances. GARCH is, certainly, a handy abacus now used by many option traders and financial directors to model risk.  But it begs the question of what makes the bell curve vibrate. And as you try to work with the model, it becomes increasingly complicated. To say much with little: Such is the goal of good science. But most financial models say little with much. They input endless data, require many parameters, take long calculations. When the fail they are “fixed”. They are amended, qualified, particularized and complicated. Bit by bid, from a bad seed a big but sickly tree is build, with glue nails, screws, and scaffolding. That people lose money on these models should come as no great surprise.

The multifractal model, by contrast, begins with the unchanging, mathematicians would call them. Its economical and flexible and mimics the real thing […]  My hope is that, someday, the small seed of multifractal analysis can grow into a fruitful new way of managing the world’s money and economy.” Despite the message of power laws one of Mandelbrot main points is the importance of time.

Hey explains the general dependence of three underlying functions with a metaphor: “ The family starts with the parent. The father takes clock time and transforms it into trading time. The mother takes clock time and changes it into a price. Merged together, the baby takes the father’s trading-time and coverts it into a price by the rules the mother provides. Last step: Use the new baby generator to make a full fractal price chart.”

 

If one read carefully he is still critical towards the practical applications and a main argument is to invest more into fundamental research on markets. Fractal theory needs more researchers working on it.

 

Key findings:

-Volatility comes in cluster and can be mild, normal and wild. Standard models only account for the normal periods (stationary issue).

-Fractal models can be scaled and do not depend on finite higher moments.

-Contrary most money can be made in wild periods, timing matters prices cluster.

-Risk mgmt and portfolio models could use multifractal model for monte carlo simulations. (Or one could do it Taleb’s way and build “antifragile” portfolios benefiting from randomness.)

 

To conclude: “Since my youth I have been shamelessly disrespectful of received wisdom […] My understanding of economics comes not from abstract theory but from observation.”

 

Mandelbrot concludes his book with the following:

“One night of February 1, 1953, a very bad storm lashed the Dutch coast. It broke the famous see dikes, the country’s ancient and proud bulwark against disaster. More than 1,800 died. Dutch hydrologists found the flooding had pushed the benchmark water-level indicators, in Amsterdam to 3.85 over the average seemingly impossible. The dikes has had been thought to be safe enough from such a calamity; the conventional odds of so high a flood were thought to have been less than one in ten thousand. And yet, further research showed, an even greater inundation of four meters had been recorded only a few centuries earlier, in 1570. Naturally the pragmatic Dutch did not waste time arguing about the math. The cleaned up the damage and rebuild the dikes higher and stronger.

 

Such pragmatism is needed in financial theory. It is the Hippocratic Oath to “do no harm”. In finance, I believe the conventional models and their recent “fixes” violate that oath. They are not merely wrong; they are dangerously wrong. They are like a shipbuilder who assumes that gales are rare and hurricanes myth; so he builds his vessel for speed, capacity and comfort- giving little thought to stability and strength. To launch such ship across the ocean in typhoon season is to do serious harm. Like the weather markets are turbulent. We must learn to recognize that, and better cope."

 

 

 

 

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Why behavioural studies matter for new “smart” energy demand startups!

Its obvious that huge economic potential is hidden in energy efficiency and smart demand business models. Various private equity companies are at the forefront of this development and build an investment case on the potential role, which technical solutions will play. I would like to emphasize a “low hanging fruit” for future business models. Nudging has become a quite popular word in behavioural studies and for policy makers but despite the general theory a lot of it is about psycholgical details. Different ways of implementation can make a difference between success and failure. I believe that the following paper from Michelle Baddeley (Cambridge/UCL) is highly relevant for any regulator, consulting company and startup in the energy demand sector. Here the link: Energy, the Environment and Behaviour Change: A survey of insights from behavioural economics

 

Just a few highlights to illustrate the difference between idealistic opinions and reality:

-“The highest correlation with actual conservation behaviour was a person’s belief about whether or not their neighbours were doing it.”

-“Given bounded attention to social norms, social norms will only result in behaviour when norms are at the top of the mind.”

- Normative influence matter.

-Families and habits play a key role in society.

-Huge potential lies in the way “toxic” emissions have to be published.

-“Thaler and Sunstein suggest that a Greenhouse Gas Inventory requiring most significant emitters to disclose their emissions could have similar beneficial effects as the Toxic Release Inventory, particularly given the current salience of climate change problems in the public consciousness. Firms will also be affected by the actions of regulators, and this may generate strategic conflicts. When firms social motivations will interact with strategic considerations it introduces additional complexities, for example Shogren et al. (2010) assert that a regulators subsidy can interact negatively with social motives of a firm concerned about reputation. Selfish firms will make an optimal effort and socially oriented firms will be subsidised less than is optimal.” (Just think about the recent increase in EEG costs…)

 

Results: A range of policy tools is required, next to “pricing” energy and emissions. Frequent simple feedback and control is important (smart meter roll out, 80% by 2020 in the EU can play a key role here). Nudging can be used to overcome biases and can be combined with monetary incentives (as outlined by Stern et al 2009), but it is important that policies aim for long term behavioural change.

 

 

My own view is that despite the important insights above, the right way is "top down". We have to change the “vision and goal” of the system as first step. This would mean to internalize the environment and social costs into our measurement of economic success. The Chinese government has already announced that the environment will be its key priority over the next 5 years and it will obviously have strong reflexive influence on the shape of the world. It is time to redefine “economic success”.

 

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Principles for investing in markets

Ray Dalio’s Principles and some rules for investing:

1)      It isn’t easy for me to be confident that my opinions are right. In the markets you can do a huge amount of work and still be wrong.

2)      Bad opinions can be very costly. Most people come up with opinions and there is no cost to them. Not so in the markets. No matter how hard I work I cannot be really sure.

3)      The consensus is often wrong, so I have to be an independent thinking. To make any money you have to be right when they are wrong.

 

1)      I worked for what I wanted, not for what others wanted me to do. For that reason, I never had to do anything. All the work I ever did was just what I needed to do to get what I wanted.

2)      I came up with the best independent opinions I could muster to get what I wanted.

3)      I stress-tested my opinions by having the smartest people I could find to challenge them so I could find out where I was wrong. I never cared much about others’ conclusion- only for the reasoning that led to these conclusions. That reasoning had to make sense to me. Through this process I improved my chances of being right, and I learned a lot of great people.

4)      I remained wary about being overconfident, and figured out how to effectively deal with my not knowing. I dealt with my not knowing by either continuing to gather information until I reached the point that I could be confident or by eliminating my exposure to the risk of not knowing.

 

5)      I wrestled with my realities, reflecting on the consequences of my decisions, and learned and improved from this process.

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Great big picture video by Ray Dalio

Ray Dalios' video explains the summary of his paper in a more visual way. In my view this should be part of every undergraduate course and emphasizes again the importance of debt. It also points out where we are in the long term debt cycle. In addition, “Beautiful” deleveraging hmm...

 

Finally, a point which is missing and not easy to get as first glance is the influence of collateral on the amount of debt and on asset prices. Collateral allows optimistic agents to leverage even further and therefore optimists have a higher impact on prices, especially house prices (see Geanakoplos papers on the leverage cycle, or my own paper on “should the FED regulate the leverage cycle”).

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Debt cycles and how the economic machine works

I highly recommend the paper from Ray Dalio on debt cycles "how the economic machine works". Its clear written and goes deep. It is also easy to see where we are at the moment according to his debt cycles models. I will write in more details about his theories soon. Please do not hesitate to provide feedback and your opinion on it. Here the link to the article:

http://www.bwater.com/home/research--press/how-the-economic-machine-works.aspx

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The financial crisis a visualization

This graph only represents the limited perspective of the author and further underlying causes in the complex financial world could be missing. We must learn to be aware of our own fallibility.[1] The progress of knowledge is framed not just by what we know, but also by gaining a better understanding of what we cannot know.[2] This could be also a direction for the future.  Nassim Taleb argues that we need a system becoming stronger and not weaker from random shocks.

 

“Meanwhile, over the past few years, the world has gone the other way, upon the discovery of the Black Swan idea. Opportunists are now into predicting, predictioning, and predictionizing Black Swans witheven more complicated models coming from chaos-complexity-catastrophe-fractal theory. Yet, again the answer is simple: less is more; move the discourse to (anti) fragility.” (Taleb, 2012, pp. 138-139)

 

A way into this direction might come from Katharina Pistor arguing for the implementation of more natural firewalls coming out of the system[3] (including ideas from the Glass-Stegall act, Volcker rule). This process is still in development but might be more stable over the long run than a central regulation. Still beside the Rogoff and Reinhart analysis a further lesson is that government regulation with clear long term targets is difficult to implement.[4]  Additionally it is important to avoid reflexive influence of the financial markets on its own regulation[5], while still pursuing more global coordination among regulators. Regulation of the OTC market particularly new derivatives is an issue for further research, while currently the regulation of OTC markets is already in progress and could be combined with the purpose of creating ceilings[6]for leverage.[7] Finally the importance of behavioural aspects should not be underestimated and a simple solution here is that decision makers need more skin in the game.

 
You will find the full article below.


[1] As the German physicist Werner Heisenberg’s states in his uncertainty principal, the root of the problem was man’s examination of nature, which inevitable impacts the natural phenomena under examination so that the phenomena cannot be objectively understood. (Bookstaber, 2007, pp. 223-224)

[2] (Soros, 2008, p. 69) and (Bookstaber, 2007, p. 220)

[3] (Pistor K. , 2012)

[4] See  (El-Erian, 2013), (Taylor, 2011, p. 22)

[5] See (Soros, The New Paradigm of Financial Markets: The credit crisis 2008 and what it means, 2008)

[6] Contrary the provision of better liquidity buffers and supporting more leverage during crisis is also necessary and is a further issue (Geanakoplos J. , Solving the Present Crisis and Managing the Leverage Cycle, 2010, p. 123)

[7] See (FSA, 2012)

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Tado the new German "cloud" NEST version

Interesting pitch presenting Tado a cloud based intelligent thermostat working with regional weather forecasts and various other functions. 

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Facemash hedge funds strategy and politics

An unconventional hedge fund strategy is to evaluate the look of CEOs based on conventional success related superficial attributes. The CEO which fits into the attitudes we subconsciously relate to success such as; tall, leadership and dynamic looking person, might not be as good as somebody, who we subconsciously  relate to more unsuccessfully looking persons (such as a small woman). Therefore, invest into the companies with the “unsuccessful” looking CEOs. This might sound unsophisticated and stupid at first glance (and is in fact more a fun article), but our first impression is a strong initial anchor for our evaluation of a person. The strategy might be even more relevant in politics and is clearly a point for Merkel. Finally, even if we are aware of our values we  might act subconsciously different (see book “the winner effect”). 

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Principals by Ray Dalio

I came across an excellent piece by Ray Dalio (CEO of Bridgewater). The document can be found here: http://www.bwater.com/Uploads/FileManager/Principles/Bridgewater-Associates-Ray-Dalio-Principles.pdf

 

In relation to investing he wrote the following:

“So in 1975, after a quick two year stint on Wall Street after school,  I started Bridgewater. Soon after, I got married and began my family.

Through this time and till now I followed the same basic approach I used as a 12-year-old caddie trying to beat the market, i.e., by: 1) Working for what I wanted, not for what others wanted me to do; 2) coming up with the best independent opinions I could muster to move towards my goal; 3) stress-testing my opinions by having the smartest people I could find to challenge them so I could find out where I was wrong; 4) being wary about overconfidence, and good at not knowing; and 5) wrestling with reality, experiencing the results of my own decisions, and reflecting on what I did to produce them so that I could improve.”

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Lecture on (Anti)fragility by Nassim Taleb

Nassim Taleb published a lecture series on fat tails (volume 1) and (Anti)fragility (volume 2).

 

Here the link further articles related to the lectures will follow soon:

http://www.fooledbyrandomness.com/FatTails.html

 

I believe his core message to design systems, which can deal with randomness rather than trying to predict extrem events with complex models is crucial (especially for academics and policy makers). A cool example for such systems benefiting from random contributions in a positive way could be crowd based business models.

 

In terms of investing its very clear design strategies, benefiting from randomness rather than trying to forecast anything. You only have to know that a lot of people think they are smart and know the future, but they will get it wrong. Simply betting on the fact that a lot of people will get it wrong with limited downside is enough to become rich over time. It requires a long term horizon and investing into uncertainty, which is against basic human psychology…If you are interested in specific strategies let me know.

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Solar energy and the wisdom of Charlie Munger

Explains also why this website is called greeninvstmentclub...

Inspiring man. One insight related to the topic "cleantec" is that the solution to our most important problem can be found in the energy market, particularly solar energy.

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Jim Rogers on investments and Europe

Jim Rogers has skin in the game and is putting his own money where his mouth is, so it might be worth listening to him (see my previous article on Europe). The end of 2014 is still not there. On the other hand his former partner Soros argues that the real world is shaped by the interest of powerful people and (wrong) believes of them and investors can have a signifcant impact. Besides the interview inlcudes good investment ideas for the next years.

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Binary prediction true exposure and climate change

Taleb and Tetlock (2013) argue in their paper “On the difference between Binary Prediction and True Exposure” http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2284964, that we have to be aware of the difference between “binary” (only two possible outcomes) and “vanilla” (multiple outcomes) scenarios. Vanilla exposures are sensitive to Black Swan effects, model errors and prediction problems, while binary are more immune to them. Indeed we might see fewer fat tails events, but their impact will get stronger.  This is also an issue for climate change models and we have to be aware of our limited perspective if we argue the effects of climate change such as the discussion  around the Stern Review (http://en.wikipedia.org/wiki/Stern_Review).  

 

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Warren Buffet's tax suggestion

Warren Buffet touches on taxes one of  the key drives of inequality. 

 

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Hedged Momentum Strategies Outperform !!!

Kent Daniel holds a really interesting talk on momentum and how to improve a momentum strategy by hedging it during crisis. He also mentiones the in my own view ground-breaking paper from  Asness, Moskowitz, and Pedersen (2013) Value and Momentum Everywhere.

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A conversation with Bill Janeway: Doing Capitalism in the Innovation Economy

This 60min interview gives you the core ideas of his book. Worth watching. 

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Cradle to Cradle! Rethinking the world of economics….

The following article is based on the book "Cradle to Cradle" from Michael Braungrat and William McDonough.


https://en.wikipedia.org/wiki/Cradle-to-cradle_design

 

“The GDP as measure of progress emerged during an era when natural resources still seemed unlimited and “quality of life” meant high economic standards of living. But if prosperity is only judged by increased economic activity, then car accidents, hospital visits, illnesses (such as cancer) and toxic spills are all signs of prosperity. Loss of resources, cultural depletion, negative social and environmental effects , reduction of quality of life- these ills can all be taking place, an entire can be in decline, yet they are negated by a simplistic economic figure that says economic life is good. Countries all over the world are trying to boost their level of economic activity so they, too, can grab a share of the “progress” that measurements like the GDP propound. But in the race for economic progress, social activity, ecological impact, cultural activity and long term effects can be overlooked.”


According to Prof. Braungart “less bad” referring to more efficiency and more eco-friendly productions and a bit of social activities is not enough. We really have to understand the triple bottom line: profit, people, and planet in a holistic way. This means to include all goals right into the whole life cycle of the product. A successful story is the Swiss textile mill Roehner and its aesthetically unique fabric that is also environmental intelligent. Here a link to the case study: http://www.iehn.org/publications.case.rohner.php

 

In the following I will write down the key steps to get there according to the book (pp 165-186).

 

“Step 1 get free from known culprits

Do everything in an environmental and social friendly way right from the beginning. From the materials to the manufacturing to the product only use materials not harmful for our health and the environment (such as PVC, cadium, lead and  mercury). You do not need to worry about any regulations and will save costs in the long run, your employees will be happy to work in your factory (reduced health risks) and you will gain a long term competitive advantage, because the cost of “technical” and not truly recyclable waste will increase exponentially over the years to come.

Step 2 follow informed personal preferences and prefer ecological intelligence

Prefer respect, this is at the heart of eco-effective design. It is difficult quality to quantify: respect for those who make the product, for the community near where it is made, for those who handle and transport it and ultimately the customers. Prefer delight, celebration, and fun. Add the element of pleasure and delight. It’s very important for ecologically intelligent products to be at the forefront of human expression. They can express the best of design creativity, adding pleasure and delight to life. 

Step 3 create a passive positive list

Create a detailed inventory of the entire palette of materials used in a given product, and the substances it may give off in the course of its manufacture and use. What, if any, are their problematic or potentially problematic characteristics? Are they toxic? Effects on local and global communities?

"Passive positive" lists – lists of materials used categorised according to their safety level

The X List – substances that must be phased out, such as teratogenicmutageniccarcinogenic.

The Gray List – problematic substances that are not so urgently in need of phasing out

The P List – the "positive" list, substances actively defined as safe for use

Step 4 activate the positive list

Step 5 reinvest

Do more than designing for biological and technical cycles we are recasting the design assignment: not “design a car” but design a “nutrivehicle”. Instead of aiming to create cars with minimal or zero negative emission, imagine cars designed to release positive emissions and to generate other nutritious effects on the environment. The car’s engine is treated like a chemical plant modelled on a natural system. Put it even further design a new transportation infrastructure! The planet will be crawling with cars, and we need other options. Sounds fanciful? Of course, but remember the car itself was fanciful notion in a world of horse and carriage.

For example Nike is testing clean new rubber that will be a biological nutrient and could likewise have a revolutionary impact on the industry.

The final point has no absolute endpoint and the final product may be totally different as the one you began to work on. Transformation to an eco-effective vision doesn’t happen all at once and it requires plenty of trial and error- and time and effort.

Finally signal your intention and restore! Drive for “good growth” and not just economic growth.

 

Except intergenerational responsibility

In 1789 Thomas Jefferson wrote a letter to James Madision in which he argued that a federal bond should be repaid within one generation of the debt, because as he puts it, “The earth belongs…to the living…No man can by natural right oblige the lands he occupied, or the persons who succeeded him in that occupation, to the payments of debt contracted by him. For if he could, he might, during is own life, eat up the usufruct of the lands of several generations to come, and then lands would belong to the dead, and not the living.”  The context is different, but the logic is beautiful and timeless.  Ask: How can we support and  perpetuate the rights of all living things to share in a world of abundance? How can we love the children of all species- not just our own- for all time? Imagine what a world of prosperity and health in the future will look like, and begin designing for it right now. What would it mean to become, once again, native to this place, the Earth- the home of all our relations? This is going to take forever. But that’s the point.”


Criticism according to Wikipedia:

Experts in the field of environment protection have questioned the practicability of the concept. Friedrich Schmidt-Bleek, head of the German Wuppertal Institute called his assertion, that the "old" environmental movement had hindered innovation with its pessimist approach "pseudo-psychological humbug".

I can feel very nice on Michael's seat covers[22] in the airplane. Nevertheless I am still waiting for a detailed proposal for a design of the other 99.99 percent of the Airbus 380 after his principles.

In 2009 Schmidt-Bleek stated that it is out of the question that the concept can be realized on a bigger scale.[23]

Some claim that C2C certification may not be entirely sufficient in all eco-design approaches. Quantitative methodologies (LCAs) and more adapted tools (regarding the product type which is considered) could be used in tandem. The C2C concept ignores the use phase of a product. According to the Variants of Life Cycle Assessment the entire life cycle of a product or service has to be evaluated, not only the material itself. For many goods e.g. in transport, the use phase has is the most influence on the environmental footprint. E.g. the more lightweight a car or a plane the less fuel it consumes and consequently the less impact it has. Braungart fully ignores the use the phase.[24][25]

It is safe to say that every production step or resource-transformation step needs a certain amount of energy (Newton's second law). Even the highest Cradle to cradle certification requires only 50% of energy for production to come from solar sources.

The C2C concept foresees an own certification of its analysis[26] and therefore is in contradiction to international ISO standards 14040 and 14044 for Life Cycle Assessment whereas an independent and critical review is needed in order to obtain comparative and resilient results. Independent external review.[27]

 

What is your opinion? 

 

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Elon Musk: The mind behind Tesla, SpaceX, SolarCity ...

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Thanks for the ride Tesla Motors!

We sold TSLA with 190% ($98 per stock)  return after one year. Our valuation was around $46 per stock. To avoid the disposition bias I placed stop losses after the exponential growth started off and monitored it very closely. I was aware that it is definitely a mistake to sell winners to early and I prefer to hold stocks at least for 2 years. But the current price reflects momentum rather than value. Our valuation of $46 per stock was already based on the fact that Tesla is able to deliver according to its business plan. Let’s see may be George Soros reflexivity theorem works for TSLA. Good luck for the future Elon Musk! 

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"The The Power of Habit" a must read by Charles Duhigg

http://charlesduhigg.com/about/

 

Really good book on the power of habit in organisations and also in ourselves including interesting case studies especially Paul O’Neills Alcoa turnaround.

My favourite pages are pp. 272-274:

 

 

 “He wanted to become a painter, and then enrolled in medicine school, then left to join an expedition up the Amazon River. Then he quit that, as well. He chastised himself in in his diary for not being good at anything. What’s more he wasn’t certain if he could get better. In medical school, he had visited a hospital for the insane and had seen a man hurling himself against a wall. The patient, a doctor explained, suffered from hallucinations. James didn’t say that he often felt like he shared more in common with the patients than his fellow physicians.

“Today I about touched the bottom, and perceive plainly that I must face the choice with open eyes”, James wrote in his diary in 1870, when he was a twenty-eight years old. “Shall I frankly throw the morals business overboard, as one unsuited to my innate aptitudes?”

Is suicide, in other words a better choice? Two month later, James made a decision. Before doing anything rash, he would conduct a yearlong experiment.  He would spend 12 month believing that he had control over himself and his destiny, that he could become better, that he had the free will to change. There was no proof that it was true. But he would free himself to believe, all evidence to the contrary, that change was possible. “I think yesterday was a crisis in my life” he wrote in his diary. Regarding his ability to change, “ I will assume for the present until next year/ that it is no illusion. My first act of free will shall be to believe in free will.” Over the next year, he practiced every day. In his diary, he wrote as if his control over himself and his choices was never in question. He got married. He started  teaching in Harvard. He began spending time with Oliver Wendell Holmes Jr., who would go on to become a Supreme court justice, and  Charles Sanders Peirce, a pioneer in the study of semiotics, in a discussion group the called the Metaphysical Club. Two years after writing his diary entry, James sent a letter to the philosopher Charles Renouvier, who had expounded at length of free will. “I must not lose this opportunity of telling you of the admiration and gratitude which have been excited in me by the reading of your Essais” James wrote. “Thanks to you I  possess for the first time and intelligible and reasonable conception of freedom.. ..I can say that through that philosophy I am beginning to experience a rebirth of moral life; and I can assure you , sir, that this is no small thing.”

Later he would famously write that the will to believe is the most important ingredient in creating a belief in change. And that one of the most important methods for creating that belief  was habits. Habits, he noted, are what allow us to “do a thing with difficulty the first time, but soon do it more and more easily, and finally with sufficient practise, do it semi-mechanically, or with hardly any consciousness at all.” Once we choose who we want to be, people grow “ to the way in which they have been exercised, just as a sheet of paper or a coat , once creased or folded,  tends to forever afterwards into the same identical folds.”

If you believe you can change- if you can make it a habit- the change becomes  real. This is the real power of habits: the insights that your habits are what you choose them to be. Once the choice occurs- and becomes automatic- it’s not only real, it starts to seem inevitable, the thing, as James wrote, that bears “us irresistibly towards our destiny, whatever the latter  may be. The way we habitually think of our surroundings and ourselves create the worlds that each of us inhabit…the unthinking choices and invisible decisions that surround us every day- and which,  just by looking at them, become visible again.“ 

 

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Environmental, social, and governance (ESG) data: Can it enhance returns and reduce risks?

Deutsche Bank Asset Management has set up an interesting new think tank 'The Global Financial Institute'. I became especially interested in the following white paper:

 

https://www.dgfi.com/DGFI/White-Papers/Environmental-social-and-governance-(ESG)-data-Can-it-enhance-returns-and-reduce-risks

 

In line with my own view  long term strategic factors are: further social factors, trust and possible future costs and taxes on environmental issues.  The market (for example the CFA Institute) is not teaching the importance, but ESG factors are crucial for long term success and investments, because of that inefficiency  valid long term returns are still possible in the environmental field. On the other hand we have to be aware of cultural shifts, which could have a strong effect on the whole field.

 

"This white paper offers a strong outlook on the field of ESG investment and recommends its deeper consid­eration by any institutional or private asset owner or financial services institution. It should be common sense to consider cultural shifts in society when making investment decisions. The fact that standard professional finance degree programs have not really taught their students how to evaluate this information makes ESG investment all the more appealing, as it substantially reduces the competition for ESG investors. Hence, this type of investment is a low-competition, longer-term strategy that can enhance investment returns and reduce risks by capitalising on common sense insights into the business relevance of specific ESG factors."

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Bankruptcy the healthier solution for Europe?

One of my favourite comments on Europe comes out of Jim Rogers book Street Smarts (pp. 202-204)

After being highly critical about the intolerance to  not respecting the Maastricht Treaty and its well-grounded purpose he wrote the following:

“The new guys were no preoccupied with being reelected, the demand of which were not well served by ridiculous fantasies like fiscal discipline. Right now, under any regimen, it will be impossible for many countries to pay off their debts. Ever. It is not going to happen. So, accepting that, what should Europe do? My solution is one the market has been imposing for thousands of years. Let them default. Let them go bankrupt. The people who are in debt with them, either by lending to them or investing with them, will take losses, serious losses in some cases, but then, for example Greece can start over from a sound base. The country need not leave the Eurozone to do it. We in America have had states go bankrupt, countries, cities –Mississippi did not pull out of the United States because it went bankrupt. Neither did New York, nor did Detroit. They went through a period of pain, people lost money, wages went down, rents went down, haircuts went down, everything went down as people adjusted to the reality that they did not have any money, that they could no longer spend money they did not have, and that nobody would lend them any money. But they prevailed. And nowhere along the way did the US dollar disappear.

Unfortunately, politicians in Greece or somewhere else will see pulling out the euro as the easy solution. The hell with the euro, we will go back to the drachma! And that would be a mistake. They may be a burst of enthusiasm at the beginning. Everybody will have this new drachma, and things may look OK for a while. But the optimism will not last. A return to the drachma will just serve as a license for the government to print money, and for the Greeks to continue spending money that they do not have. The drachma will trade at such a low price that the country will enjoy a much improved balance of trade, but everybody’s net worth will have collapsed. Nobody will trust the currency, or the Greeks themselves. Nobody will lend them money. Nobody will invest there.

There is no scenario under consideration, there is no scenario possible, that alters the fact that over the next decades people are not going to be living great in Greece. And all those people who have loaned Greece money are going to take big losses. If Angela Merkel could get all of them into a room and say, “Okay, this bank is going to close, that bank is going to stay in business, this guy is out of a job…all you guys are going to take hits, but we are going to hold everything together, everybody’s saving are safe, checks will be clear, depositors money will be protected, we will ring-fence the banks, the system is not going to freeze up and close down”, it might be different. If the chancellor of Germany could do that, the market would buy it, because at the moment (February 2013) governments in Europe have enough money. And they have enough creditability. If it happens five years from now, she can drag them all in into a room, talk to them all day long, and nobody will notice. The problem will be so bad by then that you are looking at systematic failure- the market says the hell with all of you, and the whole system collapses.

And in my view that is exactly what will happen, because politicians do not have the brains or the courage to take the necessary steps. None of them is talking about bailing out the Greeks. It is all about bailing out the banks, bailing out the management of the banks, the stockholders of the banks, and the bondholders of the banks who invested in Greece. The people of Greece will suffer but the banks will survive: the CEOs will make their salaries, the shareholders will get their dividends, the bondholders will survive. Greeks will be out on the street unemployed. They will be there either way. The difference is that my way things will eventually get better, as has happened in Iceland since 2009; the other way everything gets worse.”

 

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John Cochrane: Function Matters Not Size

I came across an interesting paper from John H. Cochrane (University of Chicago) and his insights and opinions on financial markets. My own view has always been that it is important to make arbitrage easier. This is in line with most of the points from Cochrane. He also argues for more research on high frequency trading.


 “The social question for high-frequency trading- like all of finance, really is whether it screws up markets or makes them more efficient and “liquid”." 


Just a few highlights out of his paper below and here the link to it.


http://faculty.chicagobooth.edu/john.cochrane/research/papers/Cochrane_jep_function_size_final.pdf

 

 “The majority of TRIP’s [Total Return Investment Portfolio] assets are managed by external managers specializing in a specific asset class, geography, or strategy. These asset managers outperformed their respective benchmarks in every asset class, adding over 500 basis points of performance versus the strategic benchmark.” Five hundred basis points! Put that in your pipe and smoke it, effificient marketers. At least we know one active manager’s perception of what they get for their fees. These endowments’ approach to portfolio management is pretty much standard at endowments, nonprofits, sovereign wealth funds, family offifices, pension funds, and so forth—anywhere there is a big pot of money to invest. These investors pay a lot of attention to allocation among name-based buckets, as represented in the pie charts, “domestic equity,” “international equity,” “fixed income,” “absolute return,” “private equity,” and the like. Then, they allocate funds in the buckets to groups of fee-based active managers."


 “Remember, “efficiency" means that prices incorporate all available information, not that markets are clairvoyant. The definition of “efficiency” is widely misunderstood. I once told a newspaper reporter that I thought markets are pretty “efficient,” and he quoted me as saying markets are “self-regulating!”

 

"If information is not incorporated into market prices and to such an extent that simple strategies with big alphas can be published in the Journal of Finance, there are not enough arbitrageurs. If asset prices fall in “firesales,” only to rebound later, there are not enough buyers following the fire trucks. If credit constraints are impeding the flow of capital, there is a social benefit to loosening those constraints. The literature on short-selling is revealing on this point. Short sellers uncover far more financial fraud than the Securities and Exchange Commission”.

 

“Unless we adopt the arrogant view that what we don’t understand must be bad, it is clearly far too early to make pronouncements such as “There is likely too much high-cost, active asset management,” or “Society would be better off if the cost of this management be reduced.” Such statements are not supported by theory or evidence. Nor is their not-so subtle implication that resources devoted to greater regulation—by politicians and regulators no less naive than current investors, no less behaviorally-biased, armed with no better understanding than academic economists, and with much larger agency problems and institutional constraints—will improve matters. This proposition amounts to Samuel to Samuel Johnson’s dictum on second marriages, the triumph of hope over experience.”

 

Here also the link to his blog. I think it is worth reading.

http://johnhcochrane.blogspot.ie/

 

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The effective altruist

The effective altruist movement is mainly based in Oxford, Cambridge and St. Gallen and comes out of the student body.  From my own perspective it fits well with the arguments made by Peter Unger and Peter Singer.

 

Living High & Letting Die 

Our illusion of innocence

Peter Unger 

A small amount of money sent to charity like UNICEF will ensure that fewer poor children will die. Yet even when aware of this most people sent nothing. Peter Unger examines this all-too common example of letting die, generating a bold and controversial look at moral assessment.

 

From a psychological angle on can also connect it with Daniel Ariely's point, that we try to think good of ourselves and could make a "nugde" problem out of it, so people would spend a certain amount automatically. 

On the other hand a key issue is to become a multiplier and inspire others.  

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Polarstern - Cool new sustainable utility company

Interesting start up in terms of "green gas" in Germany. I like the community character, strong support from ambassadors. Each customer supports a project in Cambodia. This makes it "ethically to a nobrainer" to change. Its also a sign of the shift to come in the German energy market. 

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The Future of SOlar

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The Third Industrial Revolution and a Zero Marginal Cost Society (Jeremy Rifkin) | DLD16

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An Investing Principles Checklist - From Charles t. Munger

“No wise pilot, no matter how great his talent and experience, fails to use his checklist.“

 

 

 

 

 

  •  Risk – All investment evaluations should begin by measuring risk, especially reputational

o   Incorporate and appropriate margin of safety

o   Avoid dealing with people of questionable character

o   Insist upon proper compensations for risk assumed

o   Always beware of inflation and interest rate exposure

o   Avoid big mistakes; shun permanent capital loss

 

  •   Independences – “Only in fairy tales are emperors told they are naked”

o   Objectivity and rationally require independence of thought

o   Remember that just because other people agree or disagree with you doesn’t make you right or wrong – the only thing that matters is the correctness of you analysis and judgement

o   Mimicking the herd invites regression to the mean (merely average performance)

 

  •   Preparation – “The only way to win is to work, work, work, work , and hope to have a few insights”

o   Develop into a lifelong self-learner through voracious reading; cultivate curiosity and strive to become a little wiser every day

o   More important than the will to win is the will to prepare

o   Develop fluency in mental models from the major academic disciplines

o   If you want to get smart, the question you have to keep is asking is “why, why, why?”

 

  • Intellectual humility – Acknowledging what you don’t know is the dawning of wisdom

o   Stay within a well-defined circle of competence

o   Identify and reconcile disconfirming evidence

o   Resist the craving for false precision, false certainty, etc.

o   Above all, never fool yourself, and remember that you are the easier person to fool

 

  •   Analytical rigor – Use of the scientific method an checklists minimize errors and omissions

o   Determine value apart from price; progress apart from activity; wealth apart from size

o   It is better to remember the obvious than to grasp the esoteric

o   Be a business analyst, not a market, macroeconomics or security analyst

o   Consider totality of risk and effect; look always at potential second order and higher level effects

o   Think forward and backwards – Invert, always invert

 

  • Proper allocation of capital is an investor’s number one job

o   Remember that highest and best use is always measured by the next best use (opportunity costs)

o   Good ideas are rare –when the odds are greatly in your favour, bet (allocate) heavily

o   Don’t fall in love with an investment – be situation-dependent and opportunity driven

 

  •  Patience – Resist the natural human bias to act

o   “Compound interest is the eighth wonder of the world “ (Einstein); never interrupt it unnecessarily

o   Avoid unnecessary transactional taxes and frictional costs; never take action for its own sake

o   Be alert for the arrival of luck

o   Enjoy the process along with proceeds, because the process is where you life

 

  •   Decisiveness- When proper circumstances present themselves, act with decisiveness and conviction

o   Be fearful when others are greedy, and greedy when others are fearful

o   Opportunity does not come often, so seize it when it does

o   Opportunity meeting the prepared mind: that’s the game

 

  • Change – Life with change and accept unremovable complexity

o   Recognize and adapt to the true nature of the world around you; don’t expect it to adapt to you

o   Continually challenge and willingly amend your “best-loved-ideas”

o   Recognize reality even when you don’t like it – especially when you don’t like

 

  • Focus – Keep things simple and remember what you set out to do

o   Remember that reputation and integrity are your most valuable assets – and can be lost in a heartbeat

o   Guard against the effects of hubris and boredom

o   Don’t overlook the obvious by downing in minutiae

o   Be careful to exclude unneeded information or slop: “A small leak can sink a great ship”

o   Face your big troubles don’t sweep them under the rig

 

In the end it comes down to Charlie’s most basic guiding principles, his fundamental philosophy of life: Preparation. Discipline. Patience. Decisiveness. Each attribute is in turn lost without the other, but together they form the dynamic critical mass for a cascading positive effects for which Munger is famous (the “lollapalooza”).

 

  

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Charles T. Munger's Psychological Checklist For Investing and life in General

Summary of Charles T. Munger’s psychology checklist taken from “Poor Charlie’s Almanack”. We should develop mental checklists for investing or at least go through them before important decisions. This one is highly relevant to life in general.

 

1)    Reward and Punishment  - Get the incentives right (Management consulting report this problem needs more management consulting). First action should always be to write down the incentives of everybody involved. If the equation does not workout change it. Incentives are despite being taught in each business school, often underestimated in real life.

 

2)    Like Loving Tendency - like and love being liked, positive feedback bias towards the loved ones. Ignore faults of and comply with wishes of, the object of affection, to favour people, products and actions merely associated with the object of affection, to distorts other facts to facilitated love.

 

3)    Dislike Hating Tendency - Often used in politics to “channel” the hatreds and disliking of individuals and groups into nonlethal patterns including elections. Politics is the art of marshalling hatreds. Often relevant on family level (property law).

 

4)    Doubt-Avoidance Tendency - The brain of man is programmed with a tendency to quickly remove doubt by reaching a decision. Which is often supported by puzzlement and stress (used as well in religion).

 

5)    Inconsistent Avoiding Tendency - Easy to prevent habits than to avoid them. It’s difficult for us to change something which we already programmed into our brain. “An ounce of prevention is worth a pound of cure”. Developing good habits and avoid the bad ones from the beginning.

 

6)    Curiosity Tendency- Curiosity can be strong motivation and lead to better performance, education needs to embrace this.

 

7)    Kantian Fairness Tendency – Human have a natural understanding for fairness, sort of “golden rule” everybody is aware of according to Kant.

 

8)    Envy/Jealousy Tendency – Natural tendency in humans, to compare. “It’s not greed that drives the world but envy.”

 

9)    Reciprocation Tendency - Small courtesy, car sales man cup of coffee for $500 extra dollars, ask for a small favor to gain relationship advantage.

 

10)Influence –from-Mere-Association Tendency- Associate highest price with highest quality. Even trivial associations work, Coke ads of happy life, military bands play impressive music etc. Some of the most important miscalculations come from what is accidentally associated with one’s past success, or one’s liking and loving, or one’s disliking and hating, which includes a natural hatred for bad news.

 

11)Simple, Pain-Avoiding Psychological Denial - If something is painful to admit, an easy way is just too simply deny it. E.g. drug addicted often trick themselves. Stay away from any conduct at all like do drift into chemical dependency.

 

12)Excessive Self-Regard Tendency - We all commonly observe the excessive self-regard of man. He mostly misappraisals himself on the high side, like ninety percent of Swedish drives that judge themselves to be above average. Also once you own something you value it more also called “endowment effect”. Example is also the overinfluence by face-to-face impression for a job candidate who is a marvelous “presenter” often causes great danger under modern executive-search practice.

 

13)Overoptimism Tendency - “What a man wishes, that also will he believe”. Excess of optimism is standard approach for us even when we are already doing well. One antidote to foolish optimism is trained, habitual use of simple probability math of Fermat and Pascal. The mental rules of thumb that evolution gives us to deal with risk are not adequate.

 

14)Deprival-Superreaction Tendency - Man values overvalues not losing to gaining. Or if man almost get something he greatly wants and has it jerked away from him in the last moment, he will react much as if he had long owned the reward and had it jerked away. Man also often compare to what is near instead of what really matters. For instance a man with $10m in his brokerage account will often be extremely irritated by the accidental loss of $100 out of the $300 in his wallet. Am man ordinarily reacts with irrational intensity to even a small loss, or threated loss, of property, love friendship, dominated territory, opportunity, status, or any valued thing. As a natural result, bureaucratic infighting over the threatened loss of dominated territory often causes immense damage to an institution as a whole. This factor, among others accounts for much of the wisdom of Jack Welch’s long fight against bureaucratic ills at General Electric.

 

15)Social-Proof Tendency - Compliance behaviour and management errors result out of social proof tendencies, most easily triggered under puzzlement or stress, and particularly when both exist. Because both bad and good behaviour are made contagious by Social-Proof Tendency, it is highly important that human societies 1) stop any bad behaviour before it spreads and 2) Forster and display all good behaviour. If only one lesson is to be chosen this would be learn how to ignore the examples from others when they are wrong, because few things are more worth having.

 

16)Contrast Misreaction Tendency - The eyes contrast in what is seen registered. Moreover, as perception goes, so goes cognition. Few psychological tendencies do more damage. Small scale damages involve buying an overpriced $1000 leather dashboard merely because the price is so low compared to his concurrent purchase of a $65000 car. Large-scale damages often ruin lives, as when a wonderful woman having terrible parents marries a man who would be judged satisfactory only in comparison to her parents. Salesman deliberately shows the customer three awful houses at ridiculously high prices. Then he shows him a merely bad house at a price only moderately too high. And, boom the broker makes an easy sale. Other example, to make an ordinary price seem low, the vendor will advertise an ordinary price as reduction. Even when people know this sort of manipulation, it will often work to trigger buying. It also demonstrated that being aware of psychological ploys is not a perfect defense.

 

17)Stress Influence Tendency - More social confirmatory decision under stress. People might turn complete personality after break down (Palov experiments), every person can be broken. A break down can change a personality completely.

 

18)Availability- Misweighting Tendency - Theories and stories that can be easy remembered have a higher weight for us, and therefore are more likely to be seen as true. Good example for this in finance is the CAPM.

 

19)Use-It-Or-Lose-It-Tendency - Over time educations narrows down to the field in which knowledge is applied. One needs systematic checklist of skills and constant training of important theoretical frameworks to keep a general toolbox for solving problems, and don’t become the man with the hammer who treats every problem with the same solution.

 

20)Drug-Misinfluence Tendency - Avoid problem from the beginning, can result in “Simple, Pain-Avoiding Psychological Denial.”

 

21)Senescene-Misinfluence Tendency - Continues learning and practice will slow down aging of mental abilities.

 

22)Authority-Misinfluence Tendency -  Higher authority can result in blind following of orders, reason for many catastrophes. Warren Buffet is always quite like a mouse around his pilots.

 

23)Twaddle Tendency – Tendency to focus on unimportant stuff.

 

24)Reason-Respecting Tendency - Why is the most important question for any task. Reason can lead to strong motivation but is often also misused to manipulate people. “Why?” is a sort of Rosetta stone opening up the major potentially of mental life.

 

25)Lollapalooza Tendency - Bringing pressure to bear form various psychological tendencies at the same time. Extreme consequences from confluences of psychological tendencies acting in favor of a particular outcome. One of the key reasons for the success of the Milgram experiment often not considered in psychological textbooks.

 

 

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A Lesson on Elementary, Worldly Wisdom As It relates to Investment Management & Business - Charles Munger

This is best piece on investment I have been reading for a long time.

 

“Indeed, the average result has to be the average result. By definition, everybody can’t beat the market. As I always say, the iron rule of life is that only 20% of people can be in the top fifth. That’s just the way it is. So the answer is that it’s partly efficient and partly inefficient.

And, by the way, I have a name for people who went to extreme efficient market theory – which is “bonkers”. It was an intellectually consistent theory that enabled them to do pretty mathematics. So I understand its seductiveness to people with large mathematical gifts. I just had a difficulty in that the fundamental assumption did not tie properly to reality.

Again, to the man with the hammer, every problem looks like a nail. If you’re good at manipulating higher mathematics in a consistent way, why not make an assumption which enables you to use your tool?

The model I like–to sort of simplify the notion of what goes on in a market for common stocks – is the pari-mutuel system at the racetrack. If you stop to think about it, a pari-mutuel system is a market. Everybody goes there and bets and the odds change based on what’s bet. That’s what happens in the stock market.

It’s not a bit easy of course, 50% will end up in the bottom half and 70% will end up in the bottom 70%. But some people will have an advantage. And its fairly low transaction cost operation, they will get better than average results in stock picking.

It’s not given to human beings to have such a talent that they can just know everything about everything all the time. But it is given to human beings who work hard at it – who look and sift the world for mispriced be – that they occasionally find one.


And the wise ones bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time, they don’t. It’s just that simple.


That is a very simple concept. And to me it’s obviously right –based on experience not only from the pari-mutuel system, but everywhere else.” 

 

Below the link to his full document:

http://old.ycombinator.com/munger.html

 

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Why Tesla's battery will Disrupt the whole energy Market

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Start with Why

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Flash boys and High Frequency Trading

High Frequency Trading (HTF) can become a quite expensive hidden tax for your pension fund: 

 

"By December 19, 2013, the people newly installed on top of Goldman Sach's stock market operations, Ron Mogan and Brian Levin wanted to change the way market worked. They truly believed that the market at the heat of the world's largest economy had grown to complex, and was likely to experience some catastrophic failure. But they also were trying to put an end to a game they could never win or control (high frequency trading). And so they'd flipped a switch, and set lots of their customer's stock market orders to IEX. When they did this they started a process that, if allowed to play out, would take billions from Wall Street and return it to investors. It would also create fairness.

 

A big wall street bank was a complex environment. There were people inside Goldman Sachs less then pleased by what Levin and Morgan had done. And after December 19 the firm had retreated, just a little bit. It was hard even for Brad Katsuyama to know why. Was it changing its collective mind? Had it underestimated the cost of being a first mover. Was it too much to ask Goldman Sachs to look up from short-term profit and study the landscape down the road. It was possible that even Goldman Sachs did not know the answers to those questions. Whatever the answer, something Brian Levine had said still made a lot of sense. "There will be a lot of resistance" he'd said. "There will be a lot of resistance. Because a tremendous infrastructure has been built up around this." It’s worth performing Goldman Sachs-like costs benefit analysis of this infrastructure, from the point of view of the economy it is meant to serve. The benefit: Stock market prices adjust to new information a few milliseconds faster than they otherwise might. The costs make a longer list. One obvious cost is the instability introduced into the system when its primary goal is no longer stability but speed. Another is the incalculable billions collected by financial intermediaries. That money is a tax on investment paid by for the economy; and more than productive enterprise must pay for capital, the less productive enterprises, there will be. Another costs, harder to measure was the influence of all this money exerted, not just on the political processes but on people's decisions about what to do with their lives. The more money to be made by gaming the financial markets -and create narratives to explain to themselves why a life spend gaming financial markets is a purposeful life. And then there is maybe the greatest costs of all: Once the very smart people paid huge sums of money to exploit the flaws in the financial system, the have the spectacularly destructive incentive to screw up the system even further, or to remain silent as they watch it being screwed up by others. 

The costs, in the end, is a tangled-up financial system. Untangling it requires acts of commercial heroism- and even then the fix might not work. There was simply too much to easy money to be made by the elites if the system worked badly than it worked well. The whole culture had to want change. "We know how to cure this", as Brad had put it. "It's just a matter of whether the patient wants to be treated".

 

 

Here the link to the new founded IEX stock exchange (Its story is captured in the book Flashboys) making life of high frequency traders a bit more difficult and reducing the hidden costs of the system for pension funds and other institutional investors.

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Limits to Growth, the 30 Year Update

The necessity of talking the industrial world to its next stage of evolution is not a disaster – it is an amazing opportunity. How to seize the opportunity, how to bring into a world that is not only sustainable, functional, and equitable but also deeply desirable is a question of leadership and ethics and vision, courage, properties not computer models. To speak of them we – the authors – need a chapter break here. We need to turn off our computers, put away our data and scenarios and reappear in chapter 8, where we will conclude with insights that have come as much from our hearts and our intuition as the have come from our scientific analysis…."

 

"It’s time to do some truth-telling on this issue. The world’s leaders do not know any better than anyone else how to bring about a sustainable society; most of them don’t even know it’s necessary to do so. A sustainability revolution requires each person to act as learning leader at some level, from family to community to nation to world. And it requires each of us to support leaders by allowing them to admit uncertainty, conduct honest experiments, and acknowledge mistakes. No one can be free to learn without patience and forgiveness. Finding the right balance between the apparent opposite urgency and patience, accountability, and forgiveness is a task that requires compassion, humility and, clearheadedness, honesty and that hardest of words, that seemingly scarcest of all resources-love."

 

“Not everything bears repetition, but truth does – especially when that truth is both denied by entrenched interests and verified by new information”

Herman E. Daly, former World Bank senior economist and Professor. School of Public Affairs University of Maryland.

 

Good video summarizing conclusions:

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Simon Sinek: Why good leaders make you feel safe

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William Janeway on Innovation

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Dynamic ESG investing and asset management

·         Outperformance of strong ESG companies in the healthcare sector   with  trust as an               obvious important factor

·         Dynamic models including social media sentiment analysis necessary to capture long             term and short term trends

·         Adjust strategy according to sentiment analysis

·         Dynamic ESG could provide a competitive advantage for a certain period of time in asset       management competition

·         As long as such articles are not posted in blogs (like this one)

 

A core issue to understand is that ESG is a lot about limiting the downside risk. Statistical methods (higher moments) and analyzing annual reports does not help to capture unknown events. ESG could potentially help to quantify some of the intangible factors (the character of the company).

 

I personally believe that we use to often heuristics as mental shortcuts in our thinking as shown by Daniel Kahneman (or pattern thinking, “How to Create a Mind”, Ray Kurzweil ). This results in undervaluing on average the impact of convex factors (because of convexity even less than average could still be a very successful strategy, see "Antifragile", Nassim Taleb), like climate change (or chain reactions, see “A Demon of our Own Design”,  Richard Bookstaber ) and do not act on it in real life or price them correctly in the investment world. Therefore, investing into convex factors (some of them can be captured with ESG analysis) outperforms over time. 

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John Eatwell on economics and finance

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Pervoskites and Solar

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Useful Business Insider chart

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Megaprojects and Risk: An Anatomy of Ambition, book review

Bent Flyvbjerg, Nils Bruzelius and Werner Rothengatter

 

“Never in the history of humankind have we built more or more expansive, infrastructure projects and never have such projects been more central to establishing what sociologist Zygmunt Bauman calls ‘independent from Space’ and Bill Gates ‘frictionless capitalism’. Yet when actual versus predicted performance of megaprojects are compared the picture is often dismal. We have documented in this book that:

  •  Cost overruns of 50% to 100% in real terms are common in megaprojects; overruns above 100% are not uncommon;
  • Demand forecast that are wrong by 20% to 70% compared with actual development are common;
  • The extend and magnitude of actual environmental impacts of projects are often very different from forecast impacts. Post auditing is neglected;
  • The substantial regional, national and sometimes international development effects commonly claimed by project promoters typically do not materialise, or they are so diffuse that researchers cannot detect them;
  •  Actual project viability typically does not correspond with forecast viability, the latter being brazenly over-optimistic.”

 

 

The aim is to decrease the risk of government, taxpayers and private investors being led- or misled, as often turns out the case – repeatedly to commit billions of dollars to underperforming projects.

 

 

Causes: more and bigger projects, lack of accountability in the decision making process, (“no skin in the game”), Promoters have actually been able to dodge risk and accountability. The tactical under-and overestimation of effects in the initial stages. Rent seeking behaviour and the associated ‘appraisal optimism’- are not in the interest of those whose money is put at risk, be the taxpayers or private investors. Nor are they in the interest of those concerned with environment, safety, democracy and the public interest.

 

 

Cures: 1)Risk and the accountability should be more centrally placed in megaproject decision making than is currently the case. Not only just better and more rational information, but also the right checks and balances are required to ensure accountability. New methodologies for risk management such as the most likely development analysis (MLD), break-even and worst case scenarios should be combined with the mentioned accountability.

 

2) Governments often play various roles such as promoters, guardian of public interests, which results in a conflict of interest in which accountability suffers. Borderlines of public and private involvement should be redrawn, shifting the risk form the public to the private sector and establishing a substantial clearer role for governments by means of arm’s length principal and shifting government involvement from project to promotion to formulation and auditing of public-interest objectives to be met by megaprojects.

There is little evidence that efficiency and democracy are trade-offs for megaproject decision making quite the opposite.

 

3) The authors propose, four basic instruments of accountability to be employed in megaproject decision making:

i) Transparency: Stakeholder involveme

nt and participation of the public sector. Against the convention argument that public participation slows down decision making and results into suboptimal decision making, mega projects that have tried to get by without publicness and participation have often into such heavy opposition that the decision making process were destabilised and second-best solution procedure and outcome forced upon actors and projects.

 

ii) Performance specification: The use of performance specification implies goal-driven approach to megaproject decision making, instead of the conventional technical solution driven one. The use of a performance specification approach means that as far as possible, all requirements with respect to a possible project are to be decided before considering various technical alternatives for the project before appraising it. Focus on the ends rather than the means. Forces stakeholder into a constructive role, and undermines the creditability of criticism directed at megaprojects simply because they happen to be megaprojects.

 

iii) Explicit formulation of regulatory regime, should be defined upfront as far as possible and will make governments carefully review issues and identify all costs before decisions are made. Furthermore, the choice of the regulatory regime will influence the risk of the project and both costs and risk should be central to any feasibility study and appraisals. Finally, if part of the financing of the project is to be mobilized (as proposed by the authors) from risk capital, this could only take place if the regulatory regime is set out, and risk which are of political nature are identified, and where relevant, as far as possible eliminated.

 

iv) Involvement of risk capital, by requiring that a substantial commitment in the form of risk capital is made, the ordinary citizen will be required to carry no, or only limited risk. Involvement of risk capital will ensure a high degree of involvement by the lenders during the final design construction and operation of a project and more effectively monitoring. As a consequence, better cost control can be expected. The authors propose two alternative models  for megaproject decision making. One based on the state-owned enterprise approach (SOE), the other on the build-operator transfer (BOT). Depending on the specific project one will be better than the other.

 

 

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Oxford Photovoltaics has the potential to revolutionize the whole industry

Oxford Photovoltaics is an Oxford University spin-out company that is developing a low cost, sustainable transparent solar cell coating that can be printed on building glass. Less toxic than traditional solar cells, it can be used on the glass facades of commercial buildings to convert sunlight to electricity. 

 

Here a few links with more information on the technology and a video from the founder:

http://www.theguardian.com/environment/2013/feb/12/printed-solar-glass-panels-oxford-photovoltaics

http://www.oxfordpv.com/oxford-pv-news/oxford-solar-cell-pioneer-named-as-only-uk-scientist-in-nature-s-top-10

https://www.innovateuk.org/-/the-future-of-solar-power-is-oxford-photovoltaics

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Hidden risks and better ways of investing

Nassim Taleb recently published a lecture on “tail risk”. Here the link to the document: http://www.fooledbyrandomness.com/FatTails.html

 

The cartoon on the front (see below) provides a good picture of what happens when you argue against the basic “gaussian” thinking of finance theory. Current portfolio theory is more and more moving towards risk parity strategies (which are  putting risk at their heart including other risk factors than volatility) such as the one proposed by AQR Capital management. The best people in finance are actually often betting against the theories taught in universities (and are probably still thankful that universities keep teaching it). Warren Buffet sold a huge amount of long term put options after the financial crisis to gain liquidity investing into undervalued securities. Doing this he was actually making money out of human psychology (people overpay for insurance and lotteries as well) and betting against the Black Scholes pricing mechanism for options, which is not the heuristic traders use, but which is still a wrong anchor value (based on “Gaussian” thinking) for many derivatives. A key message I took away from Taleb is that more complexity does not help to find a good solution. Simple heuristics could do a better job. For example building a simple heuristic to detect convexity could be enough for many problems rather than trying to use complex forecast mechanisms. The knowledge that something is convex should offer enough information to handle a problem differently (think about population growth, climate change and  technical process).

 

You do not have to be the smartest guy in the room for successful investing. More important is being aware of your own stupidity and betting on the fact that a lot of “smart people” will get it wrong.

 

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How to create a mind

Ray Kurzweil's TED talks provides the main idea of his new book how to create a mind. Intersting to think about what his scenario would mean for investing.

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Democratization and the European Union

A question I have been discussing recently is where are we heading with the EU?

 

Even if you are pro EU and agree with the general vision we need more debate on how the EU should look like and work in detail. We are moving into a world of more bureaucracy with anonymous decision makers without “skin in the game”.  I believe, if you ask the majority of European citizens how the exact decision making in the EU works and how much their national political governments (for which they vote) are influenced by EU level (for which most of them do not bother to vote) they will have a wrong picture of it. Is this a democratic system? An interesting way forward could be a more federal system with a creditable government at EU level. This would go in line with strengthening the EU parliament and increasing the government’s responsibility for actions. Furthermore, a good lesson from the US is that you can let states go bankrupt in a federal system and you have to do so.

 

 

Here an organisation that promotes European federalism: http://www.federalists.eu/uef/our-vision/

 

 

Finally, does it even make sense to promote the potentially best solution which is by itself a prisoner’s dilemma to implement?

 

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Energy Challenges & Opportunities of the 21st Century

Good discussion presented by the Churchill Club.

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Pay wars the future of mobile payments

Below a cool video from DB research on mobile payments.

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Momentum investing and 3d printing

Never ask anyone for their opinion, forecast or recommendation. Just ask them what they have- or don't have in their portfolio. Nassim Taleb (2013)

 

There you go..3d printing is a great story at the moment. In line with Schiller’s recent Noble stories drive markets. Or as Soros said there is no better investment than an emerging bubble (in the case you can limit your downside somehow and I personally prefer value but sometimes I have to do momentum). A good way to profit from emerging technologies without hours of research and extremely high risks (still high risks) are specific ETFs or indices.

Here a 3d printing index certificate offered by UBS: http://keyinvest-de.ubs.com/Produktdetails/DE000UBS13D0

 

I bought it roughly 2 months ago and made over 30% return so far. Therefore, it should be obvious why this article exists. Still success in the long run depends on limited downside mechanisms for such a strategy (just look at our Tesla exit below). 

 

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Innovation and the Green Economy

 

The slide speaks for itself. This "three-legged stool" message and the reflexive relationship of bubbles on innovation is the core take away from Janaway and his book.

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Mandelbrot “The (mis)behaviour of markets” and insights from multifractal models

In the following a few highlights from Mandelbrot’s book:

 “To me the greatest charm of the multifractal models is the economy. One simple set of rules can produce a great variety of behaviour, depending on the circumstances. By contrast, most financial academics are going through a love affair with another way of modelling market volatility. Its main inventor, Robert F. Engle shared a Nobel in 2003 for its development. It starts from the same facts I have been advancing in this book: Volatility clusters, due to dependence. To model that, it as already been mentioned that a set of statistical tools were developed; it is called GARCH, short for a model the cluster its starts with conventional Brownian model price variation.  When the volatility jumps, it plugs in new parameters to make the bell curve grow; when the volatility falls; it plugs in new parameters to shrink the curve. You might say the bell curve vibrates, to fit the circumstances. GARCH is, certainly, a handy abacus now used by many option traders and financial directors to model risk.  But it begs the question of what makes the bell curve vibrate. And as you try to work with the model, it becomes increasingly complicated. To say much with little: Such is the goal of good science. But most financial models say little with much. They input endless data, require many parameters, take long calculations. When the fail they are “fixed”. They are amended, qualified, particularized and complicated. Bit by bid, from a bad seed a big but sickly tree is build, with glue nails, screws, and scaffolding. That people lose money on these models should come as no great surprise.

The multifractal model, by contrast, begins with the unchanging, mathematicians would call them. Its economical and flexible and mimics the real thing […]  My hope is that, someday, the small seed of multifractal analysis can grow into a fruitful new way of managing the world’s money and economy.” Despite the message of power laws one of Mandelbrot main points is the importance of time.

Hey explains the general dependence of three underlying functions with a metaphor: “ The family starts with the parent. The father takes clock time and transforms it into trading time. The mother takes clock time and changes it into a price. Merged together, the baby takes the father’s trading-time and coverts it into a price by the rules the mother provides. Last step: Use the new baby generator to make a full fractal price chart.”

 

If one read carefully he is still critical towards the practical applications and a main argument is to invest more into fundamental research on markets. Fractal theory needs more researchers working on it.

 

Key findings:

-Volatility comes in cluster and can be mild, normal and wild. Standard models only account for the normal periods (stationary issue).

-Fractal models can be scaled and do not depend on finite higher moments.

-Contrary most money can be made in wild periods, timing matters prices cluster.

-Risk mgmt and portfolio models could use multifractal model for monte carlo simulations. (Or one could do it Taleb’s way and build “antifragile” portfolios benefiting from randomness.)

 

To conclude: “Since my youth I have been shamelessly disrespectful of received wisdom […] My understanding of economics comes not from abstract theory but from observation.”

 

Mandelbrot concludes his book with the following:

“One night of February 1, 1953, a very bad storm lashed the Dutch coast. It broke the famous see dikes, the country’s ancient and proud bulwark against disaster. More than 1,800 died. Dutch hydrologists found the flooding had pushed the benchmark water-level indicators, in Amsterdam to 3.85 over the average seemingly impossible. The dikes has had been thought to be safe enough from such a calamity; the conventional odds of so high a flood were thought to have been less than one in ten thousand. And yet, further research showed, an even greater inundation of four meters had been recorded only a few centuries earlier, in 1570. Naturally the pragmatic Dutch did not waste time arguing about the math. The cleaned up the damage and rebuild the dikes higher and stronger.

 

Such pragmatism is needed in financial theory. It is the Hippocratic Oath to “do no harm”. In finance, I believe the conventional models and their recent “fixes” violate that oath. They are not merely wrong; they are dangerously wrong. They are like a shipbuilder who assumes that gales are rare and hurricanes myth; so he builds his vessel for speed, capacity and comfort- giving little thought to stability and strength. To launch such ship across the ocean in typhoon season is to do serious harm. Like the weather markets are turbulent. We must learn to recognize that, and better cope."

 

 

 

 

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Why behavioural studies matter for new “smart” energy demand startups!

Its obvious that huge economic potential is hidden in energy efficiency and smart demand business models. Various private equity companies are at the forefront of this development and build an investment case on the potential role, which technical solutions will play. I would like to emphasize a “low hanging fruit” for future business models. Nudging has become a quite popular word in behavioural studies and for policy makers but despite the general theory a lot of it is about psycholgical details. Different ways of implementation can make a difference between success and failure. I believe that the following paper from Michelle Baddeley (Cambridge/UCL) is highly relevant for any regulator, consulting company and startup in the energy demand sector. Here the link: Energy, the Environment and Behaviour Change: A survey of insights from behavioural economics

 

Just a few highlights to illustrate the difference between idealistic opinions and reality:

-“The highest correlation with actual conservation behaviour was a person’s belief about whether or not their neighbours were doing it.”

-“Given bounded attention to social norms, social norms will only result in behaviour when norms are at the top of the mind.”

- Normative influence matter.

-Families and habits play a key role in society.

-Huge potential lies in the way “toxic” emissions have to be published.

-“Thaler and Sunstein suggest that a Greenhouse Gas Inventory requiring most significant emitters to disclose their emissions could have similar beneficial effects as the Toxic Release Inventory, particularly given the current salience of climate change problems in the public consciousness. Firms will also be affected by the actions of regulators, and this may generate strategic conflicts. When firms social motivations will interact with strategic considerations it introduces additional complexities, for example Shogren et al. (2010) assert that a regulators subsidy can interact negatively with social motives of a firm concerned about reputation. Selfish firms will make an optimal effort and socially oriented firms will be subsidised less than is optimal.” (Just think about the recent increase in EEG costs…)

 

Results: A range of policy tools is required, next to “pricing” energy and emissions. Frequent simple feedback and control is important (smart meter roll out, 80% by 2020 in the EU can play a key role here). Nudging can be used to overcome biases and can be combined with monetary incentives (as outlined by Stern et al 2009), but it is important that policies aim for long term behavioural change.

 

 

My own view is that despite the important insights above, the right way is "top down". We have to change the “vision and goal” of the system as first step. This would mean to internalize the environment and social costs into our measurement of economic success. The Chinese government has already announced that the environment will be its key priority over the next 5 years and it will obviously have strong reflexive influence on the shape of the world. It is time to redefine “economic success”.

 

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Principles for investing in markets

Ray Dalio’s Principles and some rules for investing:

1)      It isn’t easy for me to be confident that my opinions are right. In the markets you can do a huge amount of work and still be wrong.

2)      Bad opinions can be very costly. Most people come up with opinions and there is no cost to them. Not so in the markets. No matter how hard I work I cannot be really sure.

3)      The consensus is often wrong, so I have to be an independent thinking. To make any money you have to be right when they are wrong.

 

1)      I worked for what I wanted, not for what others wanted me to do. For that reason, I never had to do anything. All the work I ever did was just what I needed to do to get what I wanted.

2)      I came up with the best independent opinions I could muster to get what I wanted.

3)      I stress-tested my opinions by having the smartest people I could find to challenge them so I could find out where I was wrong. I never cared much about others’ conclusion- only for the reasoning that led to these conclusions. That reasoning had to make sense to me. Through this process I improved my chances of being right, and I learned a lot of great people.

4)      I remained wary about being overconfident, and figured out how to effectively deal with my not knowing. I dealt with my not knowing by either continuing to gather information until I reached the point that I could be confident or by eliminating my exposure to the risk of not knowing.

 

5)      I wrestled with my realities, reflecting on the consequences of my decisions, and learned and improved from this process.

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Great big picture video by Ray Dalio

Ray Dalios' video explains the summary of his paper in a more visual way. In my view this should be part of every undergraduate course and emphasizes again the importance of debt. It also points out where we are in the long term debt cycle. In addition, “Beautiful” deleveraging hmm...

 

Finally, a point which is missing and not easy to get as first glance is the influence of collateral on the amount of debt and on asset prices. Collateral allows optimistic agents to leverage even further and therefore optimists have a higher impact on prices, especially house prices (see Geanakoplos papers on the leverage cycle, or my own paper on “should the FED regulate the leverage cycle”).

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Debt cycles and how the economic machine works

I highly recommend the paper from Ray Dalio on debt cycles "how the economic machine works". Its clear written and goes deep. It is also easy to see where we are at the moment according to his debt cycles models. I will write in more details about his theories soon. Please do not hesitate to provide feedback and your opinion on it. Here the link to the article:

http://www.bwater.com/home/research--press/how-the-economic-machine-works.aspx

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The financial crisis a visualization

This graph only represents the limited perspective of the author and further underlying causes in the complex financial world could be missing. We must learn to be aware of our own fallibility.[1] The progress of knowledge is framed not just by what we know, but also by gaining a better understanding of what we cannot know.[2] This could be also a direction for the future.  Nassim Taleb argues that we need a system becoming stronger and not weaker from random shocks.

 

“Meanwhile, over the past few years, the world has gone the other way, upon the discovery of the Black Swan idea. Opportunists are now into predicting, predictioning, and predictionizing Black Swans witheven more complicated models coming from chaos-complexity-catastrophe-fractal theory. Yet, again the answer is simple: less is more; move the discourse to (anti) fragility.” (Taleb, 2012, pp. 138-139)

 

A way into this direction might come from Katharina Pistor arguing for the implementation of more natural firewalls coming out of the system[3] (including ideas from the Glass-Stegall act, Volcker rule). This process is still in development but might be more stable over the long run than a central regulation. Still beside the Rogoff and Reinhart analysis a further lesson is that government regulation with clear long term targets is difficult to implement.[4]  Additionally it is important to avoid reflexive influence of the financial markets on its own regulation[5], while still pursuing more global coordination among regulators. Regulation of the OTC market particularly new derivatives is an issue for further research, while currently the regulation of OTC markets is already in progress and could be combined with the purpose of creating ceilings[6]for leverage.[7] Finally the importance of behavioural aspects should not be underestimated and a simple solution here is that decision makers need more skin in the game.

 
You will find the full article below.


[1] As the German physicist Werner Heisenberg’s states in his uncertainty principal, the root of the problem was man’s examination of nature, which inevitable impacts the natural phenomena under examination so that the phenomena cannot be objectively understood. (Bookstaber, 2007, pp. 223-224)

[2] (Soros, 2008, p. 69) and (Bookstaber, 2007, p. 220)

[3] (Pistor K. , 2012)

[4] See  (El-Erian, 2013), (Taylor, 2011, p. 22)

[5] See (Soros, The New Paradigm of Financial Markets: The credit crisis 2008 and what it means, 2008)

[6] Contrary the provision of better liquidity buffers and supporting more leverage during crisis is also necessary and is a further issue (Geanakoplos J. , Solving the Present Crisis and Managing the Leverage Cycle, 2010, p. 123)

[7] See (FSA, 2012)

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Tado the new German "cloud" NEST version

Interesting pitch presenting Tado a cloud based intelligent thermostat working with regional weather forecasts and various other functions. 

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Facemash hedge funds strategy and politics

An unconventional hedge fund strategy is to evaluate the look of CEOs based on conventional success related superficial attributes. The CEO which fits into the attitudes we subconsciously relate to success such as; tall, leadership and dynamic looking person, might not be as good as somebody, who we subconsciously  relate to more unsuccessfully looking persons (such as a small woman). Therefore, invest into the companies with the “unsuccessful” looking CEOs. This might sound unsophisticated and stupid at first glance (and is in fact more a fun article), but our first impression is a strong initial anchor for our evaluation of a person. The strategy might be even more relevant in politics and is clearly a point for Merkel. Finally, even if we are aware of our values we  might act subconsciously different (see book “the winner effect”). 

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Principals by Ray Dalio

I came across an excellent piece by Ray Dalio (CEO of Bridgewater). The document can be found here: http://www.bwater.com/Uploads/FileManager/Principles/Bridgewater-Associates-Ray-Dalio-Principles.pdf

 

In relation to investing he wrote the following:

“So in 1975, after a quick two year stint on Wall Street after school,  I started Bridgewater. Soon after, I got married and began my family.

Through this time and till now I followed the same basic approach I used as a 12-year-old caddie trying to beat the market, i.e., by: 1) Working for what I wanted, not for what others wanted me to do; 2) coming up with the best independent opinions I could muster to move towards my goal; 3) stress-testing my opinions by having the smartest people I could find to challenge them so I could find out where I was wrong; 4) being wary about overconfidence, and good at not knowing; and 5) wrestling with reality, experiencing the results of my own decisions, and reflecting on what I did to produce them so that I could improve.”

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Lecture on (Anti)fragility by Nassim Taleb

Nassim Taleb published a lecture series on fat tails (volume 1) and (Anti)fragility (volume 2).

 

Here the link further articles related to the lectures will follow soon:

http://www.fooledbyrandomness.com/FatTails.html

 

I believe his core message to design systems, which can deal with randomness rather than trying to predict extrem events with complex models is crucial (especially for academics and policy makers). A cool example for such systems benefiting from random contributions in a positive way could be crowd based business models.

 

In terms of investing its very clear design strategies, benefiting from randomness rather than trying to forecast anything. You only have to know that a lot of people think they are smart and know the future, but they will get it wrong. Simply betting on the fact that a lot of people will get it wrong with limited downside is enough to become rich over time. It requires a long term horizon and investing into uncertainty, which is against basic human psychology…If you are interested in specific strategies let me know.

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Solar energy and the wisdom of Charlie Munger

Explains also why this website is called greeninvstmentclub...

Inspiring man. One insight related to the topic "cleantec" is that the solution to our most important problem can be found in the energy market, particularly solar energy.

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Jim Rogers on investments and Europe

Jim Rogers has skin in the game and is putting his own money where his mouth is, so it might be worth listening to him (see my previous article on Europe). The end of 2014 is still not there. On the other hand his former partner Soros argues that the real world is shaped by the interest of powerful people and (wrong) believes of them and investors can have a signifcant impact. Besides the interview inlcudes good investment ideas for the next years.

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Binary prediction true exposure and climate change

Taleb and Tetlock (2013) argue in their paper “On the difference between Binary Prediction and True Exposure” http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2284964, that we have to be aware of the difference between “binary” (only two possible outcomes) and “vanilla” (multiple outcomes) scenarios. Vanilla exposures are sensitive to Black Swan effects, model errors and prediction problems, while binary are more immune to them. Indeed we might see fewer fat tails events, but their impact will get stronger.  This is also an issue for climate change models and we have to be aware of our limited perspective if we argue the effects of climate change such as the discussion  around the Stern Review (http://en.wikipedia.org/wiki/Stern_Review).  

 

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Warren Buffet's tax suggestion

Warren Buffet touches on taxes one of  the key drives of inequality. 

 

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Hedged Momentum Strategies Outperform !!!

Kent Daniel holds a really interesting talk on momentum and how to improve a momentum strategy by hedging it during crisis. He also mentiones the in my own view ground-breaking paper from  Asness, Moskowitz, and Pedersen (2013) Value and Momentum Everywhere.

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A conversation with Bill Janeway: Doing Capitalism in the Innovation Economy

This 60min interview gives you the core ideas of his book. Worth watching. 

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Cradle to Cradle! Rethinking the world of economics….

The following article is based on the book "Cradle to Cradle" from Michael Braungrat and William McDonough.


https://en.wikipedia.org/wiki/Cradle-to-cradle_design

 

“The GDP as measure of progress emerged during an era when natural resources still seemed unlimited and “quality of life” meant high economic standards of living. But if prosperity is only judged by increased economic activity, then car accidents, hospital visits, illnesses (such as cancer) and toxic spills are all signs of prosperity. Loss of resources, cultural depletion, negative social and environmental effects , reduction of quality of life- these ills can all be taking place, an entire can be in decline, yet they are negated by a simplistic economic figure that says economic life is good. Countries all over the world are trying to boost their level of economic activity so they, too, can grab a share of the “progress” that measurements like the GDP propound. But in the race for economic progress, social activity, ecological impact, cultural activity and long term effects can be overlooked.”


According to Prof. Braungart “less bad” referring to more efficiency and more eco-friendly productions and a bit of social activities is not enough. We really have to understand the triple bottom line: profit, people, and planet in a holistic way. This means to include all goals right into the whole life cycle of the product. A successful story is the Swiss textile mill Roehner and its aesthetically unique fabric that is also environmental intelligent. Here a link to the case study: http://www.iehn.org/publications.case.rohner.php

 

In the following I will write down the key steps to get there according to the book (pp 165-186).

 

“Step 1 get free from known culprits

Do everything in an environmental and social friendly way right from the beginning. From the materials to the manufacturing to the product only use materials not harmful for our health and the environment (such as PVC, cadium, lead and  mercury). You do not need to worry about any regulations and will save costs in the long run, your employees will be happy to work in your factory (reduced health risks) and you will gain a long term competitive advantage, because the cost of “technical” and not truly recyclable waste will increase exponentially over the years to come.

Step 2 follow informed personal preferences and prefer ecological intelligence

Prefer respect, this is at the heart of eco-effective design. It is difficult quality to quantify: respect for those who make the product, for the community near where it is made, for those who handle and transport it and ultimately the customers. Prefer delight, celebration, and fun. Add the element of pleasure and delight. It’s very important for ecologically intelligent products to be at the forefront of human expression. They can express the best of design creativity, adding pleasure and delight to life. 

Step 3 create a passive positive list

Create a detailed inventory of the entire palette of materials used in a given product, and the substances it may give off in the course of its manufacture and use. What, if any, are their problematic or potentially problematic characteristics? Are they toxic? Effects on local and global communities?

"Passive positive" lists – lists of materials used categorised according to their safety level

The X List – substances that must be phased out, such as teratogenicmutageniccarcinogenic.

The Gray List – problematic substances that are not so urgently in need of phasing out

The P List – the "positive" list, substances actively defined as safe for use

Step 4 activate the positive list

Step 5 reinvest

Do more than designing for biological and technical cycles we are recasting the design assignment: not “design a car” but design a “nutrivehicle”. Instead of aiming to create cars with minimal or zero negative emission, imagine cars designed to release positive emissions and to generate other nutritious effects on the environment. The car’s engine is treated like a chemical plant modelled on a natural system. Put it even further design a new transportation infrastructure! The planet will be crawling with cars, and we need other options. Sounds fanciful? Of course, but remember the car itself was fanciful notion in a world of horse and carriage.

For example Nike is testing clean new rubber that will be a biological nutrient and could likewise have a revolutionary impact on the industry.

The final point has no absolute endpoint and the final product may be totally different as the one you began to work on. Transformation to an eco-effective vision doesn’t happen all at once and it requires plenty of trial and error- and time and effort.

Finally signal your intention and restore! Drive for “good growth” and not just economic growth.

 

Except intergenerational responsibility

In 1789 Thomas Jefferson wrote a letter to James Madision in which he argued that a federal bond should be repaid within one generation of the debt, because as he puts it, “The earth belongs…to the living…No man can by natural right oblige the lands he occupied, or the persons who succeeded him in that occupation, to the payments of debt contracted by him. For if he could, he might, during is own life, eat up the usufruct of the lands of several generations to come, and then lands would belong to the dead, and not the living.”  The context is different, but the logic is beautiful and timeless.  Ask: How can we support and  perpetuate the rights of all living things to share in a world of abundance? How can we love the children of all species- not just our own- for all time? Imagine what a world of prosperity and health in the future will look like, and begin designing for it right now. What would it mean to become, once again, native to this place, the Earth- the home of all our relations? This is going to take forever. But that’s the point.”


Criticism according to Wikipedia:

Experts in the field of environment protection have questioned the practicability of the concept. Friedrich Schmidt-Bleek, head of the German Wuppertal Institute called his assertion, that the "old" environmental movement had hindered innovation with its pessimist approach "pseudo-psychological humbug".

I can feel very nice on Michael's seat covers[22] in the airplane. Nevertheless I am still waiting for a detailed proposal for a design of the other 99.99 percent of the Airbus 380 after his principles.

In 2009 Schmidt-Bleek stated that it is out of the question that the concept can be realized on a bigger scale.[23]

Some claim that C2C certification may not be entirely sufficient in all eco-design approaches. Quantitative methodologies (LCAs) and more adapted tools (regarding the product type which is considered) could be used in tandem. The C2C concept ignores the use phase of a product. According to the Variants of Life Cycle Assessment the entire life cycle of a product or service has to be evaluated, not only the material itself. For many goods e.g. in transport, the use phase has is the most influence on the environmental footprint. E.g. the more lightweight a car or a plane the less fuel it consumes and consequently the less impact it has. Braungart fully ignores the use the phase.[24][25]

It is safe to say that every production step or resource-transformation step needs a certain amount of energy (Newton's second law). Even the highest Cradle to cradle certification requires only 50% of energy for production to come from solar sources.

The C2C concept foresees an own certification of its analysis[26] and therefore is in contradiction to international ISO standards 14040 and 14044 for Life Cycle Assessment whereas an independent and critical review is needed in order to obtain comparative and resilient results. Independent external review.[27]

 

What is your opinion? 

 

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Elon Musk: The mind behind Tesla, SpaceX, SolarCity ...

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Thanks for the ride Tesla Motors!

We sold TSLA with 190% ($98 per stock)  return after one year. Our valuation was around $46 per stock. To avoid the disposition bias I placed stop losses after the exponential growth started off and monitored it very closely. I was aware that it is definitely a mistake to sell winners to early and I prefer to hold stocks at least for 2 years. But the current price reflects momentum rather than value. Our valuation of $46 per stock was already based on the fact that Tesla is able to deliver according to its business plan. Let’s see may be George Soros reflexivity theorem works for TSLA. Good luck for the future Elon Musk! 

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"The The Power of Habit" a must read by Charles Duhigg

http://charlesduhigg.com/about/

 

Really good book on the power of habit in organisations and also in ourselves including interesting case studies especially Paul O’Neills Alcoa turnaround.

My favourite pages are pp. 272-274:

 

 

 “He wanted to become a painter, and then enrolled in medicine school, then left to join an expedition up the Amazon River. Then he quit that, as well. He chastised himself in in his diary for not being good at anything. What’s more he wasn’t certain if he could get better. In medical school, he had visited a hospital for the insane and had seen a man hurling himself against a wall. The patient, a doctor explained, suffered from hallucinations. James didn’t say that he often felt like he shared more in common with the patients than his fellow physicians.

“Today I about touched the bottom, and perceive plainly that I must face the choice with open eyes”, James wrote in his diary in 1870, when he was a twenty-eight years old. “Shall I frankly throw the morals business overboard, as one unsuited to my innate aptitudes?”

Is suicide, in other words a better choice? Two month later, James made a decision. Before doing anything rash, he would conduct a yearlong experiment.  He would spend 12 month believing that he had control over himself and his destiny, that he could become better, that he had the free will to change. There was no proof that it was true. But he would free himself to believe, all evidence to the contrary, that change was possible. “I think yesterday was a crisis in my life” he wrote in his diary. Regarding his ability to change, “ I will assume for the present until next year/ that it is no illusion. My first act of free will shall be to believe in free will.” Over the next year, he practiced every day. In his diary, he wrote as if his control over himself and his choices was never in question. He got married. He started  teaching in Harvard. He began spending time with Oliver Wendell Holmes Jr., who would go on to become a Supreme court justice, and  Charles Sanders Peirce, a pioneer in the study of semiotics, in a discussion group the called the Metaphysical Club. Two years after writing his diary entry, James sent a letter to the philosopher Charles Renouvier, who had expounded at length of free will. “I must not lose this opportunity of telling you of the admiration and gratitude which have been excited in me by the reading of your Essais” James wrote. “Thanks to you I  possess for the first time and intelligible and reasonable conception of freedom.. ..I can say that through that philosophy I am beginning to experience a rebirth of moral life; and I can assure you , sir, that this is no small thing.”

Later he would famously write that the will to believe is the most important ingredient in creating a belief in change. And that one of the most important methods for creating that belief  was habits. Habits, he noted, are what allow us to “do a thing with difficulty the first time, but soon do it more and more easily, and finally with sufficient practise, do it semi-mechanically, or with hardly any consciousness at all.” Once we choose who we want to be, people grow “ to the way in which they have been exercised, just as a sheet of paper or a coat , once creased or folded,  tends to forever afterwards into the same identical folds.”

If you believe you can change- if you can make it a habit- the change becomes  real. This is the real power of habits: the insights that your habits are what you choose them to be. Once the choice occurs- and becomes automatic- it’s not only real, it starts to seem inevitable, the thing, as James wrote, that bears “us irresistibly towards our destiny, whatever the latter  may be. The way we habitually think of our surroundings and ourselves create the worlds that each of us inhabit…the unthinking choices and invisible decisions that surround us every day- and which,  just by looking at them, become visible again.“ 

 

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Environmental, social, and governance (ESG) data: Can it enhance returns and reduce risks?

Deutsche Bank Asset Management has set up an interesting new think tank 'The Global Financial Institute'. I became especially interested in the following white paper:

 

https://www.dgfi.com/DGFI/White-Papers/Environmental-social-and-governance-(ESG)-data-Can-it-enhance-returns-and-reduce-risks

 

In line with my own view  long term strategic factors are: further social factors, trust and possible future costs and taxes on environmental issues.  The market (for example the CFA Institute) is not teaching the importance, but ESG factors are crucial for long term success and investments, because of that inefficiency  valid long term returns are still possible in the environmental field. On the other hand we have to be aware of cultural shifts, which could have a strong effect on the whole field.

 

"This white paper offers a strong outlook on the field of ESG investment and recommends its deeper consid­eration by any institutional or private asset owner or financial services institution. It should be common sense to consider cultural shifts in society when making investment decisions. The fact that standard professional finance degree programs have not really taught their students how to evaluate this information makes ESG investment all the more appealing, as it substantially reduces the competition for ESG investors. Hence, this type of investment is a low-competition, longer-term strategy that can enhance investment returns and reduce risks by capitalising on common sense insights into the business relevance of specific ESG factors."

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Bankruptcy the healthier solution for Europe?

One of my favourite comments on Europe comes out of Jim Rogers book Street Smarts (pp. 202-204)

After being highly critical about the intolerance to  not respecting the Maastricht Treaty and its well-grounded purpose he wrote the following:

“The new guys were no preoccupied with being reelected, the demand of which were not well served by ridiculous fantasies like fiscal discipline. Right now, under any regimen, it will be impossible for many countries to pay off their debts. Ever. It is not going to happen. So, accepting that, what should Europe do? My solution is one the market has been imposing for thousands of years. Let them default. Let them go bankrupt. The people who are in debt with them, either by lending to them or investing with them, will take losses, serious losses in some cases, but then, for example Greece can start over from a sound base. The country need not leave the Eurozone to do it. We in America have had states go bankrupt, countries, cities –Mississippi did not pull out of the United States because it went bankrupt. Neither did New York, nor did Detroit. They went through a period of pain, people lost money, wages went down, rents went down, haircuts went down, everything went down as people adjusted to the reality that they did not have any money, that they could no longer spend money they did not have, and that nobody would lend them any money. But they prevailed. And nowhere along the way did the US dollar disappear.

Unfortunately, politicians in Greece or somewhere else will see pulling out the euro as the easy solution. The hell with the euro, we will go back to the drachma! And that would be a mistake. They may be a burst of enthusiasm at the beginning. Everybody will have this new drachma, and things may look OK for a while. But the optimism will not last. A return to the drachma will just serve as a license for the government to print money, and for the Greeks to continue spending money that they do not have. The drachma will trade at such a low price that the country will enjoy a much improved balance of trade, but everybody’s net worth will have collapsed. Nobody will trust the currency, or the Greeks themselves. Nobody will lend them money. Nobody will invest there.

There is no scenario under consideration, there is no scenario possible, that alters the fact that over the next decades people are not going to be living great in Greece. And all those people who have loaned Greece money are going to take big losses. If Angela Merkel could get all of them into a room and say, “Okay, this bank is going to close, that bank is going to stay in business, this guy is out of a job…all you guys are going to take hits, but we are going to hold everything together, everybody’s saving are safe, checks will be clear, depositors money will be protected, we will ring-fence the banks, the system is not going to freeze up and close down”, it might be different. If the chancellor of Germany could do that, the market would buy it, because at the moment (February 2013) governments in Europe have enough money. And they have enough creditability. If it happens five years from now, she can drag them all in into a room, talk to them all day long, and nobody will notice. The problem will be so bad by then that you are looking at systematic failure- the market says the hell with all of you, and the whole system collapses.

And in my view that is exactly what will happen, because politicians do not have the brains or the courage to take the necessary steps. None of them is talking about bailing out the Greeks. It is all about bailing out the banks, bailing out the management of the banks, the stockholders of the banks, and the bondholders of the banks who invested in Greece. The people of Greece will suffer but the banks will survive: the CEOs will make their salaries, the shareholders will get their dividends, the bondholders will survive. Greeks will be out on the street unemployed. They will be there either way. The difference is that my way things will eventually get better, as has happened in Iceland since 2009; the other way everything gets worse.”

 

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John Cochrane: Function Matters Not Size

I came across an interesting paper from John H. Cochrane (University of Chicago) and his insights and opinions on financial markets. My own view has always been that it is important to make arbitrage easier. This is in line with most of the points from Cochrane. He also argues for more research on high frequency trading.


 “The social question for high-frequency trading- like all of finance, really is whether it screws up markets or makes them more efficient and “liquid”." 


Just a few highlights out of his paper below and here the link to it.


http://faculty.chicagobooth.edu/john.cochrane/research/papers/Cochrane_jep_function_size_final.pdf

 

 “The majority of TRIP’s [Total Return Investment Portfolio] assets are managed by external managers specializing in a specific asset class, geography, or strategy. These asset managers outperformed their respective benchmarks in every asset class, adding over 500 basis points of performance versus the strategic benchmark.” Five hundred basis points! Put that in your pipe and smoke it, effificient marketers. At least we know one active manager’s perception of what they get for their fees. These endowments’ approach to portfolio management is pretty much standard at endowments, nonprofits, sovereign wealth funds, family offifices, pension funds, and so forth—anywhere there is a big pot of money to invest. These investors pay a lot of attention to allocation among name-based buckets, as represented in the pie charts, “domestic equity,” “international equity,” “fixed income,” “absolute return,” “private equity,” and the like. Then, they allocate funds in the buckets to groups of fee-based active managers."


 “Remember, “efficiency" means that prices incorporate all available information, not that markets are clairvoyant. The definition of “efficiency” is widely misunderstood. I once told a newspaper reporter that I thought markets are pretty “efficient,” and he quoted me as saying markets are “self-regulating!”

 

"If information is not incorporated into market prices and to such an extent that simple strategies with big alphas can be published in the Journal of Finance, there are not enough arbitrageurs. If asset prices fall in “firesales,” only to rebound later, there are not enough buyers following the fire trucks. If credit constraints are impeding the flow of capital, there is a social benefit to loosening those constraints. The literature on short-selling is revealing on this point. Short sellers uncover far more financial fraud than the Securities and Exchange Commission”.

 

“Unless we adopt the arrogant view that what we don’t understand must be bad, it is clearly far too early to make pronouncements such as “There is likely too much high-cost, active asset management,” or “Society would be better off if the cost of this management be reduced.” Such statements are not supported by theory or evidence. Nor is their not-so subtle implication that resources devoted to greater regulation—by politicians and regulators no less naive than current investors, no less behaviorally-biased, armed with no better understanding than academic economists, and with much larger agency problems and institutional constraints—will improve matters. This proposition amounts to Samuel to Samuel Johnson’s dictum on second marriages, the triumph of hope over experience.”

 

Here also the link to his blog. I think it is worth reading.

http://johnhcochrane.blogspot.ie/

 

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The effective altruist

The effective altruist movement is mainly based in Oxford, Cambridge and St. Gallen and comes out of the student body.  From my own perspective it fits well with the arguments made by Peter Unger and Peter Singer.

 

Living High & Letting Die 

Our illusion of innocence

Peter Unger 

A small amount of money sent to charity like UNICEF will ensure that fewer poor children will die. Yet even when aware of this most people sent nothing. Peter Unger examines this all-too common example of letting die, generating a bold and controversial look at moral assessment.

 

From a psychological angle on can also connect it with Daniel Ariely's point, that we try to think good of ourselves and could make a "nugde" problem out of it, so people would spend a certain amount automatically. 

On the other hand a key issue is to become a multiplier and inspire others.  

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Polarstern - Cool new sustainable utility company

Interesting start up in terms of "green gas" in Germany. I like the community character, strong support from ambassadors. Each customer supports a project in Cambodia. This makes it "ethically to a nobrainer" to change. Its also a sign of the shift to come in the German energy market. 

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