Financial Essay: A Few Thoughts on Banks

A Few Thoughts on Banks - Joel Stevens, June 7, 2018

This essay discusses the current state and potential returns for the large four U.S. banks.

Rational Enlightenment Essay: Seeking Wisdom

Seeking Wisdom

Better Behavior and Interpretations

Any year that passes in which you don't destroy one of your best loved ideas is a wasted year.

Charlie Munger

Every so often, I think about my former self, and there’s always at least one behavior or assumption that just makes me think: “How could I have been so stupid?”.  Of course, at the same time, I usually think that now I’ve got it mostly figured out, and I won’t have a nasty surprise later—except that somehow, the same cycle repeats the next time.  Sadly, it took me quite a few iterations to realize that I’m pretty much always doing something stupid; I just haven’t figured out what it is yet.  Clearly, the trick is to be self-aware enough to identify the current idiocy now rather than waiting to figure it out later! Given that the new year is upon us, I thought it might be helpful to review some of my own past mistakes, as it might be helpful to others.

Interpretations

For most of growing up and even into my early adult life, I assumed my behavior and language would be interpreted by others in a fairly specific manner. First, I assumed that those who did not know me would interpret me in a neutral or slightly negative manner.  For example, if I were to say or do something rude, then these people would judge me to be a rude person.  Perhaps more subtly, if I were to say something that could be interpreted negatively even when that wasn’t my intention, then it would likely be interpreted in the more negative manner.  This assumption still seems to make sense to me, as in my experience people do not tend to give the benefit of the doubt except to those that have shown they deserve it.  So this first assumption seems to be fairly well founded at this point in my life.

For those that were close to me, it seemed logical to give them the benefit of the doubt and interpret them as positively as possible, and since this was my underlying belief, I assumed they would also interpret me in the same manner.  Said another way, I assumed that those I was closest to would always interpret my behavior in the way that it was intended rather than the neutral or negative lens I assumed for strangers.  This line of thinking seemed to make sense to me at the time, since they loved me, and shouldn’t love include interpreting someone in the best possible manner?

Over time, I’ve realized that while this assumption is true to some extent, it doesn’t always hold.  As usual, reality is more nuanced—the interpretations I received depended on many factors, such as the type of relationship, the psychological health of the people involved, whether they were having a good day or a bad day, whether they were distracted, or even if they were in the dreaded ‘hangry’ state.  Moreover, this faulty assumption resulted in some strange behavior on my part, in retrospect.  For strangers or acquaintances, I put effort into interactions, trying to be careful of how I said things, how my behavior might be interpreted, and how my behavior might make them feel.  For my loved ones, this effort did not seem necessary—why waste all that energy, since they would interpret me positively anyway?  As some more extreme examples: if my best friend came up with a business idea that I didn’t think was particularly good, I’d say that bluntly, similar to how I would think to myself.  If my dad said something I didn’t think made sense, I’d argue until it was resolved—after all, I don’t tolerate internal inconsistencies in myself, so why tolerate them with him? 

The results of both the assumption and the resultant behavior are probably obvious to the reader at this point, but they were confusing for my younger self.  Many times I hurt people’s feelings without knowing why, or I would try to do something positive, only to be interpreted in a bewildering way.  As I reflect now, I’m surprised at the extent to which this behavior was tolerated.  The reality is that those I was closest to were more affected by and more sensitive to my unfiltered behavior than the strangers I tried to protect.  Thus, while my loved ones probably did interpret me in a more positive way, I had reached the wrong conclusion—more care and consideration should be taken for those you are closest to.

Being Better

On interpretations, I believe even more that it is important to interpret loved ones as positively as possible—presumably those that are closest have earned that spot, and positive interpretations only make everyone’s life easier and better.  With regard to behavior, I think it is important to be kind to everyone, but doubly so for those that are closest.

On the broader point of rooting out poor behavior, I started with a Munger quote and finishing with his comments on destroying bad ideas seems fitting—to quote him yet again, “I have nothing to add.”

Well I've done so many dumb things that I'm very busy destroying bad ideas because I keep having them. So it's hard for me to just single out one from such a multitude. But I actually like it when I destroy a bad idea because...I think it's my duty to destroy old ideas. I know so many people whose main problem of life, is that the old ideas displace the entry of new ideas that are better. That is the absolute standard outcome in life. There's an old German folk saying...'We're too soon old and we're too late smart.' That's everybody's problem. And the reason we're too late smart is that the stupid ideas we...already have, we can't get rid of!...in most fields you want to get rid of your old ideas. And it's a good habit, and it gives you a big advantage in the competitive game of life since other people are so very bad at it. What happens is, as you spout ideas out, what you're doing is you're pounding them in. And so you get these ideas and then you start agitating and saying them and so forth. And of course, the person you're really convincing is you who already had the ideas. You're just pounding them in harder and harder…The price we pay for [not] being able to accept a new idea is just awesomely large. Indeed a lot of people die because they can't get new ideas through their head. 

December 31, 2017
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Financial Essay: Evaluating Performance

Evaluating Performance - Published by Joel Stevens on October 30, 2017

This essay discusses the drawbacks of using trailing returns to evaluate performance and proposes a different statistical method instead. This method is then applied to the investment records for a variety of famous value investors.

Financial Essay: Measuring Returns

Measuring Returns - Published by Joel Stevens on January 5, 2017

This essay discusses various methods of calculating returns--simple rate of return, time weighted rate of return, and internal rate of return. In particular, the essay shows how each return is calculated, discusses common uses of those returns, and provides illustrative examples.

Rational Enlightenment Essay: No Will

No Will

A Path to Right View

Be kind, for everyone you meet is fighting a great battle.

Reverend John Watson

In Free Will, Sam Harris does an elegant job of dispelling the illusion of free will, which I have taken the liberty to dub ‘no will’ for the sake of brevity.  Primarily, Harris presents arguments against our having any conscious control over the actions we take as well as the societal implications of the recognition of that fact, particularly on our penal system.  Although he briefly mentions the positive impact of the framework of ‘no will’ personally, I believe that fully embracing this understanding causes a sea change in how we view the world, akin to the ‘Right View’ teachings of Buddhism.

Summary of No Will

There are three main arguments against free will, each strong enough to dispel it alone.  First, there is experimental evidence that consciousness only reflects decisions that have already been made at a lower level in the brain.  As Harris is a neuroscientist, I believe his summary is better than one I can provide:

The physiologist Benjamin Libet famously used EEG to show that activity in the brain’s motor cortex can be detected some 300 milliseconds before a person feels that he has decided to move.  Another lab extended this work using functional magnetic resonance imaging (fMRI): Subjects were asked to press one of two buttons while watching a “clock” composed of a random sequence of letters appearing on a screen.  They reported which letter was visible at the moment they decided to press one button or the other.  The experimenters found two brain regions that contained information about which button subjects would press a full 7 to 10 seconds before the decision was consciously made.  More recently, direct recordings from the cortex showed that the activity of merely 256 neurons was sufficient to predict with 80 percent accuracy a person’s decision to move 700 milliseconds before he became aware of it.

Thus, it appears that the decisions we make are not decisions at all, but instead the recognition of decisions other parts of our brain have already made. 

However, even if we ignore this finding or it is later refined in some manner, we are still left with the fact that our current state is the result of previous causes and effects outside of our influence.  It is telling that psychologists have argued whether our behavior is the result of nature or nurture, neither of which we control.  We do not have any choice over who our parents were, the particular set of genes we inherited from them, or the manner in which we were raised.  We also have little or no control over the external events that impact our lives.  How can we then say we have any influence over the current state of our bodies or minds, which results in the behaviors we undertake?

Finally, borrowing again from Harris, ‘no will’ can be understood simply through paying close attention to our own conscious experience.  What is the next thought you are going to have?  You don’t know.  Where will that thought have come from?  You don’t know.  Take a moment to try to control your thoughts.  How did that go?  Let’s take it one step further—try not to think about Dumbo for the next minute.  Did you have control over my mentioning a flying elephant?  Were you able to stop yourself from thinking about him?  If we are unable to predict or control our conscious thoughts, how could we be in control of the decisions we make even if we assumed our consciousness were in charge of the decision in the first place?

A Tragic Example

Charles Whitman was born in Florida in 1941, the eldest of three children.  He was intelligent, having an IQ of 139 at age six, proficient at piano, and earned the rank of Eagle Scout by age 12.  His father was an authoritarian and often physically and emotionally abused him, his mother, and his siblings.  After high school, he joined the Marine Corps and was reportedly well liked.  During his service, he earned a Good Conduct Medal, a Sharpshooter’s Badge, and an Expeditionary Medal.  Later, he married his wife and enrolled as a student at the University of Texas.  At some point during this time, a tumor began growing in his brain and he became increasingly aggressive.  It seems clear that he was ashamed of this behavior—two of his friends reported that he had told them of striking his wife on two occasions and was “mortally afraid of being like his father”.  He admonished himself in his journal and wrote a daily guide for himself that included: “CONTROL your anger…Don’t let it prove you the fool.  SMILE—It’s contagious.  DON’T be belligerent.  STOP cursing.  CONTROL your passion; DON’T LET IT lead YOU.”  He also visited a psychiatrist to discuss his issues and reported urges to “start shooting people with a deer rifle”.  Unfortunately, this urge was not seen as an imminent threat—he then killed his wife and mother and climbed the tower at UT, killing 14 people and wounding 32 others.  Before doing so, he wrote the following (emphasis added):

I don’t quite understand what it is that compels me to type this letter.  Perhaps it is to leave some vague reason for the actions I have recently performed.  I don’t really understand myself these days.  I am supposed to be an average reasonable and intelligent young man.  However, lately (I can’t recall when it started) I have been a victim of many unusual and irrational thoughts.  These thoughts constantly recur, and it requires a tremendous mental effort to concentrate on useful and progressive tasks.  In March when my parents made a physical break I noticed a great deal of stress.  I consulted a Dr. Cochrum at the University Health Center and asked him to recommend someone that I could consult with about some psychiatric disorders I felt I had.  I talked with a Doctor once for about two hours and tried to convey to him my fears that I felt some overwhelming violent impulses.  After one session I never saw the Doctor again, and since then I have been fighting my mental turmoil alone, and seemingly to no avail.  After my death I wish that an autopsy would be performed on me to see if there is any visible physical disorder.  I have had some tremendous headaches in the past and have consumed two large bottles of Excedrin in the past three months.

It was after much thought that I decided to kill my wife, Kathy, tonight, after I pick her up from work at the telephone company.  I love her dearly, and she has been as fine a wife to me as any man could ever hope to have.  I cannot rationally pinpoint any specific reason for doing this.  I don’t know whether it is selfishness, or if I don’t want her to face the embarrassment of my actions would surely cause her.  At this time, though, the prominent reason in my mind is that I truly do not consider this world worth living in, and am prepared to die, and I do not want to leave her to suffer alone in it.  I intend to kill her as painlessly as possible.

After the local police killed him, an autopsy was performed, and a tumor the size of a pecan was found in his brain.  Experts at the time concluded that “the relationship between the brain tumor and … Whitman’s actions … cannot be established with clarity.  However, the … tumor conceivable could have contributed to his inability to control his emotions and actions”.  More recently, some have proposed that the tumor pressed against the amygdala of his brain, which could explain some of his erratic behavior.

How much control did Whitman have over all of this?  Did he have any choice in the tumor growing in his brain?  Did he have any choice in his father’s abusive behavior while he was growing up?  It is obvious that he desired to behave in a different way and repeatedly attempted to address his own issues, but how could he do so if he couldn’t stop his own “unusual and irrational thoughts” or “overwhelming violent impulses”?

Despite his horrible actions, I have a great deal of empathy for Whitman.  That is not to say, of course, that he is not responsible for those actions—as the entity that performed them, he clearly is. However, this assertion rings rather hollow if he had influence over neither his stimulus nor his responses.  In that case, what is left?  Whitman’s consciousness, which most would characterize as ultimately who he is, appears to have been held hostage in a body and mind that generated irrational and violent impulses—ones that he apparently tried, but ultimately failed, to stop.  It must have been truly hellish to experience.

We Are Automata

My college roommate majored in computer science and had a great number of complex projects.  One of my favorites was on Artificial Intelligence, where he used genetic algorithms to determine the configuration of computer entities for competition against others designed by fellow class members.  These entities competed on a two-dimensional grid that used the trained configurations to determine behavior and outcomes in the grid, which could watched on a screen.  What I found most fascinating was that you could watch the behaviors of these algorithms and how they changed over time.  Initial algorithms might get “stuck”, or generally behave inefficiently, and might not grow to fill up the space.  Others might show promising growth in the space, but had little or no defense against attacking counterparts.  Some might attack well, but might ultimately be outnumbered, losing the competition in the long run.  Or, some entities might do very well against most competitors, but fail miserably against a select few.  Thus, the outcomes for each entity depended on the values stored in its configuration, the rules governing the competition, and the other entities involved. 

I find it difficult to see any real difference in humans.  The same factors are at play, but amplified to a mind-boggling complexity.  We are unlikely to ever know the exact rules that govern our behavior in any given situation nor the environment and series of actions and reactions that got us to that state in the first place.  However, this increase in complexity does not change the reality—we have as little control over our outcomes as the simulated entities at war with each other.

A Path to Right View

At first, these conclusions seem disorienting and depressing, but they can lead to deep compassion.  If we can truly accept that everyone is at the mercy of their own neuroses and environment that they do not control, then it is difficult to remain angry or upset with them.  After all, we are not typically upset with the weather or even natural disasters—we may wish they didn’t happen or that we weren’t around, but it is nonsensical to be angry with the weather patterns themselves.  In other words, we recognize that a hurricane is simply the natural result of a complex series of interactions  of air pressure and temperature that have fed back on each other, so we may be sad when it destroys a beach and hurts the people who live there, but do not have the need to punish it for having caused the damage.  Thus it is with people, we are all just weather patterns—sometimes a gentle breeze and other times a raging hurricane, but never in control.

So if we take the same attitude towards people that we take to the weather or the simulated entities at war, our anger and desire for retribution dissipates.  For example, instead of being angry at the jerk who just cut you off, you can have compassion for him and recognize that he is not truly to blame for his actions.  Perhaps he had a terrible day or was distracted.  Or maybe he is just an unhappy person because he happened to have genes with a high inclination towards depression and might be at a bad point in his life.  Of course, just as you might seek shelter from the rain, you may then avoid being around him in the future.

Similarly, we can have compassion for ourselves.  Everyone has done something they regret, but were they put back in the same place at the same state, they would do it again—how could they not?  Thus, rather than blaming ourselves using the belief we could have acted differently, we have the option to look back with compassion, knowing we could not have done otherwise, and hopefully learn and improve going forward (though we do not have control over that either!).

Thus, if we can embrace ‘No Will’ fully, we are able to have ‘Right View’ by understanding things as they truly are.  With this view, there is no need or even the impulse for anger to arise in the first place, and we can naturally be kind to everyone.

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Financial Essays: Price and Returns and Cost of Leverage

Cost of Leverage - Published by Joel Stevens on October 11, 2016

This essay relates to the "Cost of Leverage" of various different leveraged vehicles for investing in common shares, such as using margin or purchasing calls or warrants. Additionally, the essay explores the relationship of Cost of Leverage as the degree to which the call or put is in or out of the money.

Price and Returns - Published by Joel Stevens on December 31, 2016

This essay relates to the relationship between price and returns. In particular, the essay explores how returns develop over different holding periods, underlying value growth, and prices paid relative to that underlying value.

Book Review: Good for the Money

Good for the Money: My Fight to Pay Back America - Bob Benmosche

As an investor in AIG since 2011, I was very interested in this book, which provides the inside scoop (at least from Benmosche's perspective) of the recovery and payback of the bailout money in AIG.  I was impressed with Benmosche during his tenure as CEO as an investor, and after reading this book, I am even more.

Benmosche goes through his career, in a fairly abbreviated form, as a guy that is rough around the edges, but gets shit done.  That characterization seems a perfect synopsis for the AIG recovery, where the government and the press might not be too happy with him, but he got everyone paid back his way.  Although I'm sure it was difficult to see at the time, it does appear that his much slower approach to realize the value of assets as AIG was much better than the originally planned method of selling everything as fast as possible, which likely would not have yielded enough money to pay back the loan from the government.

As I was originally, I was again saddened by his cancer and eventual death.  Benmosche's effort at AIG throughout that period was impressive.