I welcome any and all comments by likeminded souls in pursuit of the profitable truth.

—

http://seekingaletheia.wordpress.com/2010/06/02/10k-8-a-second-attempt-at-an-investment-philosophy/

As small-fry investors, we assume away the possibility of activist investing, something successfully employed by the best in the business (activist hedge funds and private equity alike), because the source of their profits is thus partially due to their business contributions and not just their investment decisions. We concern ourselves with the problem of improving passive investment decisions.

This strategy holds that:

• The traditional separation between fundamental and technical investing is incomplete. They do not contradict, they complement, and each has different sources of profit generation. *I distinguish profit generation from alpha generation, as I am increasingly questioning the entire concept of alpha as a valid metric for hedge fund managers, who aim to not lose money rather than to beat up & down markets.
• Fundamental investing has over time also been broken down into quantitative and qualitative investing
• It is time for statistical investing to be incorporated in the corpus of total investment knowledge – the third leg of a trio of disciplines that perhaps fully explain financial asset behavior.
• But then even that is incomplete – in considering the universe of investable assets, and not just individual securities, we need to reconcile the three disciplines with a fourth – macro investing – which viewed in one sense is investing based on “super-fundamentals”.

An ambitious formulation describes the four overlapping legs as such:

• Technical investing follows and detects changes in price trends. It makes money in periods of momentum, and loses money in both 1) adverse unforeseen shocks and 2) periods of no momentum. Its source of profits is other investors who at the minimum do not follow technical trading rules that are on par with yours, and in general investors who pile in or pile out due to some combination of technical, fundamental, statistical, or macro factor. Its tragic flaw is that in a world full of technical buy/sell signals we have no way of predicting which are “signalling” oncoming momentum and which are just “noise” signals doomed to alternate between buy/sell signals – a phenomenon that both ties up capital and racks up losses. A large number of individual investors lend themselves to this as buy/sell decisions can be automated without too sophisticated an understanding of the underlying philosophy.
• Fundamental investing focuses on buying assets that, based on their costs of capital vs expected return (from operations/liquidations etc) and other factors intrinsic to the business, should be worth more than the market is offering. It makes money in cases where cost vs benefit forecasts are accurate, and loses money when forecasts are adversely inaccurate. Its source of profits is driven by the profitability of the underlying business net of operational and financing costs. Its tragic flaw is known as the “value trap” – having to answer the question of why someone (likely with more information than you) would sell the asset to you when he can make the same projections you are making – and if the undervalued asset has become undervalued, what is to stop it from becoming yet more undervalued, or to languish in relative obscurity, after you buy it? A large number of institutional as well as individual investors claim to adhere to this, but frequently stray off course or apply analysis of questionable quality. It is inescapable, however, that fundamental investing has produced the most successful track record in the 20th century, and it affords more compelling stories than the other disciplines – however the very same makes fundamental investors liable to confirmation bias in their stock picking skills, among other problems.
• Statistical investing views assets as objects with stable statistical properties – the four statistical moments describing their return distributions and various strains of covariance between them, discoverable with the assumption of ergodicity – from which we can generate some long-term profitable investment rules. It makes money simply if past performance predicts the future, and loses money if indeed, “this time it’s different” – also if the underlying statistics fall prey to any number of traps ranging from selection to survivorship bias. Its tragic flaw is as yet unnamed, but could be likened to Hume’s problem of induction, Taleb’s black swan, the popular “peso problem” – what makes you think what held before will hold in future. However, the flip side of this tragic flaw is that we are able to take into account predictably regular “shocks” that frequently confound technical investors – if these shocks are something intrinsic to the asset as statistical investors assume. For example, the fundamental reason that Chinese stock markets surge prior to large national political events is because the central bank explicitly provides liquidity in a widely known market support policy – something we can certainly take advantage of in our investment decisions. Interestingly, the vast majority of academic finance research lends itself to inferences applicable to statistical investing – including Fama/French, and the copious amounts of research dedicated to the equity risk premium.
• Macro investing profits by taking advantage of macroeconomic trends, either as a weighted consideration in decisions for individual securities, or as bets against entire markets, interest rates, currencies, and commodities. It makes money if 1) the trend plays out as forecast and 2) the “play” selected to take advantage of this trend is a relatively”pure play”, and loses money if either of those isn’t fulfilled (both are necessary conditions). Its tragic flaw is the lack of “pure play” assets on identifiable trends, and the general inability of even credible economists to forecast even the direction of trends. The globally-minded, economics-PhD hedge funds are right at home here, but many investors in their countries also take care to “overlay” a veneer of macro direction before considering investments in individual securities.

A unified, comprehensive investment philosophy successfully incorporating all four of these disciplines should profit under all situations and only lose money due to new, unforeseen events that are outside the statistical bounds of prior experience.

WRS – International Islamic Finance

Bayesians in a China Shop – Shawn Wang Huntsman Senior Honors Thesis

I have slaved for the past week or so on two mammoth thesis projects. Z has sacrificed so much to bear with my grumpy sleep-deprived self through this. The quality isnt as perfect as I’d like, but in this day and age it is better to be Done than to be Perfect – because the marginal rates of productivity go down so quickly when you are facing a 40 or 50-page project to write.

Expended over the course of this journey:

• 5 Double Big Gulps from Seven Eleven
• 4 cans of Red Bull/Random Energy Drinks
• 1 trip to the Penn Hospital
• 4 all-nighters
• 2 sick babies
• 1 awkward conversation with Z’s best friend
• 5(!) cycles of my Grooveshark Vivaldi Classical Music playlist
• Almost no food consumed cos it slows down thinking
• Missed out on Walnut Walk

But I am DONE. The finality of finally graduating is hitting me. I have been trying to avoid it. I purchased my cap and gown yesterday, a strangely empty exercise. It’s the first uniform I’ll be wearing since I left the army in 2006.

Michael Pettis has repeatedly stated that consumption is falling as a proportion of US GDP because US saving has been rising due to the impact of the financial crisis. Factually the exact opposite is the case. Consumption has risen as a proportion of US GDP and saving has been falling. If the fourth quarter of 2007 is taken as the last before the full impact of the crisis then in that quarter US consumption was 85.8% of US GDP. If the second quarter of 2008, i.e. before the collapse of Lehman’s, is taken then consumption was 86.7% of US GDP – it may be seen that US consumption was rising rapidly as a proportion of GDP during the first half of 2008. For the last US GDP data available, that is for the second quarter of 2009, total consumption was 87.6% of GDP – a further sharp increase.
Taking the period from the last quarter of 2007 to the second quarter of 2009 US consumption therefore rose from 85.8% of GDP to 87.6% – a rise of 1.8% of GDP. Even if the narrow period between the first and second quarters of 2009 is taken US
consumption rose from 87.2% of GDP to 87.6%.

—

This is a response to my former prof Michael Pettis’ pieces on the WSJ and in the FT, as well as his related blog posts. I am hoping to continue this as part of a series of conversations with more established opinion leaders to develop my own debating skills and knowledge.

• The Lucasian Argument, or, all is not ceteris paribus
  • When the Japanese and German currencies soared in value against the dollar after the Plaza Accords of September 1985, many analysts thought that these countries’ trade surpluses with the U.S. would decline. But even though the value of the yen doubled, Japan’s trade surplus surged. This should not have been surprising. In response to the Plaza Accords, Tokyo directed a flood of low-interest credit into the manufacturing sector while informally guaranteeing corporate borrowers. Manufacturers increased production for export markets even as household consumption declined. The trade surplus with the U.S. rose.
  • Capital account explanation: So currency was forced up but in response interest rates were pushed way down. That triggers a dramatic outflow of capital seeking cheap assets and higher interest rates. Massive capital account deficit. Given that the BOJ did not absorb the full amount of this deficit by taking a hit to its reserves, its hardly surprising that, with export prices stable, the Japanese current account surplus rose.
  • Supply side explanation doesn’t cut it: the fact that manufacturers increased export production doesn’t mean that there was a market to buy the additional products at the same prices (if the manufacturers had cut prices by the same percentage they had increased production, no trade surplus increase would have registered as it is a nominal measure). The fact that there was a market means that:
  • Substitution effect: US buyers were substituting away from German products to Japanese.
  • This argument is not wrong, just misguided about cause-and-effect.
• The false analogy
  • China is trying to do the same thing, despite a rising yuan.
  • China, outwardly at least, is following a policy of promoting internal demand as a driver of growth instead of the prior export-led growth model. Whether its actions match up with its words are another matter, though.
• The “two countries” ludic fallacy
  • China’s trade surplus with the U.S. won’t necessarily soar. In the short run, American consumers are hamstrung by wage stagnation and rising unemployment. For the next few years, U.S. consumption will grow more slowly than its production, and the trade deficit will narrow.
  • We speak of TOTAL US consumption growing slower than TOTAL production, but nothing in that precludes the possibility that the trade deficit specifically with China won’t widen. In fact, any adverse income effect (including wage stagnation and unemployment) is far more likely to increase purchases of goods of Chinese origin rather than homegrown ones.
• What time period are we talking about?
  • China’s fiscal stimulus consists mainly of a massive expansion in bank lending, which is almost certain to lead to a sharp rise in bad loans. Resolving these, which China will have to do in the next few years, will probably require the same policies used to resolve the banking crisis of the late 1990s, which will inevitably constrain consumption growth.
  • Yes; very true, but is this actually a negative point? – in the first instance the consumption growth that is “constrained” will be exactly the consumption growth that resulted from the monetary expansion in the first place. Provided that feedback loops don’t make the constraint effect worse (although they work equally in the opposite direction in the expansion phase too), the entire effect of this will simply be to moderate the up- and down- swings in the economy due to foreign disruptions. Entirely desirable.
• Y=C+X-M??
  • Over the next five years or more Chinese economic growth will necessarily be lower than growth in Chinese consumption. The massive but unsustainable investment in infrastructure and new production facilities that characterises the Chinese fiscal stimulus package will not be able to change this fact.
  • eh? it wont be able to? why not?
• Currency indifference
  • I did have a big problem with the often-repeated assertion (and one that often pops up in discussions about China) that because Japanese trade was not denominated in yen the Bank of Japan was forced to accumulate dollars.  In fact it doesn’t matter what currency your trade is denominated in – if you run a net current and capital account surplus, your central bank must accumulate foreign currency.
  • I approve, with the usual caveat for managed-float regimes.
• Savings rate vs savings level
  • If China continues to pump out capacity and tries to export this excess abroad, and if US household savings rise much more quickly than US fiscal dis-saving (borrowing), we will almost certainly see the bad case scenario occur, at least in China, and especially if it leads to trade friction around the world.
  • Household savings rates have increased sharply – but this has little bearing on whether total levels of savings have risen or fallen. If total household income has fallen by X%, and household savings rates increase by less than X% (we all have to eat, even if we start eating Chinese takeout), then savings has fallen, not risen. The argument also overlooks public sector debt and spending, which has famously run into unprecedented deficit.
• Don’t be a banker in China
  • In that camp I might add measures to force banks to increase consumer lending, because I think the last time they tried that (with car loans), nearly half the loans went NPL, suggesting that at first consumer lending will simply consist of free consumption financed indirectly by the government, when it bails out the NPLs.  This is a form of “consumption” I guess, but it is not really what the doctor had ordered.
  • Apalling. Did not know that. Not sure I object to it though

GMAT - cracking the head, or cracking the books

Repost of my original column at BeatTheGMAT.com

hi guys,

I’m currently applying for MBA progs (Wharton Lauder R2 fyi) and discovered this forum. after browsing through some of your posts (esp. the stickies) I realized that I was really fortunate to get the score I did considering my relative lack of preparation.

So I’m not sure how much help I can be but I’m happy to assist anyone with questions.

1st Try: 690/88%/6/87% V41/92% Q42/63% 8/27/08
i had a bunch of logistical problems getting here but finally arrived about an hour early and took the test right away. did not stop for breaks. I also had the wrong impression of the cat scoring system so i emphasised getting answers right as opposed to answering all the questions. this resulted in me missing out on 4 or 5 of the final few questions of Q. however, V i finished 1/2 an hour early. breezed through.

2nd Try: (the score you see above)
it was a blessed day. I arrived in a different, unfamiliar testing center and would almost certainly have been late had i not decided to hitch a ride (yeah, stick your thumb out and pray) to the testing center in WAYNE PENNSYLVANIA (idk why i’m telling you this, just that i’m a lil superstitious and hope that it brings you good luck too) barely 10 mins before the test was scheduled to begin. Good luck continued from then on. I just guessed my way through tough Q’s and made sure to finish all the Q’s, and similarly breezed through V’s with 1/2 an hour to spare. when the guy at the desk congratulated me on my 770, i was muttering “i hope that’s enough”.. shows how much i knew about the whole mba applications field then.

prep: literally i can tell you everything that I did
1st Try: 2 days before, try the 2 computer tests provided by GMAC. note problematic areas and do the additional computer tests again provided by GMAC on those topics. the night before, bought cheapest kaplan book i could find to do some random questions in those weak areas. Got some sleep.
2nd Try: I actually did this in the midst of some very seriously involved extracurricular activities (as in, >60 hours a week type deals) but i think the distractions put the whole GMAT trial in perspective and actually made me less stressed as I went in to the exam. That plus my self-assessment that the biggest thing I did wrong on the 1st try was to not answer all the questions, so I simply resolved to make good on that decision. Did not do any computer testing, did some more kaplan exercises on the weak areas while on the train to the place (and finding out that I would have to hitchhike further in to the center! NO TAXIS WTF) You will also notice that my verbal improved from the first time – no idea why that happened except that I got extremely comfortable with the questions and had *got* into the tester’s mindset and was looking at the questions from the tester’s point of view so it got increasingly apparent which answers were there to just throw you off.

i guess if you ask me the big takeaways are that although i know exactly how you GMAT takers are feeling, try your hardest to keep some perspective in mind and know that the GMAT should only be a small part of who and what you are althou the big bad agencies would have you dedicate your life to prepping for the damn thing (how else would they earn their keep). And because you aren’t so worn out by the whole prep process, you actually think better and clearer for the unique new questions that tend to come up only on the GMAT and nowhere else (unless you signed up for that scandalous GMAT site a while back). Also, finish all the questions (Kaplan fooled me the first time giving me that bloody useless “binomial tree” model of CAT scoring, which is total-well, ok, partial- Bull if you ask me). I was a little worried about the AWA but I just read through some of the mindless prattle offered by the Kaplan book I had and resolved to simply outdo the cheap argument devices on display. (I should caution that I don’t have much of a problem with the English language…)

ok i hope i don’t come across as cocky, i just want to give you the confidence that i feel many of you need to survive this sometimes grueling process. After the GMAT comes the actual applying for schools.. now THAT took me about 2-3 months. oh and a 690 is fine even for superelite schools, i just felt that given the circumstances i detailed above it might be worthwhile to see what I should’ve got if I had known that completing all the questions was that important.

ok yup i’ll try to reply any questions posted here, hopefully this msg board’s email notification thing works. if not, find me on wharton’s S2S.

good luck to one and all. diamonds are only forged in the hardest and harshest of conditions.

in response to questions on tackling “verbals”, which many Indian candidates had problems with:

VERBAL
What I did for Verbal prep
did some exercises on RC, my weakest question type

Total hours used to study
2-3 hrs total

Materials I used
the GMAC-provided computer tests (did them all) and some quick questions from the cheapest kaplan 2009 i could find (i think it cost me about $18 in all)

Study Timing
night before/on the way to the test

Did I use solved Q’s in OG in sets or something
I don’t really know what OG is, sorry.

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RC pointers

DO THIS QUESTION ON YOUR OWN BEFORE READING FURTHER. TIME YOURSELF.
WHILE DOING THE QUESTION WRITE DOWN THE PRECISE STEPS YOU TOOK AND LOGICAL PROCEDURES, and then COMPARE THOSE TO MINE AND SEE HOW YOU CAN SYNTHESIZE THE TWO TO CREATE YOUR OWN tres AWESOME VERBAL QUESTION SOLVING METHOD.

Sample Question
Schools expect textbooks to be a valuable source of information for students. My research suggests, however, that textbooks that address the place of Native Americans within the history of the United States distort history to suit a particular cultural value system. In some textbooks, for example, settlers are pictured as more humane, complex, skillful, and wise than Native Americans. In essence, textbooks stereotype and depreciate the numerous Native American cultures while reinforcing the attitude that the European conquest of the New World denotes the superiority of European cultures. Although textbooks evaluate Native American architecture, political systems, and homemaking, I contend that they do it from an ethnocentric, European perspective without recognizing that other perspectives are possible.

One argument against my contention asserts that, by nature, textbooks are culturally biased and that I am simply underestimating children’s ability to see through these biases. Some researchers even claim that by the time students are in high school, they know they cannot take textbooks literally. Yet substantial evidence exists to the contrary. Two researchers, for example, have conducted studies that suggest that children’s attitudes about particular cultures are strongly influenced by the textbooks used in schools. Given this, an ongoing, careful review of how school textbooks depict Native Americans is certainly warranted.

Which of the following would most logically be the topic of the paragraph immediately following the passage?
• (A) specific ways to evaluate the biases of United States history textbooks
• (B) the centrality of the teacher’s role in United States history courses
• (C) nontraditional methods of teaching United States history
• (D) the contributions of European immigrants to the development of the United States
• (E) ways in which parents influence children’s political attitudes

Prep strat:
1. First of all to all you non-native speakers of English out there, I’m quite native so bear this in mind. However, you are competing with the rest of us native speakers when you take the GMAT so this is no excuse to concede defeat. You have to work extra hard just to be on the same level because you’re using a second (or third) language. So don’t just think you can get by with, for example, a slow reading speed. you should have completed scanning through the above passage in +/- 30 seconds. If you took longer, you need more practice speed-reading. Remember you are only reading for certain things (see the next section) and you couldn’t give a rat’s ass if the Question was about “Native american cultures” or about Oprah’s hairdo.

2. So remember that the testers just want to try to throw you off as much as possible. Maybe a good way to get into their mode of thinking is grabbing any random op-ed from a newspaper, extracting two paragraphs, and applying the same questions that you have seen in your practice tests. Then, come up with 1 right answer and 4 close but misleading/just plain wrong answers. In other words, BE the tester, use the tricks that you see them using.

Keep in mind when doing the GMAT RC:
1. Every RC passage has a thesis (even this para I’m writing has one). Look it up if you don’t know precisely what the word means. Theses can take a variety of stances depending on the subject matter. Doing well in RC’s require you to correctly identify these two things. For example, in this question the thesis cue couldn’t be any more obvious: “My research suggests, however, that…” and “I contend that they…” You should be able to mentally highlight (at speed, you have no time to do anything else in the real test) the words “testbooks…distort history” and “textbooks evaluate… without recognizing other perspectives.” Use this insight to solve questions like “Would the author agree with…” and so on, and for goodness sake FOCUS on every key word and don’t be careless.

2. This thesis is loosely connected to the passage’s argument structure, which for all intents and purposes you should treat as an entirely different variable. The structure cue is also pretty blatant: “One argument against my contention asserts that” and “Although…I contend that”. So this is an example of the classic “straw man” argument – state your thesis, set up some really very lame and contrived valid objection, and then totally demolish it, ultimately proving the truth of your thesis by the utter and complete destruction of your defenceless straw man. In fact this is what the featured question specifically requires: The first two have been done – it remains to demolish and restate the thesis. How do you do so? Is the thesis identified in (1) supported by option B? It focuses on textbooks, not teachers. Option C? again, textbooks ONLY. FOCUS. Option D? (What? how is that relavant?) Option E? Again, textbooks, not parents. I know how dumb I’m making this sound but it really is that simple. Don’t get into that psychological panic attack when you see this question.

3. A quick clue to completing the entire thing in under 30 seconds is to ignore the entire first paragraph except the last sentence, and then ignore all other paragraphs except for their first sentences. This is the vomit-inducing formula they teach in US college writing courses that defines Good Writing and RC’s use these a. lot. The last sentence of the first para is usually the “essay condensed into a sentence”, good for predicting both structure and thesis. and little else. but i digress.

And there you have it. Keep in mind that GMAT passages are the simplest of creatures – in any real-life essay, options A through E are feasible in the context of a much longer dissertation on the failures of the US educational system. The best way to rationalize this is to tell yourself that these essays are meant to stand alone as 3 or 4 paragraph short essays, so it wouldn’t really do to keep introducing new factors into the equation.

xxxxxxxxxxxxxxxx

CR pointers

DO THIS QUESTION ON YOUR OWN BEFORE READING FURTHER. TIME YOURSELF.
WHILE DOING THE QUESTION WRITE DOWN THE PRECISE STEPS YOU TOOK AND LOGICAL PROCEDURES, and then COMPARE THOSE TO MINE AND SEE HOW YOU CAN SYNTHESIZE THE TWO TO CREATE YOUR OWN tres AWESOME VERBAL QUESTION SOLVING METHOD.

Question
The cost of producing radios in Country Q is ten percent less than the cost of producing radios in Country Y. Even after transportation fees and tariff charges are added, it is still cheaper for a company to import radios from Country Q to Country Y than to produce radios in Country Y.
The statements above, if true, best support which of the following assertions?
• (A) Labor costs in Country Q are ten percent below those in Country Y.
• (B) Importing radios from Country Q to Country Y will eliminate ten percent of the manufacturing jobs in Country Y.
• (C) The tariff on a radio imported from Country Q to Country Y is less than ten percent of the cost of manufacturing the radio in Country Y.
• (D) The fee for transporting a radio from Country Q to Country Y is more than ten percent of the cost of manufacturing the radio in Country Q.
• (E) It takes ten percent less time to manufacture a radio in Country Q than it does in Country Y.

Think:
First sentence says: Q = Cheap 10%
Second Sentence says: Q – import cost = Cheap <10%
A says: Q Labor Cheap. Nah.
B says: Y radio = 10% of Y employment
C says: import cost <10%
D says: import cost >10%
E says: manufacturing time – Q<Y => no NECESSARY indication on cost

E may be true (its probably there to throw you off again, evil testers they are) but C is the only one that is necessarily true.

GMAC says on its websitehttp://www.mba.com/mba/TheGMAT/TestStructureAndOverview/VerbalSection/default.htm
“Critical Reasoning questions are designed to test the reasoning skills involved in making arguments, evaluating arguments, and formulating or evaluating a plan of action. Questions are based on materials from a variety of sources. No familiarity with the specific subject matter is needed.”

The last sentence is bullshit. Be familiar with basic microeconomics, and logical fallacies that every student learns in Philo 101. If you are quant-oriented, often you can reduce arguments to mathematical statements like I did in the example.

The infamous video after the break (hosted on Facebook).

Interesting production note: the original featured a drinking scene at my recent G3 birthday party, which was promptly rejected and I had to replace it with a milder oh-look-we’re-speaking-chinese clip I happened to have on hand. It was with no small irony that I noted to my French friend Raphael that censorship was not unique to China, a country that does not hesitate to cut off access to all of Youtube because of the posting of one controversial video.

It raised an interesting thought – donations as business transactions. Here is the logic:

Simplifying assumptions:
Two candidates, O and M. Whoever gets the most donations wins more votes and thereby the White House.
Everyone votes and pays taxes (albeit at various brackets)
O, if elected, will introduce tax credits worth $TC (source) per taxpayer. M, for the average American individual, will do no such thing (source)
M obtains donations exogenously, from “Special Interests”, to the tune of $SI (my model is SO neutral right?)
O only gets donations from people benefiting from his policies, total of $D per person. All donations are only calculated for personal gain from $TC.

To show:
D*number_of_taxpaying_americans_benefiting_from_tax_credit>SI in order for O to win.
TC must always > D
therefore (rearranging..)
TC > SI / (number_of_taxpaying_americans_benefiting_from_tax_credit)

Plug in numbers:
TC: $500 each. (source, again)
SI: $4,389,028 (source)
N = number_of_taxpaying_americans_benefiting_from_tax_credit = 150,000,000 (source, again)

Optimal TC = $0.029 or 3 cents. Compare to $500. Big enough a gap to overcome exaggerations from the Obama camp about the size of N. Assuming the basic relationships essentially reflected in my assumptions are broadly applicable, it would be the economic equivalent of not bending down to pick up the $499.97 dollar bill for one to fail to donate to the Obama campaign given this scheme.

The alternative inference from this (simplistic!) model is that the federal law limiting political campaign contributions by corporations encourages vote-buying from the people instead.

This was a late-night back of the envelope exercise, please dont be offended in any way if you are, you need to reserve offense for better things than this.

Image credit: http://my.barackobama.com/page/s/michelle

We were talking about negotiations and business deals and he described how he thought friendliness and that vague concept of “interpersonal skills” would be the most important in any interaction. While sounding almost like a truism, I thought for a bit and respectfully disagreed on an intercultural standpoint. Drawing from my experiences with him and other North/South Americans I have met thus far who were like him, I pointed out that in some cultures there is no fundamental presumption of trust between strangers. In fact, if I were approached by a salesman being over-friendly, I might think he has something to hide – the friendliness, then, instead of breaking the ice, sets off instinctive suspicion, no matter how unwarranted. I think I managed to impress that fact upon him, which is rare because I am not used to winning arguments like that.

The other thought was on company culture. My friend was very much for a hierarchical structure with clearly defined responsibilities and accountabilities, with managers having complete oversight, understanding, and responsibility for their subordinates. It followed from this mindset that he saw no point in my interest in facilitating communications worldwide at all levels of a company. Managers should manage their respective regions, meet regularly, and control company growth through a well-designed and responsive hierarchical structure. I informed him that he was still living in the last millenium. It is the hallmark of the modern technocracy that managers will almost certainly never truly know what their people know – to be anything less is to insist on redundancy and risk loss of competitiveness. Moreover I believe it is the entire point of professional managers in the first place, the very reason why the business school was created over a century ago. The simple truth? Even 127 years ago people had realised that business complexity had become so advanced that it was actually better to train a professional manager corps who were not specialists in anything but bringing people with different skills together and running a team. Today, the team takes on a different meaning – people’s decisions may affect someone else in not just another department, but a totally different country. Furthermore, the knowledge-intensiveness of modern products coupled with the realities of global production cost (and, increasingly, human and intellectual capital) distributions means an increased need to work across borders, cultures, languages, and yes, across departments and across formal lines of management control when the need arises. Therefore I argued for a less hierarchical structure where low level employees would be encouraged to work freely with counterparts and managers in other departments without letting his manager “take care of it”.

I compared our differences in opinion to the modus operandi of centrally planned and free market economies. I concluded that a centrally planned company would be ideal but would fail in practice because of rigidity imposed by bureaucratic structure as well as an insufficiency of information, while a free market system would create a culture of nimbleness as well as ultimately leading to a better leadership pipeline, even as it increases downside risks from failures commensurate with the decrease in level of supervision.

Maybe the Buddhists had it right countless decades ago when they asserted that past, present and future were one and chose the Lotus flower, simultaneously bearing flower and fruit at the same time, to symbolise this insight – but Einstein took this leap of faith and turned it observable, explainable, and quantifiable. Belief is easier when one has formulas, sound reasoning, and experiments to prove it. Dropping out of high school, yet earning his PhD and in the same year (1905) publishing 5 papers, 3 of which solved the biggest mysteries of physics of his day – light’s absolute speed, Brownian motion, and the wave-particle duality (fundamental, though not wholly revolutionary, to quantum physics) - and, not satisfied with 3 lives’ work, proceeded to extend again the boundaries of human knowledge in his General Theory ten years later, a breakthrough which his contemporaries estimate would have taken at least multiple decades to arrive at otherwise.

Hard worker, pacifist, astute political observer (for himself), scientist willing to re-examine his most fundamental assumptions. Perhaps he is the best example of proof that the ideas of one person know no limits and can change the world.

p.s. Shout-out to Fermi too – another amazing soul.

Tatooine's Two stars

Total eclipses are a luxury of our time. Future beings will not be able to experience this magical natural phenomenon which turns day into night.

From my class notes:

The Moon’s average distance from Earth increases by 3.8 centimeters per year. Such a precise value is possible due to Apollo laser reflectors which astronauts left behind during lunar landing missions. Eventually, the Moon’s distance will increase so much that it will be too far away to produce total eclipses of the Sun—they will all be annular.’

More factoids after the break.

Fact: About half the solar systems in the known universe are binary systems! (Two stars)

Earth is slowing down!

The reason for Earth’s rotational slowdown in the first place are ocean tides, which are caused by the gravitational pull of the Moon and, to a lesser extent, the Sun. But as the tides are attracted to the Moon, the oceans appear to rise and fall while Earth rotates beneath them, which generates friction between water and ocean bottoms, primarily in shallow seas. This tidal friction gradually transfers angular momentum and rotational energy from Earth to the Moon’s orbit. Earth looses energy and slows down while the Moon gains the energy and consequently it’s orbital period and distance from Earth increase by slowly spiraling outward. This outspiraling has been occurring for a very long time. Fossil evidence (corals, tidal layers) clearly shows that earth’s day was shorter than now: about 18.5 hours some 500 MY ago, about 17 hours 1 BY ago, and about 11.5 hours 2 BY ago. Tidal friction has also caused the Moon to keep the same hemisphere toward Earth.

The theory of tidal friction was later developed by George Darwin (son of the famous Naturalist) in the 1880s. He used it to predict the future of the Earth-Moon system: in several BY (Billion Years) the month would be some 55-60 days long and Earth will have slowed down to rotate at that same period, so the same hemisphere of Earth faces the Moon, and lunar tides no longer generate friction. But the tides raised by the sun on Earth cause it to further slow down, so its rotational period will become longer than the Moon’s orbital period. This causes the Moon to approach Earth, reversing its past orbital outspriral into an inspiral. As it comes closer to Earth over another few BY, it will eventually raise fierce ocean and land tides, and Earth will raise even larger tides on the Moon. Both will heat up and ultimately coalesce.

I also did well with a recent paper here on the sociological deviance of options backdating.