Book Review: The Art of Non-Conformity

I’m trying to read more books by other bloggers, and the one I managed to finish first was The Art of Non-Conformity. Based on the writings at eponymous ChrisGuillebeau.com, the book’s tagline is “Set Your Own Rules, Live the Life You Want, and Change the World”. Sounds good, eh?

I’m not sure how I found the site initially, but I remember finding it neat that he resides in my old zip code of 97214. Awesome neighborhood. As you might expect, it is more of a “lifestyle design” book than anything specifically financial.

What do you want from life?

The author’s adventures so far has included going from doing manual labor at FedEx, to selling stuff on eBay, to volunteering with a medical charity in West Africa for four years. He now makes a living as a writer, selling a variety of “unconventional living” eBooks and now this physical one. One of his current big goals is to visit all 192 countries in the world.

A big chunk of the book is about finding what you really want to achieve in life. Instead of trying for less work, why not better work. What do you imagine as your legacy? When trying to figure this one out, Guillebeau pushes you to think openly – take risks and don’t listen to what others say can’t be done. Sprinkled throughout the book are stories about his experiences and those of others who are leading non-traditional lives. Two of my favorite quotes:

Take your dreams seriously.

We tend to overestimate what we can complete in a single day, and underestimate what we can complete over longer periods of time.

Making it happen
How do you create your ideal life? Spend your time towards your real priorities. Stop spending time on busywork or other inefficient activities. Realize that a “Stop-Doing List” is just as helpful as a “To Do” list. Instead of a “work/life balance”, which often works out to be “stop working so much, since you hate it, but enough so you can eat”, why not make your work align with what you want your effect on the world to be?

The author is a strong proponent of self-employment, especially through internet-based businesses that allow you to be location independent. This makes sense, because this is exactly what he has done successfully. However, at times I felt the book was colored a bit too strongly with his own experiences.

One example is how he’s not a big fan of college and graduate degrees, noting repeatedly that 80% of it was a waste of time. (I’d say his eventual occupation and his degree of Masters in International Studies had something to do with it. Many engineers or medical school graduates probably think higher of their education.) School isn’t always the answer, but he really seems to dismiss it too easily because it didn’t help him personally.

Personal Finance
I’ve already said this isn’t a financial book, and so don’t be surprised that the section on personal finance is pretty sparse. Most of the advice is of the big-picture variety, and parallels his life advice. Just like you should only spend time towards what you really value, you should spend money happily on what you really value. Don’t spend a dime on the rest. Life experiences are more important than physical stuff.

One interesting idea was his preference for what he calls Income-Based Financial Independence as opposed to Wealth-Based. Basically, he dislikes the traditional goal of having a “Number” of say a million dollars as a goal. Instead, he wishes to create a certain income from work that he likes to do, while also having the freedom and time to do all the other stuff he wants. Somehow he avoids the term “passive income”, but he does tell you to avoid work that simply trades time for money.

Wrap-Up
By far, the strongest part is the author’s easy and energizing style of writing, which makes adventure seem within grasp to everyone. If you have that little idea in your mind that you want to do something different/drastic/scary, then this book will help push you to take the next step. Cynical readers will just see this as rah-rah impractical dreamy fluff. However, I happen to agree that accomplishing just one bold task can make us feel invincible, propelling us to do more. Hopefully, this review will help you decide if this book is for you.

Posted in Book Reviews | 12 Comments »

Talent Is Overrated, Deliberate Practice, & Tiger Moms [Book Review]

If you’re looking for a inspirational book to read for the new year, consider this one, but read on to see if you like what you’ll learn. In Talent Is Overrated, author Geoff Colvin explores what makes world-class performers different from everyone else.

What is the key to great achievement?

• Hard work?, or
• Innate talent?

Talent vs. Practice

One area where we often give the credit to talent to is musicians. Look at the “kid genius” Mozart, who famously composed his first piece at age 5. Well, Mozart started learning music at age 3 from a pushy composer father who loved to teach (and likely helped write many of his early works). He had been working at music for over 10 years by the time he wrote anything that was widely acknowledged to be of special quality.

In a separate study comparing music students enrolled in elite music schools with those in regular public schools, it was found that the average number of practice hours need to reach the same level of skill was the same for all students. Sure, the students in the elite group were often practicing 2 hours a day vs. only 15 minutes a day for the other kids. But no matter how you clocked those hours, quickly or slowly, nobody got there without putting in the same amount of hours.

Next, let’s look at sports and Tiger Woods. Woods was a prodigy, but he was also an only child to a army-trained teacher/father who started him playing golf at a mere 7 months old. He was playing and practicing on a real golf course by the age of two, and throughout his career was known for his intense practice habits.

The fact is, that almost every study that has looked for evidence of the sort of genetic edge that we call “talent”, has failed to find it. Instead, they find that without exception, every single top achiever has put in thousands upon thousands of hours of practice into their field. In addition, the amount of skill is almost directly proportional to the amount of hours put into it. Terms like the “10,000 hour rule” (as noted in the book Outliers) or the similar “10-year rule” have been created to describe how long it takes before true mastery is achieved.

Deliberate Practice

But wait, lots of people do the same thing, every day, for years. Why aren’t they all awesome? Researchers have also found that “practice” is too vague of a word. Instead, what creates excellence has been termed “deliberate practice”. Deliberate practice is not just hitting through a bucket of golf balls every day.
Read the rest of this entry…

Posted in Book Reviews, Family | 14 Comments »

The E-Myth Revisited: Small Business Book Review

I bought The E-Myth Revisited: Why Most Small Businesses Don’t Work and What to Do About It by Michael Gerber at a outdoor market because it was a finance “bestseller” and I’d seen it on a few reading lists. It’s been sitting on my bookshelf since (along with many others…), but once I picked it up and read a chapter, I went ahead and finished over the next two days.

Why Businesses Fail

The “E-Myth” stands for the Entrepreneurial Myth, which I’ll paraphrase as the belief that all a successful business needs is a hardworking, skilled, fearless entrepreneur. When we think successful small business, we think of Bill Gates or Richard Branson of Virgin. Is it really that simple? 40% of small business fail within one year. 80% of them fail within 5 years.

This book states that, in reality, a successful business needs three roles to be fulfilled:

• a technician which understands the technical aspects of the business,
• a manager which plans and organizes, and
• a entrepreneur who provides the vision and energy.

You might think you have all of these characteristics already, but these roles are often in conflict with each other. Most businesses start out with only one role really filled – that of the technician. A plumber starts a plumbing company. A baker starts a bakery. A graphic designer starts a design shop. Usually, the motivation is that they don’t want a boss. The end up have a poorly trained boss – themselves.

When things get hard, usually the technician wins out. The perceived solution is to work harder, do everything by yourself, so that you can “do it right”. This is where many businesses start to fail. Now, if you’re really stubborn and hardworking, you can make this stretch out for a long time. You’ll also be really tired and unhappy.

I actually see this first part of the book as separate from the next part. It teaches you to look at how you are running your businesses. Are some of the roles being too strong, or being neglected? The manager tends to micromanage, and the entrepreneur tends to be the frustrated dreamer.

The Solution

Okay, so now what? How do you take your business to the next level?

Gerber says to look at the franchise model, and uses McDonald’s as an example. Don’t focus on the fact that you may hate the food there. The true power of McDonald’s is that every single aspect of the business was broken down step-by-step and laid out that a random person off the street could “read the manual” and open up their own McDonald’s restaurant. Where to locate the restaurant. The layout of the kitchen. The menu. How each hamburger is ordered, stored, cooked, assembled, and finally delivered to the customer.

What’s your system? If you were to train a reasonably smart person without any knowledge in your field, how would you break down your business to them? What is the unique value proposition that you offer, and how do you achieve it? What does each roleplayer do? As the saying goes, “Explain it to me like I’m a 10-year old.”

Recap

I view this book as “big picture” type of book that will definitely get you thinking differently about your business and business goals. Since it is also relatively short and easy to read, I would recommend it to anyone who wants to work in a small business, or is already working in one. (It’s also really easy to find at the library or used for cheap – try Amazon or Half.com.)

The book is definitely more applicable to a small business where you plan on one day being more “hands off”, like a restaurant, a store selling widgets, or a big design agency. But even for the many people out there who are perfectly happy being a one-person show, you can still apply the concepts of this book. You can break yourself down into what your special roles or tasks are. Write it down. You may not have ever thought of yourself in this way. Then you can focus on those areas, and either get rid of or outsource the tasks that you don’t need.

Now, some critics will call this book common sense from a self-appointed guru. In this way, I feel this book is a bit similar to Rich Dad, Poor Dad by Robert Kiyosaki. I didn’t really like the rest of his books, but the idea that you should buy assets that grow instead of liabilities like cars or gadgets can be helpful. But reading it was definitely a net positive for me, as was reading The E-Myth Revisited. Both are not the best writers out there, but still manage to convey their message.

Posted in Book Reviews, Entrepreneurial | 8 Comments »

How To Be Clutch With Your Money – Book Review

Drive. Click. Choke. Empowered. Switch. Bounce. It seems that the short book with the one-word title is very popular these days. Here’s another one: Clutch: Why Some People Excel Under Pressure and Other Don’t, by Paul Sullivan. The book explores stories of people both overcoming and succumbing to extremely stressful situations.

The people profiled include war veterans, actors, and athletes. In particular, five key characteristics of the “clutch” are given:

• focus,
• discipline,
• adaptability,
• the ability to be fully in the present, and
• being driven, whether by fear or desire

What about a financial crisis? Your home value plummets while your mortgage rate jumps, you are suddenly unemployed, or your investments drop drastically in value. How will you respond so that your household survives? Seems a lot different than making a golf swing, but here I tried to summarize the section using the five traits above:

Focus. Take responsibility. Change what you can. Don’t waste time blaming others like the mortgage lenders or the credit card issuers that jacked up your rates.

Discipline. Cut your costs without emotion. Sell liabilities like cars, boats, vacation properties. Walk away from your home mortgage if needed. You should always have enough cash to cover twelve months of your expenses.

Adaptability. What is most important to you? Family? Well, your family will still love you if you live in an apartment and drive a $3,000 car. Learn to live without the rest.

Be in the present. Don’t wait. Don’t think you’ll be bailed out, or something magical will happen. If you rely on hope an sit around waiting for things to improve, you’ll just burn through more of your reserves and end up even worse.

Being driven. Figure out what motivates you. Maybe it is fear of losing it all, or desire for financial freedom.

Posted in Book Reviews, Frugal Living | 2 Comments »

Blink: Don’t Think Without Thinking When It’s About Money

Thanks to the discovery of free eBook rentals at the library, I finally read Blink: The Power of Thinking Without Thinking by Malcolm Gladwell over the weekend. It’s a short book and an easy read, which probably helped create its great popularity.

The book is primarily about the power of your “adaptive unconscious” to make quick and often-accurate decisions. By doing what Gladwell terms “thin-slicing”, the mind extracts the pertinent information out of a ton of available data. An expert on antiques spotting a fake within seconds, a researcher who has seen hundreds of couples being able to predict divorce, a veteran military commander winning a war game against a sophisticated algorithm overwhelmed with data, or someone who has studied facial expressions for years being able to spot hidden emotions. While interesting, I viewed much of this as an expected result of experts being experts.

However, in the end it also exposes how the unconscious can make bad decisions, full of prejudices and tendencies that you aren’t even aware of. Even if you think you are making decisions completely objectively, unless you truly strip out all the other variables then you can’t be sure. Although there is little mention of personal finance topics here, I would say this cautious side is where the book applies to money.

Other books like Your Money and Your Brain and Predictably Irrational have shown that a lot of our instinctual and/or unconscious tendencies towards money actually hurt us financially. We repeatedly find ourselves in speculative bubbles, our mind does quick relative calculations when it shouldn’t and we get used to a better lifestyle too quickly. Being aware of these hidden tendencies can help us become more successful.

Posted in Behavioral Economics, Book Reviews | 1 Comment »

How To Sue a Telemarketer (Book Summary)

I’ve been getting an increasing number of telemarketing calls recently, so I readily agreed to a review copy of How To Sue a Telemarketer by Stephen Ostrow, lawyer and judge. I had a vague recollection that you can get $500 every time a telemarketer violates the Do No Call list, and was hoping there would be a quick form or template to fill out and slam these annoying folks. It turns out to be a bit more complicated than that, but the basic steps are outlined below.

Before you do anything else, you should confirm that your phone number is registered at the National Do-Not-Call Registry. While you can file a complaint at the same website, that doesn’t have nearly the bite of a lawsuit with financial penalties.

Step 1: Data Collection

When an unsolicited telemarketer calls and you think they are in violation of the law, don’t yell at them. In a conversational tone, try to extract as much of the following information as possible:

• Name of telemarketer
• Name of company
• Company website
• Company telephone number
• Company address
• What they are trying to sell you

Writing it all down is probably the most simply, having a recording is easier but you can’t tape a telephone conversation without notice in many states. (Here’s is a list of states with one-party consent.)

Step 2: Research and Lawsuit Initiation

Using this information, you can then research the legal names of either the company employing the telemarketer and/or the telemarketers themselves. Now you know who to sue. Next, you must file a complaint through your state’s Small Claims Court. The form is relatively simple to fill out and some templates are included in the book.

Here’s a list of potential violations of the Telephone Consumer Protection Act of 1991 (TCPA), each of which are separate. You can have been a victim of any one or a combination. Federal law allows for $500 per violation, which can be increased to $1,500 per violation if deemed” willful and intentional”.

• Violation of Do Not Call list.
• Pre-recorded messages (robocalls)
• Failure of solicitor to identify themselves.
• Failure to send the company’s Do-Not-Call policy within 30 days after demand.
• Blocking a number on CallerID by a telephone solicitor

A third party must then serve the complaint to the defendant, usually via sheriff or process server. You’ll also need to file a Proof of Service to show that the accused was served.

Step 3: Your Day in Small Claims Court

Now that you have filed the lawsuit and the defendant has been notified, a court date will be set and you’ll actually face your defendant in court. The person who actually called you won’t be there, just some representative. Some tips about how to present your case to the court are given, but basically you want to document all the details of the call. Since this is a civil court, you just need to prove that it happened more likely than not.

While searching online, I found another success story for suing rogue telemarketers. In his case, the telemarketer actually called him up before the court date and offered him $500 upfront to settle out of court. Nice.

The most depressing part of the book was the part where I found out what calls are not covered under the Act:

• Calls from organizations with which you’ve established a business relationship
• Call by, or on behalf of, tax-exempt non-profit organizations including political compaigns.

So if I get service from Comcast, they can still bug me. And I’ve already decided to vote against any politician who robocalls me. Grrr.

There are many more nuances in the book that aren’t covered here. If you aren’t turned off by required footwork above, then this book may be worth a read. It does try to keep a humorous edge to it, hopefully the energy will encourage you to follow through and get some justice.

Posted in Book Reviews, Funny | 11 Comments »

Getting Organized In The Google Era (Book Summary)

I ran across Getting Organized in the Google Era in an airport bookstore last month, and while I wasn’t enamored enough to pay the $23 retail hardcover price, I did add it to my library want list. The author Douglas Merrill was formerly the Chief Information Officer at Google, so I figured he might know something on the topic of organizing data in the digital age. Here are my notes.

First of all, this is not a detailed organizational framework like that of the best-seller Getting Things Done by David Allen. It’s actually more like a series of blog posts that ended up being stretched into a book. Merrill uses a very casual, storytelling style of writing with lots of (sometimes awkward) personal stories and song lyrics mixed in. It skips around a lot, from high-level organizational philosophies to tips on using Gmail to how his girlfriend died of cancer.

Organizational Principles

In the end, the book’s overall theme did stick to the subtitle of “How to Get Stuff out of Your Head, Find It When You Need It, and Get It Done”, and I did write down a lot of good basic principles from the book. Here they are, paraphrasing:

• Don’t keep stuff in your head, get it out as soon as possible. Write it, type it, say it, whatever. Either paper and digital might be better for any specific task.
• Always trying to multitask can actually make you less efficient overall.
• Stories make it easier to remember information.
• Don’t spend forever organizing your information, just search for what you need. Desktop searching, Google web searches, Gmail e-mail search, online calendars – use them to simplify things.
• When overwhelmed or hitting a roadblock, break big tasks into smaller ones.
• Try to integrate work with life instead of trying to balance them together. When people say the want a “work-life balance”, that’s usually just code for wanting to work less.

Useful Tools and Services

Another good part of the book was his list of software and websites that he found useful in organizing his life. Most are free, but some do cost money. A few are only on Mac OS X. Like I said, this seems like it would make a nice blog post… and now it is one I’m only listing the favorites.

• Google. His favorite search engine, what a surprise. There are lots of little shortcuts in Google that help save you time. Want flight info? Just type the flight number in. UPS Tracking number? Just type it in. Here’s a cheatsheet straight from the source.
• Quicksilver. Desktop search/application management/launcher tool. Mac only. [download, free]
• Gmail. The best feature of Gmail is that you can quickly search through every single one of your e-mails, reducing the need to carefully organize everything. However, using some simple labels and filters can still help you group conversations and topics. Also has good spam filters.
• Adium / Pidgin. Connects to multiple instant messages services all at once. Free. Adium is for Mac, Pidgin is for Windows.
• Dropbox. Easy to use, online shared hard drive in the “cloud”. Good for storing, sharing, and syncing across computers. 2GB free, 50GB for $10/month. [website]
• Things. To-Do List / Task manager software. [download, $49.95]
• Xmarks. Put your web browser bookmarks online so you can sync across computer and access anywhere. Works with Firefox, Internet Explorer, and Safari. [website, free]
• Google Health. Allows you to store and manage all of your health information in one central place. Even though I use a lot of Google stuff, I am still wary of sharing this type of data with Google. [website]

A related book that I also plan on reading soon is Upgrade Your Life by Gina Trapani of Lifehacker.

Posted in Book Reviews, Time Management, Tools & Calculators | 8 Comments »

Slow Down Your Hedonic Treadmill

You may be familiar with Predictably Irrational, a best-selling book by a professor in behavorial economics that challenges the idea that humans behave rationally. In fact, says author Dan Ariely, humans are predictably irrational in many ways that may surprise you. I recently learned about his new book, The Upside of Irrationality, in this Yahoo article by Laura Rowley, which according to the description “exposes the surprising negative and positive effects irrationality can have on our lives.”

One of the more intriguing topics Ariely explores is the idea of hedonic adaption, also known as the hedonic treadmill. From Wikipedia:

Humans rapidly adapt to their current situation, becoming habituated to the good or the bad. We are more sensitive to our relative status: both that which we recently have and that which we perceive others to enjoy.

When things are awesome, we eventually get used to it (celebrities, lottery winners). When things are really awful, we get used to that as well (severely injured). This is why it’s hard for people to achieve a constantly higher level of happiness. We get a nicer car/house/toy, we get used it, and then soon we just want an even nicer car/house/toy, never getting anywhere as if we are walking on a treadmill.

So how does this relate to money and personal finance?

Stay Happy By Slowing Down Pleasure

Considering that we only experience transient pleasure with many improvements in our lives, we should take care and indulge very gradually. Savor each slight improvement! A good quote from Ariely:

Imagine a new college graduate, finally earning an income and eagerly anticipating a beautifully furnished apartment after years of dorm living. “The lesson here is to slow down pleasure,” Ariely writes. “A new couch may please you for a couple of months, but don’t buy your new television until the thrill of the couch has worn off.”

When Slashing Expenses, Make Big Cuts

On the other hand, we should take full advantage of our adaptability by cutting back as much as possible all at once when we have to. Don’t slow down the pain and drag it out with constant reminders.

“It will be really painful for a few months but you’ll get used to it,” says Ariely. “It might be good to cut down too much — and then increase back.” By contrast, making small lifestyle adjustments every month requires readapting over and over and prolongs the pain. (By the same token, it may be better to reduce a major expense in one fell swoop, such as moving to a smaller apartment, than to face the daily downer of skipping your favorite gourmet coffee, Ariely suggests.)

I think the apartment idea is very good application of this theory, and look forward to reading the rest of this book.

Posted in Book Reviews, Budgeting, Frugal Living | 8 Comments »

Emergency: This Book Will Save Your Life (Book Review)

“Terrorist attacks. Natural disasters. Domestic crackdowns. Economic collapse. Riots. Wars. Disease. Starvation. What can you do when it all hits the fan?”

Sounds like great travel reading, right? Well, it was, at least for me. Emergency: This Book Will Save Your Life by Neil Strauss is not, as you might think, a detailed survival manual, but mainly of one guy’s journey to try and protect himself from all that could kill him. He calls himself a “Fliesian”, based on the book Lord of the Flies, which in his words is “someone who believes that people, if put in a world where there are no consequences to their actions, will do horrible things.”

The first half of the book pretty much details all the things that could go wrong in the world, and his primary goal is to get a second citizenship from another country. The idea being that if the sh*t hits the fan here, he could in theory escape to safety to this other country. The main problem is that most countries, unless you are a citizen by birth or family, force you to renounce your US citizenship. However, it turns out that you can essentially “buy” citizenship in several countries for, oh, about $500,000 in the island country of St. Kitts. I thought this was quite anti-climactic, and not very useful knowledge for most of us.

One related theory that I did find interesting was on how to become a “perpetual tourist”, as to minimize your tax burden and maximize your personal freedoms. To achieve this, you will need “three flags” from three different countries:

1. Have your citizenship somewhere that does not tax income earned outside the country.
2. Have your businesses in a stable, low or no tax country.
3. Live as a tourist in countries where you actually like to spend your time.

A nice idea, but we are not told how to make this actually happen. We do find out that Swiss banks won’t even talk to U.S. citizens trying to open an untraceable account.

The second half of the book is more focused on actual survival skills. However, again it’s more of a story of how he takes a variety of different courses from shooting guns to camping to recognizing edible plants to tracking animals, and less of how to actually do these cool things.

The most practical part of the book for me was when he did a 3-day test where he shut off all of the utilities in his condo (water, gas, electricity) and tried to survive on his own. This is actually something I want to try. Most people know to keep some water and food. But how much water do you actually need? What if you don’t have enough? Another example of what you might overlook – where will you poop without flushing toilets? The cardboard port-a-potty he bought had bags that disintegrated in less than a day.

He also explores what’s needed in a bug-out bag, which is a kit designed for you to grab, run, and survive for about 72 hours. He points out that in a city-wide disaster like Katrina, it is unlikely that emergency crews will be able to help average citizens for up to a week. They’ll be too busy helping the seriously ill. You’ll be on your own.

This book was a very easy read, and definitely worth it the time spent if only to explore different possibles. I must say, I do have a certain fascination of living “off the grid”. In some areas near me, I figured that I could have a house that is both completely solar-powered with batteries, and could collect enough rainwater if not by a natural water supply. Too bad I get the shakes when I can’t check my e-mail for 24 hours…

Posted in Book Reviews | 6 Comments »

Notes and Lessons from Liar’s Poker: Rising Through the Wreckage on Wall Street

Here’s a book review of an oldie-but-goodie. Liar’s Poker by Michael Lewis is a non-fiction account of the author’s experiences as a 24-year old the 1980s who started working as a bond salesman for Salomon Brothers, one of the most powerful investment banks at the time (now folded into Citigroup).

Half of the book is an insider’s view of the fast-paced and testosterone-driven world of trading and sales on Wall Street. Lewis explains terms like “Big Swinging Dick” and how he made of dollars of profits for the company, sometimes by necessarily screwing a few customers over. Don’t ever forget their priorities! Here is a quote from a 2008 Portfolio article where Lewis takes a look back:

When I sat down to write my account of the experience in 1989—Liar’s Poker, it was called—it was in the spirit of a young man who thought he was getting out while the getting was good. I was merely scribbling down a message on my way out and stuffing it into a bottle for those who would pass through these parts in the far distant future. Unless some insider got all of this down on paper, I figured, no future human would believe that it happened.

The other half explains how some of the most powerful securities in the world were created – namely high-yield “junk” bonds (which exploded in the late 1980s) and mortgage-backed securities (which took longer, and exploded in the late 2000s). They saw an opportunity:

From the early 1930s legislators had created a portfolio of incentives for Americans to borrow money to buy their homes. The most obvious of these was the tax deductibility of mortgage interest payments. The next most obvious was the savings and-loan industry.

The savings and loan industry made the majority of home loans to average Americans and received layers of government support and protection. The breaks given savings and loans, such as deposit insurance and tax loopholes, indirectly lowered the interest cost on mortgages, by lowering the cost of funds to the savings and loans. The savings and loan lobbyists in Washington invoked democracy, the flag, and apple pie when shepherding one of these breaks through Congress. They stood for homeownership, they’d say, and homeownership was the American way. To stand up in Congress and speak against homeownership would have been as politically astute as to campaign against motherhood. Nudged by a friendly public policy, savings and loans grew, and the volume of outstanding mortgages loans swelled from $55 billion in 1950 to $700 billion in 1976. In January 1980 that figure became $1.2 trillion, and the mortgage market surpassed the combined United States stock markets as the largest capital market in the world.

Following the money, in 1986 Salomon Brothers created the first mortgage derivative. Soon after, they figured out how to take BBB-rate bonds with a unknown maturity and perform financial voodoo to create top AAA-rated bonds with more predictable maturities. (A good explanation of collateralized debt obligations (CDOs) and tranches is in the video Crisis of Credit Visualized.)

Lewis also learned the trader mentality:

Many of the trades that [mentor] Alexander suggested followed one of two patterns. First, when all investors were doing the same thing, he would actively seek to do the opposite. The word stockbrokers use for this approach is contrarian. Everyone wants to be one, but no one is, for the sad reason that most investors are scared of looking foolish. Investors do not fear losing money as much as they fear solitude, by which I mean taking risks that others avoid. When they are caught losing money alone, they have no excuse for their mistake, and most investors, like most people, need excuses. They are, strangely enough, happy to stand on the edge of a precipice as long as they are joined by a few thousand others. But when a market is widely regarded to be in a bad way, even if the problems are illusory, many investors get out.

All in all, this book was a very fun read. It reminded me of somewhat of Ugly Americans by Ben Mezrich, but Liar’s Poker had a much more authentic and feel of historical significance to it.

Posted in Book Reviews | 3 Comments »

Taleb’s Thanksgiving Turkey

[image credit]

I’m still in a tryptophan coma, but here’s a timely mention of the story of the turkey from Nassim Taleb’s book The Black Swan which I am (supposed to be) reading. The following excerpt is taken from the transcript of a Charlie Rose interview.

——
CHARLIE ROSE: And what is the story of the turkey?

NASSIM NICHOLAS TALEB: In the book, I have the story of a turkey that is fed for 1,000 days by a butcher, and every day confirms to the turkey and the turkey’s economics department and the turkey’s risk management department and the turkey’s analytical department that the butcher loves turkeys, and every day brings more confidence to the statement. So it’s fed for 1,000 days…

CHARLIE ROSE: Gets fatter and fatter and fatter.

NASSIM NICHOLAS TALEB: Fatter and fatter. On the day when its comfort will be at its maximum, there is going to be a surprise. There will be a surprise for the turkey.

CHARLIE ROSE: Yes.

NASSIM NICHOLAS TALEB: There will be a surprise for the turkey’s economics department, all those Ph.D.’s. Will it be — after all, there’s maximum (inaudible)…

CHARLIE ROSE: But it’s not a surprise for the butcher, is it?

NASSIM NICHOLAS TALEB: Not a surprise for Charlie Rose as well. Not a surprise for humans. It’s a surprise for the turkey. So the whole idea here is we are not to be a turkey.
——

Who or what might be the next turkey?

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The Great Depression: A Diary – Book Review

Benjamin Roth was a lawyer in Youngstown, Ohio during the Great Depression and kept a regular diary of his impressions during the era. The diary was required reading for his son who also became a lawyer at the firm he started, in order to understand what their clients went through. After the recent crash, it has now been published as a book called The Great Depression: A Diary.

The book is primarily a straight transcription of the original handwritten journal, with a few editor’s notes to provide a little additional background when needed. Each entry is dated, and it is very interesting to see the first-person perspective unfold over time. Indeed, imagine a “blog” back then and you’d get this. Roth was not an economist or historian, and simply wrote down what he saw.

Historical Similarities
It is easy to find many similarities between the recession back then and now. The stock market and real estate market boomed, speculation was rampant, and then it all collapsed. Banks were stuck with mortgages that nobody could afford to keep up with, and foreclosures were everywhere. Unemployment was very high, although it was 25% back then as compared to 10% now.

[9/19/32] It looks as tho the Democrats will win because everybody wants a “change”.

Sound familiar?

Roth considered himself a Republican, and did worry a lot about “a shift towards socialism” and inflation always being around the corner. The government did end up spending a lot of money to stimulate the economy, although not exactly the same way as now. On the other hand, many things that seemed like radical changes back then are things that we almost take for granted today – including new institutions like the FDIC to provide bank deposit insurance, the SEC to regulate investments, and even Social Security.

Historical Differences
Throughout the diary, Roth is always talking about how numerous banks failed or re-opened temporarily only to close again due to rapid withdrawals. This led to even the strongest banks putting very tight restrictions on withdrawals (i.e. max 5% of deposits). Without something like the FDIC, people ended up selling their account balances for 40 cents on the dollar because they needed the money immediately or were afraid they’d never see it again.

Personal Finance & Investing
Roth often wrote about personal finance and investing as well. He really like the idea of saving up a lot of cash during boom times, and then investing it all at the “bottom” after a crash, although he gradually seemed to realize that predicting the exact bottom was impossible and that simply holding it for the long term might be more reasonable.

In normal times the average professional man makes just a living and lives up to the limit of his income because he must dress well, etc. In times of depression he not only fails to make a living but has no surplus capital to buy stocks and real estate. I see now how important it is for the professional man to build up a surplus in normal times. [...] His practice suffers and he has no chance of rising above the level of the ordinary practitioner who lives from day to day and from hand to mouth.

[5/9/1932] Those men who were wise enough to sell during the boom and then keep their funds liquid in the form of government bonds, etc. were not farsighted enough or patient enough to wait almost three years to re-invest. Most of them re-invested a year or more ago and now find stock prices have sagged to 1/3 of what they were when they thought they were buying bargains.

Of course, back then there was still the CNBC equivalent of various economists and business leaders sharing their “future economic outlook”. Roth recorded their predictions and always seemed to come back with a later follow-up note “…the predictions were wrong.” Some things never change!

If I were to levy a criticism of this book, it would be that it is more of a list of his observations, as opposed to his personal actions. For example, he often mentions how local Bank A or Bank B has failed or is restricting withdrawals. But Roth doesn’t actually share where he keeps his money, if he has moved it due to fear, or if he has had problems withdrawing his own deposits. He doesn’t share his personal investments, even though he records the share prices of many companies regularly. This ends up making the trip to the past a bit more dry than it could have been, but it was still a fun and enlightening trip to take.

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