Category: Book Reviews

Flannery’s “The Eternal Frontier”

Posted on by Evan in Book Reviews, Evan's Sabbatical

Over the past 4 months in NZ Tina and I have spent much of our waking moments immersed in the natural beauty which makes this country such a special place to visit.  As it does with traveling to foreign places it got me thinking about the natural treasures which are close to home that I have yet to explore.  Furthermore, I’ve come to realize that I am ignorant about the natural forces that have shaped the very environment in which we live.

It just so happened that while I was exploring another one of my favorite environments, a used book store, I came across a book by Tim Flannery entitled, “The Eternal Frontier: An ecological history of North America and its Peoples“.  Perfect.

Flannery’s book takes the reader back 65 million years when an asteroid, now known as ‘Chicxulub’, struck North America thus brining “modern” ecological history into being up to the present day where he focuses on the human impact on the environment.

For me, the first 64,999,500 years of the book were a little slow.  However, there were two themes that struck a chord with me.  First, it is remarkable how detailed of a history modern day scientists are able to create based on the limited remnants of ancient history they are given to work with.

Second, it is humbling to compare our concept of time, which is heavily influenced by the length of a human life, in the perspective of “modern” ecological history which spans 65 million years.  Even if you live long enough to call yourself a centurion you will only witness .00015% of North America’s modern ecological history.

In the last 500 years of the book Flannery focuses on the impact that humans have had on the North American environment.  Much like Friedman’s, “Hot, Flat, and Crowded“ the story he writes is not pretty.  BUT, he also ends on a hopeful note which leaves the reader with a positive feeling about the future.

Especially interesting was the sociological insight he borrowed from the turn of the 18th-century lecturer Frederick Jackson Turner who characterized US society as a “Frontier” society in which pioneers continually push the edge of the frontier, exploiting natural resources (which are plentiful on a frontier), all the while furthering economic development (see page 292).

When viewed in this context it is not entirely surprising that the US has developed into the world super-power given that human immigrants acting within a free market economy have benefitted from a very rich ecological base over the past few hundred years.  The cornucopia of natural resources has allowed our “frontier society” to consume almost without end all the while becoming the wealthiest country on earth.  But  the environment is beginning to show signs of our “frontier” existence.  As Flannery suggests, the environment is beginning to place natural limits on our ability to live and exist as we have in the past.

I was left thinking that “The Eternal Frontier” will be twofold.  First, it will involve developing technologies that will allow our society to “do more with less” (AKA efficiency).  However, it will also likely have to involve a cultural shift away from valuing more (AKA consumption) towards valuing a simpler existence.

Here are some of my notes from the book:

*The land-mass that is today North America was formed many millions of years ago when two smaller land-masses with very different environments separated by the Bearpaw Sea merged.

*Miraculously, some species of trees have survived and evolved over 65 million years when the Chicxulub struck North America to today.  These are the Houn Pine, Kauri, Araucaria Pine, and Wollemia Noblis and some others listed on page 33.

*Trees that grow into the shape of a cone have evolved from polar conditions where the sunlight is flat.  By having a cone shape they are able to optimize light coming from both flat and vertical angles.

*The existence of trees today that were around before the Chicxulub struck means that it likely struck in the winter.  This is because darkness engulfed the planet for many months after the asteroid struck.  Trees would have been able to survive because they would have already lost their leaves for the winter.  When they lose their leaves they absorb the nutrients for the dark months.

*This rule of biology can also apply to other forms of competition-

“One of biology’s more iron-clad rules seems to be that the inhabitants of larger lands are likely to be more successful immigrants than those of smaller ones.”

*The topographic makeup of North America creates a “climactic trumpet” which intensifies climatic shift on the continent.  This trumpet is created by two land features.  First, the up-side-down pyramid shape of the continent that is created by the wide reaches of Alaska-Greenland in the North and the tip of the Mexican Peninsula in the South.  Second, the fact that North America’s coasts have North-South running Mountain ranges.  Therefore, in the winter cold air surges south through the funnel that is created and vice-versa in the summer.  As a result, temperature changes are more extreme in North American relative to other continents.

*Trees are an excellent example of a self-sustaining organism-
“…little is lost to the tree when it sheds its leaves, for a leaf loosed into the… air has a 99 per cent chance of landing within twenty to thirty meters of its source.  As its leaves rot in spring, it’s quite likely that the tree will be able to recoup whatever investment in nutrients it put into making the leaf, just at a time when it needs it most.”

*On page 147-148 Flannery provides an excellent explanation of an ice age & glacial periods.

*Because of the North American “climate trumpet” we should actually be the MOST worried about climate change around the world because the effects will be most dramatic on our continent.

*Animal behavior & genetics: “The behaviors animals use to avoid predators are both genetically based and learned.”

*I always thought that complex societies grew into existence at the same time as agriculture.  However, Flannery points out that in pre-Columbian North America large societies evolved in California even though many still ate on hunting & gathering methods.

*When the Spanish arrived in Mexico around 1520 they came across an Aztec society which was far more advanced than anything they’d ever seen in Europe.  In fact, Tenochtitlan covered 13 square km’s and had a population of about 200,000, five times larger than London.  A detailed description is written on page 251.

*On page 267 Flannery explains that English settlers were “inept colonizers”.  However, what ultimately allowed them to overcome French settlers as the dominant ethnic group in the new colony was their “character of… frontier..of the soil”.  They expanded the frontier and controlled more soil.

*Flannery suggests that two myths exist regarding pilgrims of the Mayflower.  First, that Plymouth Rock is likely NOT the location at which they set foot in America.  AND, that the pilgrims were not seeking religious freedom.  His argument is laid out on page 270-271.

*Frederick Jackson Turner believes that the challenges of the frontier had a “cultural-stripping” effect on the pioneers which helped to shape the modern ‘American’.

*A sad piece of US history- “By 1871…the United States had made more than 370 individual treaties with various Indian groups, every one of which had been violated…”

*On page 320 Flannery explains the importance of mega-fauna (large mammals) on the health of grasslands.  Essentially, they eat the grass and store the nutrients in their stomachs and digestive systems then dole it out in their waste.  Without mega-fauna these nutrients are washed away during the rainy season.

*On page 324 Flannery explains that many animals evolved in herds or flocks because congregating in large numbers made identifying stealth predators easier (multiple sets of eyes are better than one set).  However, in 19th century America it ultimately led to their downfall because human predators were hunting with guns.  He goes into detail about the Great Plains bison.

*“…mussels are important indicators of ecosystem health.”

*Scary stuff- “In 1990 the Nature Conservancy summarized the losses and depletions from this rich realm (N.A. ecosystem).  They reported that four out of every ten species of North American freshwater fish were either extinct or vulnerable to extinction.  Half of the continent’s crayfish species were similarly affected, while nearly 70 per cent of its freshwater mussels were in danger.”

*More scary stuff on page 336- “By the 1950s North Americans had eliminated about four-fifths of the continent’s wildlife, cut more than half its timber, all but destroyed its native cultures, dammed most of its rivers, destroyed its most productive freshwater fisheries and depleted a good proportion of its soils.”

*On page 345 Flannery calls for a holistic approach to natural conservancy.  He goes as far to suggest reintroducing mega-fauna such as jaguars and lions may be needed in Yellowstone.

Schroeder’s “The Snowball”

Posted on by Evan in Book Reviews, Evan's Sabbatical

There are very few people in the business world that I respect more than Warren Buffett (hereby referred to as “WB”).  His skill, success, conviction, simplicity, and humor are all characteristics that I have a deep admiration for.  In the past I’ve read several books which cover WB’s investment style but lack significant biographical detail.  The latest book about his life entitled, “The Snowball and the Business of Life” fills the gap where previous books have failed by focusing on his life including details about his upbringing, family, and business.

The book was written by Alice Schroeder who covered Berkshire-Hathaway as an equity analyst in her previous career.  According to the inside cover WB & Schroeder became friends over the years.  WB eventually encouraged Schroeder to pursue a writing career and offered her unprecedented access to interview family and friends with the goal of producing a cohesive book on his life.  The results are spectacular.  With the exception of “Atlas Shrugged” this has been my favorite book that I’ve read on our trip.

If you like what WB stands for or have an interest in his investment style this book is definitely worth a read.

In reading the first part of the book about his upbringing I took notes on some of the lessons that WB learned along the way.  These lessons would ultimately help WB achieve unprecedented investment success.

Here are the lessons:

a) “Inner Scorecard”- pg. 33- from father:  WB learned to have an “inner scorecard” from his father who always made decisions based on his principles instead of following trends or crowds.  This obviously helped WB make investment decisions later on in life when Wall Street considered them unpopular (or vice versa: not make investments when Wall Street considered them popular).

b) “It might be easier to go through life as an echo, but only until the other guy plays a wrong note.“- pg. 58- from a band experience.

c) Care about opinion- pg. 62- Sidney Weinberg- When WB was young his father took him to a Wall Street investment company where he got to meet the CEO, Sidney Weinberg.  WB remembers that Weinberg paid attention to him and asked him about his opinion which he appreciated.

d) Don’t fixate on what was paid for a stock- pg. 65- self-lesson from his investment days at the age of 12!

e) Don’t rush unthinkingly for a small profit- pg. 65- self-lesson from his investment days at the age of 12!

f) Investing other’s money- a loss may make them upset- pg. 65- self-lesson from his investment days at the age of 12!

g) Know the deal in advance- pg. 74- shoveling snow for his grandfather

h) Didn’t like hard manual labor- pg. 75- working in grocery

i) Don’t criticize others- pg. 99- Dale Carnegie’s “How to Win Friends and Influence People“.

j) Calculating odds, betting when odds are in favor, emotional decision-making- pg. 108- horse racing.

k) Thinking for yourself- pg. 134- Lou Green

l) A stock is the right to run a small fraction of a business- pg. 147- Ben Graham

m) When investing always use a margin of safety- pg. 147- Ben Graham

n) Mr. Market is your servant- pg. 147- Ben Graham

o) On not allowing money to change how he lives.- pg. 186- Ben Graham

p) “It pays to hang around with people who are better than you.“- pg. 158- His experience in the National Guard

q) Power of customer loyalty- pg. 169- owning a gas station business at a young age

r) Scuttlebutt/ qualitative analysis- pg. 263- Charlie Munger (who learned it from Phil Fisher which I wrote in this book review)

s) The retailing business is about merchandising, not finance- pg. 291- H-K retail company which he bought early on in his investment career.

t) “Far better to buy a wonderful company at a fair price than a fair company at a wonderful price.“- pg. 388- Gurdon W. Wattles

u) Ovarian Lottery- pg. 646- trip to China with Bill Gates

Other notes from the book:

*WB’s memory for #’s is remarkable.  There are various points in the book where he recalls details about dates and numbers in business dealings he had had 30 years earlier.  I have also met other financially successful individuals and this is a trait that stood out in my mind with these people as well.

*Quote: “In the short run, the market is a voting machine.  In the long run, it’s a weighing machine.”

*Quote: “Praise by name, criticize by category.”

*On WB & Charlie Munger: “They thought alike and had the same fascination with business as a puzzle worth spending a lifetime to solve.  Both regarded rationality and honesty as the highest virtues.  Quickened pulses and self-delusion, in their view, were the major causes of mistakes.”

*WB’s focus: There are multiple sections of the book that describe WB’s focus.  In one instance he is on his plane with his family.  As the plane entered a period of turbulence he kept his nose down in his papers.

*On pg. 28-29 Schroeder writes out an average day for WB.  Worth finding the book to read for yourself.

*A hilarious practical joke WB played when he was younger.  Here’s his quote about it:  “I made up a letterhead from the American Temperance Union, Reverend A. W. Paul, President.  I’d write letters to people on that letterhead saying that for years I’d lectured around the country on the evils of drink, and in these travels my appearances were always accompanied by my young apprentice, Harold.  Harold was an example of what drink could do to men.  He’d stand there on stage with a pint, drooling, unable to comprehend what was going on around him, pathetic.  Then I said that, unfortunately, young Harold died last week, and a mutual friend had suggested that you might be a replacement for him.”

*By the time WB was a senior in high school he had the following income sources:
a newspaper route, calendar sales, magazines sales, golf balls, car buffing business, and pinball machines.  In each of these instances he’d fund the business and hire a “partner” to do the work.  With his work he was earning more money than his teachers.

*WB originally began as a stockbroker but did not like the conflict of interest  that was inherent in the stockbroker- client relationship.

*Investing in yourself for 1 hour each day- “Charlie (Munger), as a very young lawyer, was probably getting $20 an hour.  He thought to himself, ‘Who’s my most valuable client?’ And he decided it was himself.  So he decided to sell himself an hour each day.  He did it early in the morning, working on these construction projects and real estate deals.  Everybody should do this, be the client, and then work for other people, too, and sell yourself an hour a day.”

*On page 253 WB likens his value approach to investing as “buying dollar bills for forty cents…“.

*One of the main engines of growth for WB in his career is the ‘float’ money he receives through his insurance business.  Through ‘float’ his business received insurance premiums in advance of paying our claims.  During the time in which his insurance business had the money he was able to invest the funds and earn a return.  This profit on the money is what is known as ‘float’.  Banks also have a business structure that profits from ‘float’.

*Retail businesses are very difficult to invest in.  Charlie Munger explains: “Retail is a very tough business…  Practically every great chain-store operation that has been around long enough eventually gets in trouble and is hard to fix.  The dominant retailer in one twenty-year period is not necessarily the dominant retailer in the next.”

*WB’s methodology for buying stock/ companies: “…estimate an investment’s intrinsic value, handicap its risk, buy using margin of safety, concentrate, stay in the circle of competence, let it roll as compounding did the work.”

*From 1978 to 1983, the Buffett’s net worth increased from $89 million to $680 million.

*On page 514-515, the book describes the era of junk-bonds & hostile take-overs.  It sounded a lot like the 2003-2005 when financing was cheap.  The new name for “hostile take-over” however was “private equity”.

*Munger & WB on defining risk as volatility- they thought it was “twaddle and bullshit“.

*Schroeder provides a great explanation of derivatives on page 544.

*Chapter 48 covers the Salomon Brothers debacle where WB temporarily served as CEO.  In a great section of the chapter the author defines Munger’s term “thumb-sucking” as not speaking up or handling an problem as soon as it arises.  In the end leadership at Salomon at the time of the problems were guilty of “thumb-sucking”.  Had they acted fast and been transparent they likely would have avoided the issues.

*WB’s ‘front-page rule’ for conduct: “I want employees to ask themselves whether they are willing to have any contemplated act appear the next day on the front page of their local paper, to be read by their spouses, children, and friends, with the reporting done by an informed and critical reporter.”

*When asked what one factor was most important in getting to where he’d gotten in life WB said, “focus”.  It turns out that Bill Gates at the same dinner replied with the same answer.

*Schroeder describing WB’s focus: “This kind of focus couldn’t be emulated.  It meant the intensity that is the price of excellence.  It meant the discipline and passionate perfectionism that made Thomas Edison the quintessential American Inventor, Walt disney the king of family entertainment, and James Brown the godfather of soul.”

*The book covers briefly WB’s idea of the “institutional imperative” which is defined as, “the tendency for companies to engage in activity for its own sake and to copy their peers instead of trying to stay ahead of them.”  Obviously, WB isn’t too keen on buying companies that suffer from the institutional imperative.

*Munger & WB on using math models for investment decisions: “…using models to make investment decisions was like driving a car on cruise control.  The driver might think he was fully alert and attentive, but would find out differently when the road turned winding, rain-slicked, and full of traffic.”

*WB’s advice for college graduates: “…go to work for whom they admire the most.”

*As WB became more famous he got more demands on his time.  Here is how Schroeder described how he handled it:  “He did only what made sense and what he wanted to do.  He never let people waste his time.  If he added something to his schedule, he discarded something else.  He never rushed.  He always had time to work on business deals, and he always had time for people who mattered to him.”

*WB describes an ideal business: “The ideal business is one that earns very high returns on capital and that keeps using lots of capital at those high returns.  That becomes a compounding machine.  So if you had your choice, if you could put a hundred million dollars into a business that earns twenty percent on that capital-twenty million-ideally, it would be able to earn twenty percent on a hundred twenty million the following year and on a hundred forty-four million the following year and so on.  You could keep deploying capital at those same returns over time.“

Gladwell’s “Outliers”

Posted on by Evan in Book Reviews

Back in February I was able to convince my friend Kevin Hill to trade me his brand new hard bound “Outliers” by Malcolm Gladwell for my well worn paper-back Atlas Shrugged.  Thanks Kevin.

I read Gladwell’s previous book entitled “The Tipping Point” a couple years ago and enjoyed his unique perspective in explaining how trends are developed.  In this latest book Gladwell shifts that unique perspective into explaining how “outlying” events develop.

For Gladwell, an “outlier” is a person or event that happens outside of the norm.  In the book he uses examples such as the Beatles’ extraordinary music ability, Bill Gate’s extraordinary technological ability, and a plane crash.

In our media-driven and at times short-sighted culture these “outlying” events are often chalked up to innate ability, in which case the pocessor of this ability is considered to be extraordinaryly lucky.  Or, in the case of a plane crash, we often think that it is the result of an extremly unlucky occurance that causes the plane to malfunction.  The common theme between these events being the fact that they are the cause of chance (be it lucky or unlucky).

However, as Gladwell explains in his book these events are anything but chance.  In fact, they are often the result of 6-7 conditions coming together to create an environment where the “outlying” event will occur.

As he explains in the case of Bill Gates, it wasn’t that Bill Gates was gifted with some innate ability to program computers.  Gates was lucky in that he was born with an IQ that was high, but certainly not higher than many other computer programmers.  When he was in high school he was given an opportunity to that many other aspiring computer programmers were not given.  He was given virtually unlimited access to a computer in which he could practice programming (at that time computer access was expensive).  With this unique opportunity he capitalized by spending 8-10 hours per day for over a year practicing.  With all his practice he developed an expertise that in other era’s may not have resulted in much of a livlihood.  But, Gates developed expertise in an industry that was ripe for rapid growth just at the right time.  Had he been born 10 years earlier or later we may not even know his name.

As Gladwell explains in this example it is not just that Gates was born with a unique ability that no one else pocesses.  Instead, he happened to be smart, given an opportunity no one else had, took advanatge of it, and was in the right place at the right time.

In the case of a plane crash they tend to occur because of a set of circumstances much different from the manner that Hollywood films portray.  They generally occur not because of a single engine malfunction but instead because of a set of 6-7 conditions.  In the book he looks at specific crashes and how they were typically the product of 3-4 technical malfunctions which in and of itself would typically not be a problem.  However, when combined with other conditions such as a tired pilot, in bad weather, at an unfamiliar airport the results turn tragic.

In the conclusion of the book Gladwell writes a fascinating chapter in which he looks back on his own family history to see what factors from previous generations played a role in who he is today.  Interestingly, he discovers that among other factors the relatively light shade of his grandmothers skin likely played a part in his families history (had it been darker she may have been a slave in the fields of Jamaica).

For me, reading the book was an old-fashioned reminder that the decisions I make on a daily basis do indeed direct the outcomes in my life.  Furthermore, the decisions that I make can also lead down a path that will influence future generations.  Here are some more notes from the book-

*Confusing maturity with ability- Especially in sports, kids who are relatively older and therefore more mature often get picked as “all-stars” or labeled as “gifted” and are often exposed to better coaching/ teaching etc.  As a result, they develop into better athletes/ students or whatever later in life.  However, at the time they are selected it may not be that they are innately more talented than other kids.  It is likely that they are slightly older and therefore a little more mature.

*10,000 hours- Gladwell notes other studies which find that 10,000 hours of study/ practice is required to become a master or expert in a certain discipline.

*A direct correlation between IQ and success- “The relationship between success and IQ works only up to a point.  Once someone has reached an IQ of somewhere around 120, having additional IQ points doesn’t seem to translate into any measurable real-world advantage.”

*Family background and upbringing play a huge role in determining the welfare of a child in their later years.

*Setbacks may temporarily delay success for an “outlier”.  However, ultiumately setbacks provide opportunities that allow the outlier to springboard ahead.

*3 qualities that make work satisfying- “Those three things- autonomy , complexity, and a connection between effort and reward- are, most people agree, the three qualities that work has to have if it is to be satisfying.”

*Cultural legacies- language can impact development- In most Asian languages the vocabulary used for numbers are much simpler than in english where they are irregular (i.e. eleven, twelve, thirteen, fourteen….twenty-one, twenty-two, etc.).  As a result, children in Asian cultures develop fundamental math skills at a much quicker pace than their American counterparts.

*Summary found on page 267- “…success follows a predictable course.  It is not the brightest who succeed…Nor is success simply the sum of the decisions and efforts we make on our own behalf.  It is, rather, a gift.  Outliers are those who have been given opportunities- and who have had the presence of mind to seize them…  They (outliers) were born at the right time with the right parents and the right ethnicity…”

Moore’s “Bowerman and the Men of Oregon”

Posted on by Evan in Book Reviews, Evan's Sabbatical

I ran my first and thus far my only marathon here in Portland back in October.  Tina and I trained and ran the entire marathon together (BTW, we managed to run the entire course).

Much of the credit for our successful completion of the marathon goes to Tina’s friend and palates teacher Susan Schmidt.  Susan is a super-fit marathoner herself and passed along a ton of great knowledge during our training months.  We wouldn’t have done as well as we did without her assistance and motivation.

Before departing for our 6-month trip Susan also passed along the book “Bowerman and the Men of Oregon” by Kenny Moore to read while traveling.  The book is a biography of the legendary University of Oregon track coach Bill Bowerman.  I am super thankful that Susan gave me this gem because it’s a book I probably wouldn’t pick out for myself but after reading it am very happy that I did.

Prior to reading the book I only knew a little about Bill Bowerman.  During our training for the marathon Tina and I did a lot of running at the Nike campus which is only a mile from our house.  If you didn’t know, the Nike headquarters is on “One Bowerman Drive” in Beaverton, OR.  I knew he had coached Nike founder Phil Knight (after reading the book I now know that Bowerman was a co-founder as well) at University of Oregon but knew little about his life or his legacy.

The author of the book, Kenny Moore, was coached by Bowerman at University of Oregon and became close with him and his family.  As a result, he offers a truly unique perspective into the life and times of the University of Oregon legend.

What impresses me first about Bowerman was his conviction to his principles.  The book quotes Phil Knight as commenting about Bowerman in saying, “he was always wrong on his facts and right on his principles.” There are numerous stories throughout the book about Bowerman going to bat for his athletes which he coached.  He knew what was right and wrong and grew frustrated when faced with others who didn’t share in his opinion.

In another example Moore explains Bowerman’s technique for testing a person’s character- “Assigning mundane, even menial tasks was a test that Bill often applied.  Failing it might not cause Bill to disappear a team member, but it would lead to a kind of probation.”

The second aspect of Bowerman that impresses me was his ability to put things in perspective.  Everything he did was a small piece of something bigger that would ultimately become his legacy.  Moore explains, “Bill Bowerman was designed…to process.  The defining aspect of his life was preparation, not completion.  The house was always unfinished, the big meets were always grounding for bigger, the best shoes could always be made better.”

In another part of the book Moore writes about Bowerman after contemplating a decision that kept U of O from defeating an opponent in a track meet, “Bowerman would nod and acknowledge such natural regrets, but didn’t seem to share them.  He occasionally pointed out that victory is sweet, but you wake up the next morning and it has flown.  Similarly, defeat dissolved.  Occasionally his view was so long that it seemed a kind of enlightened disinterest.”

Beyond Bowerman’s personal characteristics it was also interesting to learn about the many other areas in which he impacted Oregon, Nike, and the US as a whole.

What was interesting to read while in New Zealand was the impact that this country had on Bowerman and on the US as a whole.  In 1962 Bowerman brought a group of his Oregon men to race against a group of NZ runners led by their coach Arthur Lydiard.  Upon showing up to NZ Arthur dragged Bill out on a jog everyday for the entire 6 weeks that he was there.  Arthur had started jogging groups in Auckland as a way for people to get exercise.

Upon his return Bowerman has lost 10 pounds and 3 inches off his waistline.  He was so impressed with the NZ joggers that he began recreational running clubs in Eugene in 1962.  This is thought to be the birth of recreational running in the United States.  To quote Bowerman on the subject of exercise, “To procrastinators who complain that they cannot afford the fifteen or twenty minutes a day, I echo the words of Arthur Lydiard: You cannot afford not to take the time.'”

Prior to reading this book I always thought that Phil Knight was the sole founder and inventor behind Nike shoes.  However, it was actually Bill Bowerman while at the University of Oregon who first designed and invented the shoes that Phil Knight would make billions$ on.  Not to worry, Bowerman also made a pretty penny off of Nike stock and served on the board of directors for 25 years.

All in all, the book was a great read and would be enjoyed by any Oregonian with a passion for sports.  I would highly recommend it.

Here are a few other quotes from the book.

-The author Kelly Moore remembers, “There are few things that can compare to being young and healthy and a part of a team that you want to be on, and doing well, as well as you could, and being proud.”

-A motto taken on by Bowerman and his friends as they aged and began to lose their memories, “Hey, Alzheimer’s isn’t so bad.  You meet new friends everyday.”

-Bowerman on his philosophy of training, “That’s all training is.  Stress.  Recover.  Improve.  You’d think any damn fool could do it…”

Ayn Rand’s “Atlas Shrugged”

Posted on by Evan in Book Reviews, Evan's Sabbatical

I began reading Atlas Shrugged, by Ayn Rand, on the flight from Portland to Los Angeles on the outset of my 6-month sabbatical with my wife.  I completed the 1,074 page novel on the flight to New Zealand at the conclusion of our European-leg of our trip.  WHAT A GREAT BOOK!  My only regret is that I didn’t read it sooner.  I was originally given this boheamouth of a book by a close friend after graduating from college but was always to intimated to start it.  I think this book makes an excellent gift to any college graduate!

The story follows the trials and tribulations of the US economy during a fictional period in which an overwhelming wave of socialist/ communist ideology comes to fruition.  As new economic policies are implemented the story follows the impact they have on “industrialists” who share a common conviction of free enterprise.  Through the dialogues Rand is able to articulate her own conviction for the tenants of “objectivism“, which is a philosophy she is credited for pioneering (or at least giving a title). 

There are two epic dialogues in the book that do well in summarizing Rand’s philosophy in my opinion.  If you do nothing else, find the book and read these two sections:

-The first occurs on pages 382-386 where the character Francisco d’Aconia, an industrialist, speaks to a group of “socialist” thinkers at a cocktail party.  Here is an excerpt:
    “Money is your means of survival.  The verdict you pronounce upon the source of your livelihood is the verdict you pronounce upon your life.  If the source is corrupt, you have damned your existence.  Did you get your money by fraud?…If so, then your money will not give you a moment’s or penny’s worth of joy.  Then all the things you buy will become, not a tribute to you, but a reproach; not an achievement, but a reminder of shame.”

– “They say it’s hard for man to agree.  You’d be surprised how easy it is- when both parties hold as their mutual absolute that neither exists for the sake of the other and that reason is their only means of trade.”

– “Did it occur to you, Miss Taggart…that there is no conflicts of interests among men, neither in business nor in trade nor in the most personal desires- if they omit the irrational from the view of the possible and destruction from their view of practical?  There is no conflict, and no call for sacrifice, and no man is a threat to the aims of another- if men understand that reality is an absolute not to be faked, that lies do not work, that the unearned cannot be had, that the undeserved cannot be given, that the destruction of a value which is, will not bring value to that which isn’t.” 

-The second occurs near the end of the book (pages 927-984) and for me is the pinacle of the story.  It is a speech given by John Galt to the nation given as a radio address.  Here is an excerpt:
    “Do not say that you’re afraid to trust your mind because you know so little…  Live and act within the limit of your knowledge and keep expanding it to the limit of your life…  Accept the fact that you are not omniscient, but playing a zombie will not give you omniscience- that your mind is fallible- that an error made on your own is safer than ten truths accepted on faith, because the first leaves you the means to correct it, but the second destroys your capacity to distinguish truth from error.”

and

    “Happiness is the successful state of life, pain is the agent of death.  Happiness is that state of consciousness which proceeds from the achievements of one’s values.”

Here are some other notable excerpts:

-Dagny Taggert asks Francisco, “…what’s the most deprived human being?”  His reply: “The man without purpose.”

-Francisco speaking to Mr. Reardon (two industrialists) on the subject of gaining trust-
    “…I don’t like people who speak or think in terms of gaining anybody’s confidence.  If one’s actions are honest, one does not need the predated confidence of others, only their rational perception.  The person who craves a moral blank check of that kind, has dishonest intentions, whether he admits it to himself or not.”

-Dr. Stadler speaking to Dagny on 1st sight of the motor reminents-
    “…do you know the hallmark of the second-rater?  It’s resentment of another man’s achievement.  Those touchy mediocrities who sit trembling lest someone’s work prove greater then their own.  They have no inkling of the loneliness that comes when you reach the top.  The loneliness for an equal- for a mind to respect and achievement to admire.  They bare their teeth at you from out of their rat holes, thinking that you take pleasure in letting your brilliance dim them- while you’d give a year of your life to see a flicker of talent anywhere among them.  They envy achievement, and their dream of greatness is a world where all men have become their acknowledged inferiors.  They don’t know that their dream is infallible proof of mediocrity, because that sort of world is what the man of achievement would not be able to bear.  They have no way of knowing what he feels when surrounded by inferiors- hatred?  No, not hatred, but boredom, of what account are praise and adulation from men who’m you don’t respect?…”

-Dagny Taggert’s principle-
    “Place nothing above the verdict of your own mind.”

-Dagny observing the luxury of simplicity she experienced in Mulligan’s home:
    “There was an art of luxury about the room, but it was the luxury of expert simplicity; she noted the costly furniture, carefully chosen for comfort…  There were no superflous objects, but she noticed a small canvas by a great master of the Renaissance worth a fortune, she noticed an oriental rug of a texture and color that belonged under glass in a museum.  This was Mulligan’s concept of wealth, she thought- the wealth of selection, not of accumulation.”

Heilbroner’s “The Worldly Philosophers”

Posted on by Evan in Book Reviews

My passion for economics was ignited in college thanks to my favorite professor Randy Grant (no disrespect to Jeff Summers because he was also a major influence).  For some reason economics was the one subject that made sense to me, almost as if it were intuitive.

Of all the great economics classes that Linfield had to offer two stood out as my favorites.  My favorite was environmental economics because of the interesting problems the subject posed (i.e externalities, individual vs. social cost-benefit analysis, free loading, etc.).

However, my second favorite economics class was, “This Evolution of Economic Thought”.  It was taught by Randy who later re-wrote the text with his doctoral professor Stanley Brue (if this is any indication as to what a dork I am I actually bought this text for myself for my 28th birthday).  It may also have been that this was my favorite class because it had the least intimidating final (trivial pursuit with economics questions).

That said, when Robert L. Heilbroner’s, “The Worldly Philosophers: The Lives, Times, and Ideas of the Great Economic Thinkers” was given to me as a gift for Christmas in 2007 I was excited to read it.  However, even given my excitement I didn’t manage to pick it up until Thanksgiving 2008.  But, once I picked it up I couldn’t put it down.

Economics is such an interesting science.  It is arguably one of the youngest sciences on the planet and therefore the history is very recent.  What I found most intriguing about Heilbroner’s account about the history of economic thought is how he associated the environmental impacts of his subject’s contributions to economic thought.

For example, in describing the contributions of Karl Marx he created the context under which Marx developed his philosophy (i.e. industrial revolution, exploitation of labor, etc.).

Second, Heilbroner dedicates a relatively large proportion of his book to lesser known “underground” economists who made important but somehow less noteworthy contributions to the subject of economics.

If you enjoy economics this is a great read.  If not, don’t bother.

Here are my notes:

*When times are tough people come together:

“…when the specter of starvation can look a community in the face…the pure need to secure its own existence pushes society to the cooperative completion of its daily labors.”

*During medieval times economics as a science could very well have been established.  However, as Heilbroner explains,

“…it had not yet conceived the abstract elements of production itself.  Lacking land, labor, and capital, the Middle Ages lacked the market…”

*During the middle ages the process of “enclosure” (privatizing of land for the purpose of raising sheep) caused land to be regarded as a valuable which is an important step in the concept of scarcity and the marketplace.

*Adam Smith wrote with a lot of humor in compiling the index of his The Wealth of Nations.

*Adam Smith’s most notable contribution from The Wealth of Nations:

“What he sought was, ‘the invisible hand,’ as he called it, whereby, ‘the private interests and passions of men’ are led in the direction ‘which is most agreeable to the interest of the whole society.”

*Great economists see society as an evolving process:

“To Smith and the great economists who followed him, society is not conceived as a static achievement of mankind which will go on reproducing itself, unchanged and unchanging, from one generation to the next.  On the contrary, society is seen as an organism that has its own life history.”

*Adam Smith believed that wealth accumulation was good because of the positive impact on society.

*Although many people believe that Adam Smith’s laissez-faire doctrine means that he was universally opposed to government intervention this is not necessarily the case.  Here is a quote from Smith:

“the understandings of the greater part of men are necessarily formed in their employments.  The man whose whole life is spent performing a few simple operations…generally becomes as stupid and ignorant as it is possible for a human creature to become unless the government takes some pains to prevent it.”

*However, Heilbroner goes on to write that Smith thought:

“The market must be left free to find its own natural levels of prices and wages and profits and production; whatever interferes with the market does so only at the expense of the true wealth of the nation.”

*Heilbroner writing about Thomas Malthus:

“For what the essay on population said was that there was a tendency in nature for population to outstrip all possible means of subsistence.”

*David Ricardo also had a negative outlook on natural developments in a market economy.  He felt that the interests of landlords ,”always opposed …the interest of every other class in the community…”

*David Ricardo was a gifted businessman.  Much like a modern day value investor:

“Sir John Bowring later declared that Ricardo’s success was based upon his observation that people in general exaggerated the importance of events.”

*According to Heilbroner, Ricardo’s biggest contribution to economic thought was the tool of abstraction.  By thinking of land, labor, and capital as abstract items economists were later able to build economic models.

*Utopian Robert Owen recognized the impact that a person’s environment can have on their behavior:

“…Owen was convinced that mankind was no better than its environment and that if that environment was changed, a real paradise on earth might be achieved.”

*In John Stuart Mill‘s text Principles of Political Economy he points out that the true province of economic law is production and not distribution.  He goes to associate laws of production as natural laws.

*In Karl Marx‘s Manifesto he differed from previous economic thinkers in that he saw communism as a logical conclusion to the developments in the economy rather than being a matter brought upon society as a choice.

*While writing about Marx and theories of economic fluctuations Heilbroner delivers this brilliant paragraph:

“A crisis does not mean the end of the game.  Quite the contrary….each crisis serves to renew the capacity of the system to expand.  Crisis-or a business slump or recession, in modern terminology-is therefore the way the system works, not they way it fails.”

*Critics of Marx later discovered that he made a major mathematical mistake in equating labor value & price.  As a result, he concluded that communism was eminent in his model.  In retrospect this is easy to dismiss as inaccurate.

*Following Marx economists began to focus their studies on more detailed aspects of the economics (i.e supply and demand, marginal utility) instead of the broad-based macro-view that previous economists had taken.

*Francis Edgeworth described humans as pleasure machines.  For him economics was defined to be,

“…the study of human pleasure-mechanisms competing for shares of society’s stock of pleasure…”

*Coincidentally, Heilbroner wrote this paragraph about Henry George‘s view on property speculation that sounds dangerously similar to today’s economic reality in the US (interesting to note that Henry George lived in California which is one of the hardest hit by the recent housing downturn):

“George was convinced that rent led inevitably to wild speculation in land values and just as inevitably to an eventual collapse which would bring the rest of the structure of prices tumbling down beside it.”

*Many critics of the Iraqi War have speculated that the source of US aggression was more about economic interests than threats to our freedom.  John Hobson probably would have agreed.  Here is Heilbroner on Hobson:

“Imperialism thus paves the way to war-not by swashbuckling adventures or high tragedy, but through a sordid process in which capitalist nations compete for outlets for their unemployed wealth.”

*Alfred Marshall‘s famous description of supply and demand (arguably his greatest contribution) per Heilbroner:

“Neither cost nor utility…could ever be quite divorced from the determination of price; demand and supply…were like ‘the blades of a pair of scissors,’ and it was as fruitless to ask whether the upper or lower blade of the scissors did all the cutting.”

*Two additional contributions from Marshall-  First, he believed an economy ultimately rested on the decisions of the individual.  This was a major shift in perspective.  Second, he did not focus on political influences.  He saw economics being independent of political influence.

*Heilbroner writing about the stock market crash of 1929- does his description bear any resemblance to the housing market today?:

“In retrospect it was inevitable.  The stock market had been built on a honeycomb of loans that could bear just so much strain and no more.  And more than that, there were shaky timbers and rotten wood in the foundation which propped up the magnificent show of prosperity.”

“And then there was the fact that the average American had used his prosperity in a suicidal way; he had mortgaged himself up to his neck, had extended his resources dangerously under the temptation of installment buying, and then had ensured his fate by eagerly buying fantastic quantities of stock- some 300 million shares…on margin.”

*During World War I John Maynard Keynes worked for the British Treasury in the area of foreign finances.  As a testament to his brilliance it was said:

“…men of ripe judgment have declared that Keynes contributed more to winning the war than any other person in civil life.”

*One of Keynes’s major contribution was his recipe for government spending during times of depression to help stimulate the economy.

*Joseph Schumpeter coined the term “entrepreneur” and saw their innovating activity as the source of profit in the capitalist system.

*Interestingly, Schumpeter agreed with Marx in that they shared the view that capitalist economies are bound to eventually fail.  However, they disagree on the path under which this occurs.  For Marx the process took place because of the collective uprising of the working class.  For Schumpeter it occurs because as the economy grows large corporations are erected.  Over time, the values of entrepreneurship and innovation (which create economic growth) are replaced with bureaucratic management.

*Heilbroner writing about Schumpeter’s view that economic analysis is subjective (hence, a person’s environment impacts their economic views):

“There is a ‘preanalytic’ process that proceeds our logical scenarios, a process from which we cannot escape, and which is inescapably colored with our innermost values and preferences.”

Thomas Friedman’s “Hot, Flat, and Crowded”

Posted on by Evan in Book Reviews

I was introduced to Thomas Friedman as a senior at Linfield College.  My finance professor invited a guest speaker in for a lecture.  I don’t remember who the speaker was or what the topic of the lecture either but I do remember he was raving about a book he had recently read entitled, The Lexus and the Olive Tree.  He recommended that we all read it so I picked it up.

With that book I came to appreciate Friedman’s ability to evaluate complex conditions from a “10,000 foot view”.  This is probably most evident in his book The World is Flat.  Each of these two books ends with somewhat of pessimistic conclusion that sounds much like a doctor telling a patient about their fatal illness that has little or no chance of healing.

This pessimism is absent in his newest release entitled Hot, Flat, and Crowded-Why We Need a Green Revolution and How it Can Renew America.  Instead, Friedman not only accesses the ills that face our environment but also recognizes the opportunity that the US has to lead the world in innovation and a more sustainable way of life.

Here are my notes:

*Friedman argues that the US has effectively become fat and lazy:

“In some ways, the subprime mortgage mess and housing crisis are metaphors for what has come over America in recent years: A certain connection between hard work, achievement, and accountability has been broken.  We’ve become a subprime nation that thinks it can just borrow its way to prosperity……”

*Friedman argues that as a nation we seem to think less about the collective national interest.  Furthermore, we fail to think long-term in a lot of areas.

*In the wake of ’73-’74 oil embargo we didn’t invest long-term in fuel alternatives to derive energy.  In contrast, Japan invested heavily in conservation while France invested heavily in nuclear power from which they get 78% of their energy today.

*In recent years the government has not asked for public involvement in fixing our problems.

*Friedman states:

the “….post 9/11 performance was one of the greatest squandered opportunities for American nation-building in our history.”

This is because the population was motivated to get involved but the government failed to ask.

*Royal Dutch Shell predicts that from 2008-2050 all forms of energy consumption will double.  However, I would guess it would double even faster than that.  At 5% growth consumption would double every 15 years (using the rule of 72).

*Projections of global warming:

“Since we can’t stop C02 emissions cold, if they continue to grow at just the mid-range projections, “the cumulative warming by 2100 will be between 3 and 5 degrees Celsius over pre-industrial conditions,” says the Sigma Xi report, which could trigger sea level rises, droughts, and floods of biblical scale…”

*Quoting an essay in the New York Times about consumption:

“A real problem for the world is that each of us 300 million Americans consumes as much as 32 Kenyans.  With 10 times the population, the US consumes 320 times more resources than Kenya does…”

*Friedman discusses the concept of a “cradle to cradle” economy in which everything is recycled.  Instead of buying things people would lease them.  For example, instead of buying an appliance, a person would lease it from the manufacturer.  Once it had ended it’s useful life it would be returned to the manufacturer who would then reuse the material.  This would shut down on resource consumption.

*More on “over-consumption”:

“…the average American consumes enough energy to meet the biological needs of 100 people…..By comparison, China and India currently consume approximately 9-30 times less energy per person…”

*Peter Schwartz sums up America’s energy policy for oil:

“Maximize demand, minimize supply, and make up the difference by buying as much as we can from the people who hate us the most.”

*Friedman argues that 9/11 was a missed opportunity for the US to “end our addiction to oil” because we could have asked the population to participate in the sacrifices in the name of patriotism.

*Friedman points out that the style of Islam that benefits from the oil infrastructure of the middle east is one which is much more “puritanical” than the “softer-edged” Islam which is more prevalent in areas such as Egypt.  It got me thinking, I wonder if there exists a positive correlation between the incidence of terrorism & the price of oil (the argument being that when the price of oil increases>money flows into more fundamental Islamic messages which translates into more terrorist attacks).

*On the next page (pg. 94) Friedman draws a negative correlation between the price of oil and political freedom in the middle east.

*Friedman on the benefits of renewable energy:

“…the world will be a better place politically if we can invent plentiful renewable energy sources that eventually reduce global demand for oil to the point where even oil-rich states will have to diversify their economies…”

*Friedman on “going green”:

“That is why going green is no longer simply a hobby for high-minded environmentalists…It is now a national security imperative.  Any American strategy for promoting democracy in an oil-rich region that does not include a plan for developing renewable energy alternatives that can eventually bring down the price of oil is doomed to fail.”

*Ray Kurzweil suggests that people have difficulty grasping exponential change.  This got me thinking that this is why people have difficulty saving money for retirement (which earns exponential returns in the form of compound interest).

*Friedman on pricing in externalities:

“Because in a world that is hot, flat, and crowded-where energy, water, land, natural resources, and energy resources are all being stressed- everybody, in time, is going to be forced to pay the true cost of energy they are using, the true cost fo climate change they are causing, the true cost of biodiversity loss they are triggering, the true cost of the petrodictatorship they are funding, and the true cost of the energy poverty they are sustaining.”

*Friedman is not suggesting that small incremental changes in how we conduct our lives will make a difference.  Instead, he believes a systematic overhaul is needed:

Jonathan F.P. Rode: “Optimizing individual components can only lead to incremental change; optimizing the system can lead to a transformational ecology.”

*Friedman believes that a “green movement” DOES NOT have to work against the economy.

*Under a regulated marketplace, “Utilities made their money by building stuff- more power plants and more power lines that enabled them to sell more and more electrons to more and more customers- because they were rewarded by their regulators with increased rates on the basis of those capital expenditures.  (Instead of being rewarded for increasing efficiency)

*Friedman on creating incentives in place of regulations:

“We are not going to regulate our way out of the problems of the Energy-Climate Era.  We can only innovate our way out…”

*When oil prices fall, it places a dis-incentive on energy innovation.  Friedman suggests a variable tax which would place a floor price on a barrel of oil at $100.  When the free market price for oil drops below $100 a tax would be imposed to bring it up to $100.  This would create a permanent incentive for innovation to replace oil.

*Bubbles create rapid innovation in the industry that is experiencing the bubble.

*Machiavelli on the courage of leading:

“It ought to be remembered that there is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introducing a new order of things…”

*Friedman makes the argument that a gasoline/ carbon tax would increase the cost and encourage green innovation.  The problem is that taxes are unpopular.  Friedman’s suggests that if framed properly the American public may support such a tax.  He suggests that we are currently being taxed but that we’re being taxed by Saudi Arabia, Iran, Russia, Venezuala, “and if we continue on this track…Mother Nature”.

*I read the book Natural Capitalsim by Armory Lovins & Paul Hawken a while back.  One of the major themes of that book is that green innovation often comes with unintended benefits.  Friedman also highlights this theme by writing about the GE diesel locomotive.  GE designed this new locomotive in response to stricter EPA emission standards.  The GE design not only reduced emissions but also improved fuel efficiency which has improved their competitive position in that industry.

*Pollution= Waste:

“…pollution is simply waste:wasted resources, wasted energy, wasted materials.  Companies that eliminate such waste will be using their capital, technology, and raw materials more productively to generate maximum value and, therefore, will become more competitive.”

*Texas Instruments plant.  Friedman uses a new wafer plant that Texas Instruments built a few years ago as an example of how energy efficient buildings can not only be cheaper to operate but cheaper to build.

*Friedman also discusses how LEED certified buildings are shown to have higher occupancy rates, rental rates, and values.  However, per his previous point, they may not be any more expensive to build.  Therefore, as soon as real estate developers understand this more LEED buildings should be constructed.

*On the topic of utilities Friedman points out that the current incentive system DOES NOT promote efficiency.  He believes that,

“The ideal situation is that the utility makes more money by pushing you to save more electricity- so the utilities profits go up and the customer’s total bills actually goes down…”

*Breakdown of US’s current sources of energy production:

“….right now about half of America’s electricity comes from burning coal, 20% from nuclear power, 15% from burning natural gas, 3% from burning oil, 7% from hydropower, and 2% from burning wood and geothermal, solar, and wind sources.”

*Friedman points out that he believes that conservation and a healthy economy can exist.  In fact, political leaders must establish policy with ecological and “people” considerations in mind.

*Here’s an interesting point that I thought was interesting (parents take note):

“Biological, health, and economic data indicate that children who connect with nature perform better in school, have higher SAT scores, exhibit fewer behavioral challenges, and experience fewer attention deficit disorders.”

*Friedman arguing for the long-term value of wind and solar energy production:

“Solar and wind power may be more expensive to install today, but the price of fuel- sun and wind- are fixed.  They will be free forever.  Fossil fuel systems may be cheaper to install today, but the prices of these fuels- coal, oil, and natural gas- are constantly fluctuating, and with carbon taxes of one kind or another part of the future and demand for these fuels steadily rising, in America and elsewhere, they are clearly headed upward in price.”

*When people measure their consumption it becomes behavior-changing.  For example, those who track their spending habits make decisions to spend less money.  Thos who track their consumption of energy make decisions to consume less.

*Friedman believes that the government should fund research to create breakthroughs.  The free market can take it from there:

“Government’s job is to seed the research that will produce the sorts of fundamental breakthroughs in chemistry, materials science, biology, physics, and nanotechnology that open the way for whole new approaches to solving energy problems….  Venture capitalists can then pick off the most promising ideas and try to commercialize them.”

*Friedman describes the problems in the bureaucracy of utility of improvements.  Specifically he tells the story of a project in California that started in 2002.  The construction timeline is only 2 years.  However, they don’t expect to be done until 2013 because of the permitting process.

*Michael Mandelbaum, a Johns Hopkins professor, makes an interesting point on why long-term environmental interests are not represented in the political process.  Climate change pits:

“…the present versus the future-today’s generation versus its kids and unborn grandchildren.  The problem is, the future can’t organize.  Workers organize to get workers rights.  Old people organize to get health care.  But how can the future get organized?…”

*Friedman responds to Mandelbaum’s point by answering:

“An unusual situation like this calls for that ethic of stewardship…”

*The current system for energy regulation needs to be streamlined into a common oversight entity.  Here’s a snapshot of the current framework:

“Local and regional utilities…are regulated by states…  The Environmental Protection Agency oversees air quality, water quality, and fuel quality standards.  The Department of Transportation…is responsible for setting auto and truck mileage standards.  The Department of Energy’s Office of Science is the biggest source of funds in the country for energy research.  And the DOE has responsibility for setting efficiency standards for appliances and the national model building code.  The Department of Agriculture has a big say in ethanol production.  The US Army Corps of Engineers oversees the building and maintenance of many of our hydroelectric damns, while the Fedral Energy Regulatory Commission oversees interstate electricty transmission lines and the Nuclear Regulatory Commission regulates the building and operation of nuclear power plants.  It’s the president’s Council of Economic Advisers that rules on the economic viability of any energy initiative.”  (it actually goes on-see page 408 of hardback edition)

Studs Terkel’s “Hard Times”

Posted on by Evan in Book Reviews

Although I had heard of Studs Terkel prior to his death in October I was not familiar with his work. Upon his passing in October 2008 I read and watched a couple tributes to him by various journalists. When I learned that he specialized in “oral history” I was intrigued.

Given the economic downturn we find ourselves in today I thought it might be interesting to pick up his book Hard Times which is an oral history of the Great Depression.  Written in 1970 the book is a series of interviews with hundreds of people recalling their experiences in the Great Depression.

The diversity of experiences is striking.  Most of the people that Terkel interviews recall stories of economic hardship.  Many of the men left their families to “hobo” around the country looking for work.  However, on page 79 William Benton recalls his experiences during the 1930s which included making $2 million per year.

Here are some notes from the book:

*Jim Sheridan recalls there being greater camaraderie during the Great Depression than there was at the time of his interview.  This is also something that my grandmother talks about.  As I talk to people today about the economy and the new political direction our country is taking many of them are hopeful that society will “come together” to make things better.  When times are tough it seems like people take greater care of each other.

*E.Y. Harburg recalls that during the depression she lost all her possessions which forced her to use her creativity.  This represents another byproduct of difficult times.

*A man named Roy speculated that a depression today would hurt society more than it did in the 1930s.  His rational is that because we take so many things for granted we wouldn’t know what to do with ourselves.  I’m not so certain.  I think we would make it through.

*It was interesting to read many of the people’s thoughts regarding the depression because in a lot of ways there are similarities to what people are thinking today.  Here are a couple quotes that you could just as easily read in today’s newspaper:

“…the American way that seemed so successful.  All of a sudden, things broke downand didn’t work.  It’s a difficult thing to understand today.  To imagine this system, all of a sudden- for reasons having to do with paper, money, abstract things-breaking down.”

“the market went down again…The public got scared and sold….Over speculation was the cause, a reckless disregard of economics.”

* The depression made people appreciate security:

“…there’s a conditioning here by the Depression.  I’m what I call a security cat.  I don’t like the job I have, but I don’t dare switch….I won’t hang around with failures.  When you hang around with successful people, it rubs off on ya.

*Another positive byproduct of the difficult times as explained by Country Joe McDonald:

“I travel around and talk to some of the Mexican migrant workers.  In a way, they seem closer to each other than most well-off middle-class people.  Their impoverished condition somehow made them very real people.  It’s hard to be phony when you haven’t got anything.  I mean when you’re really down and out.  I think the Depression had some kind of human qualities with it that we lack now.

*William Benton was probably the most interesting interview in the book for me.  This man thrived during the Great Depression selling his advertising business in 1935 for multi-million dollars.  He described his time during the Depression as “Progress through catastrophe”.  It was a great reminder that even in difficult times it is possible to do well.

*Martin DeVries recalled that had people been more fiscally responsible in the late 1920s the Depression may not have happened.  Likewise, had people made better decisions about lending money, borrowing money, and speculating on real estate the same could be true about the turmoil we find ourselves in today.  Here is Martin’s quote:

“…But many of them hadn’t lived properly when they were making it.  They hadn’t saved anything.  Many of them wouldn’t have been in the shape they were in, if they had been living in a reasonable way.  Way back in the ’29s, people were wearing $20 silk shirts and throwing their money around like crazy.  If they had been buying $2 shirts and putting the other $18 in the bank, when the trouble came, they wouldn’t have been in the condition they were in.”

*During the Depression soe households would open up their basements for people to stay who were down and out.  Since they couldn’t get jobs to pay rent they would “work around the house”.

*A women named Dorothe recalls that, “The faith people had in each other was different” during the Depression.

*Lary Van Dusen recalls:

“The Depression left a legacy of fear, but also desire for acquisition- propery, security.  I now have twenty times more shirts than I need, because all during that time, shirts were something I never had.”

*During the presidential campaign many people compared Obama to Kennedy.  However, listen to this quote and think about any similarities to the conditions underwhich FDR was elected:

“It was the hopeful voice of FDR that got things out of the swamps.  He didn’t have much to offer, but it was enough.  He was a guy flexible enough to understand the need for experiments, for not being rigid and for making people feel there was somebody who gave a damn about them.”

*One miscelaneous point that I found interesting was that bike racing was appaerntly a fairly popular sport prior to the Depression.  During that time it lost its popularity and was never able to come back.

*Dr. Nathan Ackerman speculates:

“I think a depression today would have a paradoxical effect, at least temporarily.  Political upheaval, on one hand- and bringing people closer together, on the other.  Greater consideration for one another.”

Borrow Smart Retire Rich

Posted on by Evan in Book Reviews

Todd Ballenger is now a professional author and speaker but his career began in the financial services industry.  In fact, during his career he has held licenses to act as a Realtor, life insurance agent, financial planner, and mortgage loan officer.

His unique perspectives from each of his endeavors has led him to create what he calls his, “7-step process for managing the wealth in your house” which he outlines in his book Borrow Smart Retire Rich.

Here are my notes & lessons from the book:

* In 2005 real estate equity accounted for 61.2% of the average US household’s net worth (over the time period 1952-2005 the average was 19.9%.

*Waiting to buy a home can prove a costly mistake.  I blogged about this concept at this link.

*Financial advisers typically seek to balance their clients’ assets based on their desire for safety, liquidity, and return.  You can also apply these criteria when making decisions regarding the best mortgage structure on a house.

*Net worth: Most people understand that a household’s net worth is equal to: Assets – Liabilities.  However, most people don’t realize that the specific location of their assets and liabilities is an extremely important concept on the path towards wealth creation.  Here is a link to a blog posting about this concept.

*Playing defense in a depreciating market: “The key to avoiding loss of wealth in a depreciating market is having the flexibility to wait for the market to recover.” For me this means having liquidity.

*Home equity is not a very “liquid” asset.  The only way to access your homes equity is to sell it or take a loan out against it.

*Life events which can impact a person’s ability to access their home’s equity through a loan:

a) Job loss/ Career Change

b) Lawsuit against homeowner

c) Forced early retirement

d) Income changes

e) Disability

f) Death

g) Home value change

h) Tax lien

i) Marriage/ divorce

j) Identity theft

k) Collection

l) Judgement

*Making principal payments: See this blog posting.

*House equity has no return on investment: “If you invest $40,000 and the investment is still worth $40,000 after 30 years, your investment has earned a 0% return.  It has had no growth.  Thus, the ability of your house to influence your net worth boils down to whether or not the house’s value appreciates or depreciates over time.”

* Net after tax borrowing cost: “When you borrow money against the value of your house at 7%, the lender will earn a 7% return.  If you are in a 32% federal and state tax bracket, and your interest is tax-deductible, then….your actual cost of borrowing is 4.76%.”

*On paying off the mortgage versus saving the money: “…many of us with a mortgage believe that the mortgage should be paid off before we start getting serious about saving.  However, that approach has some hidden costs.  For one thing, it means losing time to allow investment earnings to compound.”

*Calculating the cost of prepaying the mortgage versus saving-click this link for more

*The idea of shifting wealth away from the home and into savings/ investments which earn a higher EPR comes with “discipline risk”.  This is the risk that the homeowner will not use the savings productively and will instead use it to consume non-appreciating goods.

* Buying a house 100% with cash employs no leverage.  If one uses a mortgage to buy a home then leverage is employed enhancing return on investment.

* Factors that go into determining how much leverage to use in buying a home:

a) Risk Tolerance

b) Time Horizon

c) Net after tax cost of borrowing

d) Need for liquidity

e) Goals for real estate

* Ballenger equates equity in one’s home to bond holdings in evaluating a household’s investment mix.  This is because equity represents money invested in the house which saves on interest expense at a rate similar to long bonds.

*Click this link for a great metaphor about learning to manage wealth.

* Using a strategy to reposition equity away from the house and into assets out of the home (that carry a higher return than the net cost of borrowing) can create substantial wealth over time.  However, a more traditional amortizing loan may prove to be a better option for a household that does not display discipline with their spending habits.

* Option payment ARMs represent the most effective tool for building wealth so long as the rate of return on equity invested outside of the home exceeds the net cost of borrowing AND discipline is exercised.

*Click this link to learn about financial arbitrage and how it applies to borrowing out of necessity and borrowing out of opportunity.

*Click this link to learn about why every home purchase is made with 100% financing.

*Top reasons for a new mortgage (and hense an annual mortgage review)

a) Deciding to sell your house sooner than expected OR deciding to stay in a home longer.

b) Deciding to remodel

c) Change in marital status

d) Birth of a new baby

e) Change in income

f) Change in tax status

g) Inheritance

h) New investment or business opportunity

i) Change of employment or job location

j) Major illness

k) Change in value of home

l) Change in interest rates

Phil Fisher’s “Common Stocks and Uncommon Profits”

Posted on by Evan in Book Reviews, Investing, Personal Finance

Common Stocks and Uncommon Profits is considered to be Phil Fisher’s signature book on investing. This investment classic was originally published in 1958 but the content is timeless.

In this book Fisher describes his unique investment criteria which is more growth oriented than the value approach that I have been more interested in as of late. However, despite the difference in investment objective Fisher has plenty of valuable insights to share about his research approach which is much more qualitative in nature than Graham’s & Dreman’s.

I was initially introduced to Phil Fisher by reading The Warren Buffet Way by Robert Hagstrom, Jr. In Hagstrom’s book he describes Warren Buffet’s investment philosophy as a synthesis between the Benjamin Graham & Phil Fisher.

In my quest to learn everything I can about Warren Buffet and his investment approach I naturally had to read this investment classic.

Lesson’s/ Note’s from Common Stock and Uncommon Profits:

* You can get an idea of how Fisher views “stockbrokers” in his humorous description- “men who know the price of everything and the value of nothing.”

* On patience- “…it is often easier to tell what will happen to the price of a stock than how much time will elapse before it happens.”

* On buying companies and sticking with them- “ ….finding the really outstanding companies and staying with them through all the fluctuations of a gyrating market proved far more profitable to far more people than did the more colorful practice of trying to buy them cheap and sell them dear.”

* On stocks vs. bonds- “Bonds have become undesirable investments for the strictly long-term holdings of the average individual investor.”

* On causes of inflation- “It seems to me that if this whole inflation mechanism is studied carefully it becomes clear that major inflationary spurts arise out of wholesale expansions of credit, which in turn result from large government deficits greatly enlarging the monetary base of the credit system.”

* “Scuttlebutt”- This is the word Phil Fisher uses to describe his method of interviewing various people with ties to a specific company to learn more about the firm’s prospects. These individuals may include competitors, suppliers, customers, “scientists” (research and development), industry analysts, etc.

* Fisher’s 15 points- These 15 points represent the criteria that a company must meet in order to be an attractive investment. Fisher admits that a company may not need to meet ALL 15 of these criteria but certainly should meet most of them.

* Point 1- Does a company have products or services with growth potential?

→ Measuring growth- “….growth should not be judged on an annual basis but, say, by taking units of several years each.”

→ “These companies which decade by decade have consistently shown spectacular growth might be divided into two groups….I will call one group…fortunate and able and the other group….fortunate because they are able.” Good investments are those that are fortunate because they are able.

→ On management- “…the investor must be alert to whether the management is and continues to be of the highest order of ability; without this, the sales growth will not continue.”

* Point 2- Does management have a determination to continue to develop products or processes that will further increase sales after existing products and processes have been exploited?

→ Google?- “The investor usually obtains the best results in companies whose engineering or research is to a considerable extent devoted to products having some business relationship to those already within the scope of company activities.”

* Point 3- How effective are the company’s R & D efforts in relation to its size?

* Point 4- Does the company have an above-average sales organization?

* Point 5- Does the company have a worthwhile profit margin?

→ a comparison of profit margins should be made “for a series of years.”

→ boom years vs. slow years- During boom years in an industry the marginal companies will grow profits at a quicker pace than more favorable companies. This is because in less prosperous times the marginal companies are not as profitable. Be aware of this when comparing profit margins.

* Point 6- What is the company doing to maintain or improve profit margins?

* Point 7- Does the company have outstanding labor relations?

* Point 8- Does the company have outstanding executive relations?

* Point 9- Does the company have depth in its management?

* Point 10- How good are the company’s cost/ accounting controls?

* Point 11- Are there aspects of the business which make the company outstanding to its competition?

→ I think of this as the concept of a “moat” which Buffet often looks for in a company.

* Point 12- Does the company have a short-range or long-range outlook in regard to profits?

* Point 13- In the foreseeable future will the growth of the company require sufficient equity financing that will cause dilution which will ultimately cancel out current stockholders benefit?

* Point 14- Does the management talk freely to investors about its affairs when things are going well but “clam up” when troubles occur?

→ This is another are where I think Fisher had great influence on Buffet.

* Point 15- Does the company have management of unquestionable integrity?

* On growth vs. value- “The reason why the growth stocks do so much better is that they seem to show gains in value in the hundreds of per cent each decade. In contrast, it is an unusual bargain that is as much as 50 per cent undervalued.”

* A stock should be purchased when, “a worthwhile improvement in earnings is coming in the right sort of company, but that this particular increase in earning has yet produced upward move in the price of that company’s shares. I believe that whenever this situation occurs the right sort of investment may be considered to be in a buying range.”

* On when to sell- “This is when a mistake has been made in the original purchase and it becomes increasingly clear that the factual background of the particular company is… less favorable than originally believed.”

* On emotion- do not let ego enter into investing decisions. When an investment goes bad admit you were wrong and take your medicine (sell).

* On learning from mistakes- Fisher encourages investors to learn from their mistakes.

* Never sell a stock simply because it has significant outstanding gains. Fisher provides an analogy about a class of students. As an investor you are able to “buy” the future income stream of one of the students. As an investor you buy the student who had the brightest prospects. If this student goes onto law and school and becomes a highly paid lawyer you wouldn’t necessarily sell the stock in this student after they had made a lot of money in their career because it is likely that this person still has the highest income potential.

* On dividends- Fisher, like Buffet, concerns himself more with return on capital than on dividends paid.

* On diversification- Like Buffet, Graham, and many other value investors Fisher believes that investors should concern themselves with investing in good companies more than in many companies.

* On diversification- “Usually a very long list of securities is not a sign of the brilliant investor, but of one who is unsure of himself.”

* Buying best firms in un-favor industries- Although Fisher is not considered to be your classic value investor he does recognize that trends and fads do appear in the financial markets. Because of that he advocates for buying best firms in out-of-favor industries.

* On finding investment ideas- For Fisher, the most valuable source of investment ideas was in talking with other investment professionals whose opinions and knowledge he respected.

* In order to be a successful investor one must have “great effort combined with ability and enriched by both judgment and vision.”