Author Archives: Dave

About Dave

A student of the markets and life. Seeking to predict the future and failing often enough.

Emotional Analysis Paralysis

“I want you to want to clean the dishes.” Brooke Myers to Gary Grobowski in the 2006 movie The Breakup.

Today in a philosophy course on free will and morality, we discussed the distinction between first-order and second-order desires. In the above mentioned scene, Jennifer Aniston’s second-order want was frustrated by Vince Vaughn’s lack of first-order volition to clean up around the house. The author contended that it is our ability to have so called second-order volitions that makes us ‘persons’ as opposed to mere biological creatures. It is our mastery of these second-order wants, which is supposed to be central to any concept of free will.

However, in an era when we are bombarded with messages, influences and guidebooks on what we “should” be doing with our time, I wonder: how much does this distinction stands up to our everyday experiences?

I know that there certainly are times where I consciously aim to cultivate my first-order desires (e.g. I am currently working my way through a book, Getting Things Done, which is supposed to help me to corral the various different low-level wants and priorities I have on my plate). However, there are many times where I don’t “try” to want anything at all. I just *do*.

Especially in the areas of romance and interpersonal relations, I think an overly-controlled set of lower desires can create bad outcomes and confusion. I can know that I *do* love someone, but do I want to feel that way? Should I want to want her? What about wanting to want to want her?

The problem with self-reflection and self-analysis in the area of desires is that there really is no basis for the analysis. Who decides what is right and wrong?

Should I want to be his friend? Should I enjoy our conversations? Should I want more of her company?

Given the massive amount of information we have at our fingertips when making everyday decisions about our ordinary wants and desires, to place an undue burden on higher-order analytical processes creates the potential for paralysis. Have you ever heard or experienced “analysis paralysis”? I know I have, and often it is at this higher order of abstraction, where “what if” scenarios lose their grounding.

I think listening to your conscience is sometimes helpful, and sometimes you should go with your gut. Sometimes your instincts know best, and sometimes the help of a friend can make a situation easier to handle.

Perhaps biggest challenge in life is that there is no handbook, and it is in wrestling with these kinds of questions that philosophers and joe the plumbers have been perplexed for eras. This uncertainty is also perhaps life’s greatest gift as it creates the possibility for true freedom – the ability to define our own rules and our own futures.

Maybe men should want to want to do the things that women want them to want to do. Or maybe women shouldn’t want to want the men to want to want the things they can’t help wanting them to do.

To be honest, I think the inner workings of such relations will remain a mystery far longer than anything in the realm of physics or the “hard scientists”.

For any of you science-worshipers who point to chemistry as your end-all-be-all here, I point to the current state of the financial markets to show the status of the mathematics underlying the research in your beloved “neuropsychiatry.” If the most well compensated people on earth can’t model something as simple as housing prices do you really think some scientist working in a lab is going to statistically “prove” that our emotions can be predicted by a certain combination of neurochemicals and brain matter?

We are decades away from anything close. And unfortunately likely centuries away from finally recognizing the futility of our current conceptions and theories about consciousness.

I don’t think that means we should give up trying. I don’t think we could if we tried. But maybe a little less analysis would help with the indecision…and our relationships.

HBS Centennial: Social Entrepreneurship In Education

Below are my notes from a panel during this week’s HBS Centennial Celebration.

The Panel, hosted by HBS Professor Stacey Childress, featured 4 of the leading entrepreneurs making changes in education nationwide.

Steve Barr - Founder of Green Dot; Kevin Johnson – Founder of St. Hope and Sacramental Mayoral candidate;  Michelle Rhee - Washington D.C. Schools superintendent, and Wendy Kopp founder of Teach For America.


The definition of Social Entrpreneurship: pursuing social change, regardless of the resources you currently control.

Some stats about our educational system:  3 million teachers and 50 million students. 40 percent of poor are in largest 100. We spend $450 billion annually. This has doubled over 30 years but the outcomes have declined.

Our students are tops in the world in math and science in the 4th grade,  but by high school they fall to 25th in math (out of 30).

There are 4 general areas we need to address:

1) Achievement gap.

2) People problems.

3) Performance tools.

4) Institutions.

Steve Barr – founder of Green Dot

Founded it himself (with his Chocolate lab) after a death in the family. When you lose your family, you get bolder.

In the old days – high school was enough. His, brother dropped out. He was jock.

Looking back on his experience he decided he wanted to create schools where everyone gets attention – not just the cool kids and the jocks.

Most schools are very undemocratic – centralized. In contrast, small private schools have: high expectations, college acceptance, no big office downtown, accountability, call back, connected.

He wanted to replicate this private school environment. So he started with one school…built from there. Now at 19 schools. Now he wants to create political will to change current system.

Kevin Johnson- St. Hope

Grew up in Oak Park Sacremento. After high school he got a scholarship to Berkeley. Realized he was totally unprepared. Played for Suns in NBA – visited cities nationwide. Started St. Hope after school program for kids while playing for the Suns…but the schools were so bad, he realized that is not enough.

All poor places were the same – kids were told they weren’t allowed to have same opportunities just because of where they were born.

3rd graders that are behind 80 percent never caught up. We build prison systems based on these reading scores.

Finally decided to create new schools.

Wants to revitalize a community. Public schools, economic development, return and the arts. Focused on one area in a community. Pre-k through twelve. Need a continuum. Runs Sacramento High School -2nd oldest high school in the country. Took college acceptance rate from 20-30 percent to 80 percent.

Michelle Rhee – Washington D.C. Schools

50k students. Highest risk school in the entire country. 70 percentage point achievement gap. 12th percentile in reading and 8 percentile in math. Kindergartners start close close to their peers…by 3rd grade they are far behind. Schools are so bad they make kids worse off the longer they stay.

Money was not the issue: they spent a lot of money per pupil, but had bad results.

Transformational focus 2 areas:

Accountability. The Adult has responsibility and stake in success. Pay based on performance. Red tier or green tier. Green tier – 40 percent raise + upside possibilities…up to 131k in salary. People backlashed. You have to give up tenure.

Leadership. No school board. Just mayor. She hates boards. Change will take different kind of leadership. Must reject compromise. Need decisive change…she received advice from someone who said “soften your message.” She said, “I totally disagree…we spend too much time softening our message. We don’t do a good enough job calling out the issues.”

Wendy Kopp – Teach For America

Problem of educational iniquity is so big, we need to channel future leaders into they system.

The program: commit 2 years to high poverty communities. Both helps kids and shapes leaders.

This is a solvable problem. Kids do have the potential. She rejects silver bullet theories. It will take hard work. 2/3rds of her people end up staying in education, but some leave. And that is good too.

Goal is to keep growing. Last year 25,000 applicants. 7,000 teachers next year. We are seeing reasons for hope – schools are improving…snowball is rolling. New Orleans is changing.

General Thoughts

Warren Buffett: if you want to fix public schools, make private schools illegal.

We need political will.

Change is necessary.

Need reform from within plus political will. Takeaway from Aspen Ideas Festival. Someone needs to be a chancellor, someone needs to be a mayor.

Michelle has a billion dollar budget, showing that big institutions can help to make change because of their resources if organized properly.

Leaders are putting kids first.

Cities are incubators for nationwide change (i.e. a one-sized fits all approach might not work).

Political will is absolutely crucial: Michelle *needs* Fenti (mayor) to make it work. Closed 15 restructured 27 fired 1/3 of principals. Most politicians fold under the pressure.

We need unrelenting leaders like Kevin.

Ms. Rhee’s compensation system is being funded by foundations…charter schools are worried, but ultimately public school competition is necessary.

The end goal: we are so far from where we need to go. We need systems of schools to have systems like what we have in GE. We need much better efficiency.

Limit is not the kids: it is the getting the right adults.

Leadership is important. Adrian Fenti saw Klein in New York did it…followed him. We need a different kind of leadership. Elect Kevin.

How can graduate schools of ed help? People are taking watered down approach. We need the systems themselves to retain, attract, train best talent. Need more research.

We have not embraced the technological revolution enough. Someone needs to pioneer the technology revolution in schools.

We have a crisis. We need to make people realize the implications: Economic development, public safety etc.

How are we going to save the economy? Education.

Perspective Matters. Especially In Tough Times.

The Reality: We are facing real challenges.

I really hate to admit it, but I think there is more bad news on the horizon. The news coming out of the hedge fund industry is really troubling, and the issue with this industry’s challenges (like that of the banking industry) is that as these firms are forced to sell assets en-masse, values of securities fall in a disproportionate relation to their intrinsic value.

This phenomenon is very similar to the one that is occurring in the housing market: banks are foreclosing on houses, and selling them into a market where there are not enough buyers.

These pressures are likely to remain for awhile. And we should be prepared for this.

In addition, the pressure that the middle class in America is feeling from strained personal balance sheets in addition to a growing pessimism about the economy will likely cause spending to fall as: 1) people stop buying because they are worried and 2) people stop buying because they just can’t stretch any farther and no one will lend to them.

All of this is likely going to materialize slowly over the next few weeks and months.

Warren Buffett’s Pro-American stance.

However, now is not the time to dwell on these issues.

As I mentioned below (Dealing With Bad News), it is natural to retreat into a cave when bad news strikes. People don’t like to face the music and unfortunately this is materializing in the markets as investors stand on the sidelines in fear.

However, at least one investor – and arguably the best investor in History – is buying American stocks. And urging the rest of us to do so: Buy American. I Am.

If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.

Why? A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors.


Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

Warren Buffett is stepping up in the way that few others in this country have done yet to point out in simple and clear terms: America has the best economy in the history of the world, and we can’t lose sight of all of the great companies and innovation going on here today and the strength of our economy in the long term.

Case in point, Google, a perfect example of the kind of innovation that makes this country great, has continued to grow as advertisers continue to recognize that the old media’s approach – pushing ads down people’s throat – has been defeated by Google and others who allow us to consume our content (and our advertising) in ever more flexible and personalized ways.

In addition to Google and new media there are exciting things happening in education, clean technology, biotech & healthcare, the entertainment industry, the power industry, biotech plastics, and many other industries.

So before you give up on our country while it is down, step back for a moment and think about it.

Optimism has real impact.

Someone I admire a lot told me today about a study that was done recently where 2 groups were given a set of identical household tasks to perform over a period of weeks. Group 1 was told nothing special about their chores. Group 2 was told that the tasks they were performing as a good form of exercise and good for their health by a group of healthcare professionals.

A surprising result ensued: those who *believed* their efforts were healthy for them lost weight, lowered their blood pressure and got healthier.

This was a study done by serious researchers at a major academic institution. The takeaway: our perspective sometimes matters as much as the reality.

I believe we are capable of facing the world, the good and the bad parts of it, and keeping our optimism intact. And right now our country needs us to do just that.

Who Won The Debate? America. (Video)

America won the debate tonight. The candidates agreed on 1 thing – education. Regardless of our politics this issue is the most important for our future. Now let’s hold them to their promises.

How Investing Is Like Relationships

  • There is always a large amount of uncertainty.
  • It is much harder to stomach when there is volatility.
  • When things are good, it feels great. When things fall, it hurts like hell.
  • There is always room for improvement.
  • Not all ideas are good ideas.
  • Everyone has their own strategy.
  • While there are lots of guidebooks, there surely is no rulebook.
  • At the end of the day, you have to take a leap of faith to have any chance of winning.
  • When the world changes you should consider changing your approach.
  • A lifetime track-record of success is almost impossible to retain.
  • Anyone with half a brain and some guts can do it well.
  • Imagination is crucial.
  • Once you pull the trigger, commitment is key.
  • Following the herd not only is a bad idea, it is dangerous.
  • You never know when or where inspiration will strike.
  • There will certainly be valleys, but if you believe in your convictions, they will also lead to peaks down the road.
  • The greatest are admired by almost all of us.

Yes. This Is A Bailout

Any question as to whether the government was going to use its powers to directly prop up failing financial institutions will soon be eliminated.
According to Bloomberg: U.S. Treasury Said to Invest $125 Billion in Major U.S. Banks

The Bush administration will invest about $125 billion in nine of the biggest U.S. banks, including Citigroup Inc. and Goldman Sachs Group Inc., in the government’s latest attempt to shore up confidence in the financial system.

The Treasury plans to spend $25 billion each for stakes in Citigroup and JPMorgan, people said. Another $25 billion will be divided between Bank of America and Merrill, which agreed last month to be acquired by Bank of America. Wells Fargo is to get at least $20 billion, Goldman and Morgan Stanley will each get $10 billion, and State Street and Bank of New York will get about $3 billion each, people said.

The government will obtain its stakes with a type of security designed not to dilute the value of common shares.

It is this last piece of the plan – that existing common equity holders will not get diluted by the government’s investments – that I hope is not accurate.

One of the key ingredients to getting the bailout proposal to the finish line was that any entity that sold assets to the government would have to give up equity. It seems unfair to allow existing equity holders to have a free pass at government funds in any case.

The warrant concept included in the bailout bill served 2 functions: 1) It allowed the government to participate in the upside of any plan to save these institutions, and 2) It forced existing management to take a hit, by sharing the pie with taxpayers.

Given Mr. Paulson’s sophistication and the job he has done to date, I would venture to guess that the article has this piece wrong.

But one thing appears to be clear: Mr. Fuld’s company, and my former employer, Lehman Brothers will likely be the first and the last major investment bank to fail if the government has anything to say about it. I would imagine he as well as investors in institutions like Washington Mutual are wondering why they got left out in the cold.

Dealing With Bad News

Although the news around the financial crisis continues to worsen, an equally important and self-perpetuating component of this crisis is people’s reaction to the news.

Where We Are In The Crisis

To re-iterate: It has been obvious for two years that a recession was inevitable, and it is likely we will see more losses for real people and companies of all sizes before we get through this.

That the crisis is spreading in a logical manner was indicated by GE’s announcement on Friday that they are seeing rising consumer defaults: GE takes hit as consumers default on debt. The next step is slowing retail sales, failures by more companies exposed to these sales, more layoffs, etc.

However, a recession does not mean the economy does not continue to function, and some losses does not mean everyone will lose their job or savings.

We have seen recessions before and we will see them again, and we will be ok. It is all a part of capitalism!

Dealing with the reality of how this crisis has unfolded has been hard because – like everywhere else in life – predicting the future of how people react is very difficult.

The “Markets” = People

We can not lose sight of the fact that, at base, these markets are comprised of individuals or computer programs built by individuals. When the complexity of predicting human behavior is multiplied by a series of financial innovations like derivatives and highly levered institutions with connections across global capital markets, predicting the outcome of shocks becomes nearly impossible.

If I was better at math, I would draw a fancy formula to “prove” such a proposition, but like most true things in life, it seems obvious without much explanation.

One of the most difficult aspects of this predictive process is figuring out how individual decision-makers (including bankers, investors and consumers) will react to the ongoing crisis. This is important because pessimism can make a bad problem worse.

The recent downward spirals in markets from the LIBOR market to the stock market to the local corner market are partially based on the reality of weakening fundamentals in the economy, but they are also based on a normal human reaction to bad news.

People = Irrational

Jeremy Grantham of GMO, one of the smartest investors around in my opinion, talks about how “career risk” is a very important element to understanding market movements. When everyone is buying, it is more risky for your career to be the one to stop buying first…and today, when everyone is selling, if you are the first one to start buying and you are wrong, it might look bad to your boss.

I think this explains part of the herd mentality that we are witnessing.

However, I think part of it is also explained by something like The Kübler-Ross grief cycle:

The initial state before the cycle is received is stable, at least in terms of the subsequent reaction on hearing the bad news. Compared with the ups and downs to come, even if there is some variation, this is indeed a stable state.

And then, into the calm of this relative paradise, a bombshell bursts…

* Shock stage: Initial paralysis at hearing the bad news.
* Denial stage: Trying to avoid the inevitable.
* Anger stage: Frustrated outpouring of bottled-up emotion.
* Bargaining stage: Seeking in vain for a way out.
* Depression stage: Final realization of the inevitable.
* Testing stage: Seeking realistic solutions.
* Acceptance stage: Finally finding the way forward.

As people across the economy, in whatever role they are playing, get the bad news that the world is in a more disappointing state than they expected, it is only natural that they will react with grief. As explained by they framework above, this is usually experienced in distinct phases marked by one’s emotional response and mental reaction.

Of course, this theoretical framework, like every framework, is limited and it likely does not apply to everyone, but I think it highlights the basic idea that people do not act rationally when they are faced with shocks to their world view.

They – being human beings – react emotionally as well as rationally.

That is why I have been trying to shift my focus to optimism as much as possible lately. Seeing the glass as half-full, or even one-quarter-full, makes it much easier to start thinking about ways to move forward. It helps to move to the next “stage” in the above cycle, or more simply, it allows for one to think creatively about how to improve things rather than wallowing in the disappointment of the losses we face.

I can promise you that there will be more bad news on the television and on the Internet tomorrow and for months to come. But there will also be good news. I hope that we can collectively deal with our losses and griefs in such a way that allows us to move forward more quickly than the alternative, and I think that starts by seeing the good in the world.

In the mean time, be careful out there in the markets.

Unforeseen Side-Effects of Lehman Bankruptcy

Apparently there may be up to $360B dollars in losses tomorrow as the auction for the Lehman CDS contracts are settled according to this Reuters article: Lehman CDS sellers face massive losses in auction

Banks, hedge funds and other sellers of protection on Lehman Brothers’ debt are facing losses in the area of 90 percent the insurance sold when the value of the failed bank’s credit default swaps are settled in an auction on Friday.
The auction to settle credit default swaps protecting the debt will be one of the largest settlements of contracts in the $55 trillion market, with around $400 billion in contract volumes estimated on Lehman’s debt.

Fannie Mae and Freddie Mac’s credit default swap settlements on Monday were the largest to date. But unlike swaps on the agency debt, which recovered more than 90 percent of their value, Lehman’s protection sellers face the possibility of being virtually wiped out.

This component of the Lehman bankruptcy highlights some of the unforeseen repercussions of their filing that are causing ripples throughout the financial markets.

It also highlights the magnitude of the $60 Trillion notional value CDS market. One way to think about this is that there is somewhere between $15 and 20 Trillion of face value between MBS, CMBS, and Corporate bonds. The CDS market thus represents 3-4x the total amount of credit outstanding in the economy.

Thus, whenever corporate defaults happen, the losses associated with these failures can be much larger than the “balance sheet” of the failing company. Given the fact that there are people on both sides of these CDS transactions, this arguably should not be a net loss to the economy (i.e. there are both winners and losers).

However, when losses come in spikes like this, it can clearly threaten the viability of individual firms, forcing them to sell other securities, which exacerbates the pressure of normal losses.

Furthermore, given the already strained nature of a number of these firms, it is clear that continued losses like this will cause failures.

As we are in the midst of the turn of a credit cycle, losses are inevitable and part of a slowing economy. The problem this time around is that institutions are highly levered and losses are being felt in ways that were unforeseen…causing more firms to lose money, sell assets, and creating further downward pressure on asset classes globally.

All of this adds to the fear and uncertainty that you are feeling and seeing in the markets right now.

Things are looking bad. Things will probably get worse.

BUT, don’t forget, things are also very good. There are a lot of phenomenal companies that are going down with those that are challenged, and particularly in technology, these companies will be making money for years to come.

I am convinced our best days are ahead of us…we just may have a few more bad ones in between now and then.

UPDATE: Last night’s estimates were accurate. According to this arcticle, losses will be upwards of $360B: Lehman Debt Protection Cost Set at Auction

Issuers of unregulated derivatives promising a payout in the event of a Lehman Brothers default will pay more than 91 cents on the dollar to settle credit default swaps related to the bankrupt company.

Be Optimistic (video)

There is a lot of bad news out there. But keep in mind, this isn’t new news – just a change of focus.

A video blog-post tonight about why we should stay optimistic even in these tough times:

Warren Buffett On The Crisis By Charlie Rose (video)

A long, but worthwhile explanation on where we are…and why the bailout was necessary. Thx to ADK.

Some highlight Buffett-isms from the video:

  • I would rather be approximately right than precisely wrong
  • This is truly an economic Pearl Harbor.
  • The patient on the floor in cardiac arrest is not Wall Street, it is the American Economy
  • Everyday you don’t react to Pearl Harbor you are otherwise behind in a war that you would have fought.
  • Sheila Bear and Hank Paulson are great leaders…need more tools. They need money and flexibility.
  • Derivatives…financial weapons of mass destruction.
  • We naturally go through the 3 I’s: Innovators, Imitators, and the Idiots.
  • Leverage is a lot like Cinderella at the ball…we all know they turn into pumpkins at 12…nobody wants to leave before then.
  • Confidence in institutions is a lot like oxygen…when it is gone for 5 minutes it is the only thing you think about.
  • The American System unleashed more potential in human beings…we have all the ingredients for an incredible future.
  • Beware of Geeks bearing formulas.
  • I’m not worried about the country, I’m worried about anything that gums up the potential of the country.
  • The recession is going to get worse…best case is 6 months. Worst case is a long time….5 years.
  • It is more important who the Treasury Secretary is than who the Vice President is.
  • I would hand a blank check to someone like Hank Paulson.
  • Mark to market is a good idea. Telling the truth never hurt anybody. You get in a lot of trouble when you start putting fictitious numbers on assets.
  • I am paying the lowest tax rate in my life…and that is crazy. I should be paying more taxes.
  • We need real leadership in government. Someone who can explain things to people.
  • If AIG had tried to unwind its derivatives book, it would have hit every financial institution in the world.
  • It would be crazy not to do this….you are going to see more bad news. But over time the system will work.