Philosophical Musings

April 27, 2007

The Problem with Munger’s Worldly Wisdom

Filed under: investing — Elad Kehat @ 7:43 am

I recently came across the transcript speech made by Charlie Munger, of Berkshire Hathaway fame, to the U of South California Business School in 1994. The speech, titled “A Lesson on Elementary, Worldly Wisdom As It Relates To Investment Management & Business”, is both insightful and entertaining, which makes it a great read.
Nevertheless, I believe that there’s a big problem with the system that Munger recommends we use in managing our financial investments.
Essentially, what Munger suggests is that we limit ourselves to a very small number of investments (say 20 in a lifetime) and be very diligent about picking those few. Whenever we do find one that passes our extreme scrutiny, we should load on it, and stick with it for the long term.
Munger has a lot to show for his method – Berkshire Hathaway has been built on this system with a small number of exteremely successful investments that have multiplied tens of times in value over a few decades. These include Coca Cola, American Express, Walmart and The Washington Post, to name a few well known examples.
But is this system really a good choice for the average Joe? Say you’re like me, in your thirties, making a nice income in your day job, and trying to invest your savings well enough so that you can retire comfortably 30 or 40 years from now. What would be a wiser choice for you to follow, Munger’s system, or building a diversified portfolio from a bunch of market index ETFs that would guarantee you more or less average market performance?
Obviously, if you want above average returns, you can’t go with the market index funds option, and Munger offers good reasons why letting money managers play with your money isn’t very likely to give you that desired edge either (you’re more likely to get sub-par returns). However, let’s analyze the Munger system, and see whether you’re likely to be better off using it.
The Munger system – picking only a handful of stocks over your lifetime, sticking with them, and sticking for the long haul, requires you to be a very good stock picker. After all, if you only pick a handful, there’s not much room for error. It makes perfect sense – if you pick only winners, you’ll win big, but are you going to pick the winners?
That’s why Munger suggests that you pick just a few – you can’t know everything about everybody, so you better focus more narrowly. That assumption suffers on two fronts: (a) you don’t have the time, experience and access that Buffett and Munger have in order to focus as well as they do and (b) you’re simply not as good at recognizing the good from the bad as they are. There’s a reason that there’s only one Buffett. As Munger himself says, only one fifth can be at the top 20%, and this guy is at the top 0.00001%… To the genius it seems as if he’s just applying simple worldly wisdom, to the rest of us, he’s applying magic.
So what’s your outcome likely to be if you apply Munger’s system? Let’s use Munger’s worldly wisdom – the bell curve. The majority of stock pickers will make average picks, and overall get average returns, a minority will make above average return, and a small minority’s returns will be truly spectacular. The flip side is of course that there’s an equal minority who’ll make below average returns, and a small minority who’s returns will be just horrible.
Making just a few picks in your lifetime does not guarantee the quality of your picks. Moreover, the less attempts you make at stock picking, the more likely you are to be affected by chance than to let your skill shine through.
What it all comes down to is that on average, users of the Munger system will make average returns. The average in a bell curve (assuming that stock picking aptitude is distributed normally) also includes the majority, so that’s most likely where you’ll end up. No better than if you just invested in some index funds.
There’s still the minority that makes better returns, and there’s a fair chance that you’ll end up there. That’s great, but you have to remember that it’ll be your reward for taking a risk. The risk is that you have an equal chance to fall in the bottom of the bell curve, and then woe to you. For you have to keep in mind that it’s life savings that we’re gambling with here. If you have the bad luck of being one of the bad stock pickers who just thought he could strike it rich by taking additional risk, then say goodbye to your cozy retirement.
In short, while Munger is witty, insightful and funny, and while it’s terribly tempting to believe that you too can become a billionaire (or merely very well off) by following his simple strategy, you better be damned sure that you’re a way-above-average stock picker to follow that strategy in your spare time and expect to win.
As for me, I’m definitely not against risk taking – my friends think of some of my decisions as terribly risky, but I try to take risks only with the things I know, from experience and conviction, that I’m good at. My experience with stocks has taught me that stock picking isn’t one of those things, and so my savings are better off in an index fund making average returns.


April 23, 2007

Weak?! Participation in Web 2.0 sites

Filed under: Uncategorized — Elad Kehat @ 8:39 am

This story from Reuters cites finds that Web 2.0 “is far less participatory than commonly assumed”.
Only 0.16% of YouTube visits are by video uploaders, only 0.2% of Flickr visits are by photo uploaders and a mere 4.6% of Wikipedia visits are by page editors.
The article’s title, “Study finds weak participation…” makes it clear that this is an attempt to diss the sharing phenomenon. Now this is a classic case of reading the data plain wrong, and is based on the assumption that participation means “everybody talking and nobody listening”. Instead, what it proves is just how well the whole sharing thing works – people do a little bit of talking and a hellovalot of listening. In a world with so many voices, that’s the only way to have a conversation… The unidentified Reuters author forgets that participation means listening too.
Now let’s take a look at the mechanics of a Web 2.0 site. After I upload some photos to Flickr, I send an email to my friends to come in and see them. That’s one small visit for me to upload, and a large number of visits to watch. When they upload their photos, it’s the same. Also, I occasionally wonder around Flickr to look at photos by people I don’t know. Some of them are absolutely stunning.
So, is my level of participation “weak”? No. If everyone uploaded more photos than everyone else looks at, then the average photo would have an infinitely small number of viewers. Uploading on average 2 photos for every thousand I view, means that on average photos have hundreds of viewers (averages lie of course, as this “market” probably has long tail attributes, but that’s besides my point). Now that doesn’t change the fact that I’m a participant – I did my share of sharing my own content.
The difference between this new phenomenon of social websites and user generated content and what we had in the past is that now everyone has a change to participate at all. I bet that 99.9% of Flickr users never presented their photos in a gallery. We must also remember that the economics of digital content, or virtual stuff don’t work the same as those of actual atoms. That the amount of content that the average user donates is much smaller than the amount he consumes is just fine.


Here’s an interesting related article on the parts different people play in social networks.

April 16, 2007

Major Lables are not to blame for Music Business Demise

Filed under: business,Copyrights,economy,music — Elad Kehat @ 7:26 pm

A NY Times article by Tony Sachs and Sal Nunziato tells the story of the independent CD shop that they owned in Manhattan for 12 years, until it closed in 2005.
They are full of criticism for the major record labels, whom they blame for making all the wrong moves in the face of the file sharing revolution, mistakes that they claim have led to their shop going out of business.
It is an important read, that helps you realize how the revolution does not hurt just big faceless corporations or multimillionaire-but-still-gready musicians. It also affects small business owners, who lose the business that they had spent 12 years nurturing.
But as much as I share their loathing for the big record labels, Mssrs Sachs and Nunziato are plain wrong. The labels are not responsible for the demise of their shop, and rather than make mistakes, I believe that they soon enough realized where all this is going, and began fighting for their lives with all the tools at their discretion (basicly money, which is used to influence lawmakers and public opinion).
Sachs and Nunziato’s shop had closed because its many of its customers no longer had a need for it. It’s great that their staff, unlike Best Buy’s actually “knew who Van Morrison was”, but people now go to the internet for music advice. It’s fun to claim that Tower Records had “the entire history of recorded music under one roof”, but that claim is plain wrong, and in any case, we can turn to file sharing to really find any piece of music ever recorded, and searching for it is easier too.
They continue by claiming that “the customers who had grudgingly come to trust our opinions made the move to online shopping or lost interest in buying music altogether. Some of the most loyal fans had been soured into denying themselves the music they loved.” Come on guys, people don’t deny themselves of the music they love. Instead they have a much better source now, and they still spend endless hours browsing and building themselves a great collection, but it doesn’t cost them money.
They end by saying that “the occupation we planned on spending our working lives at is rapidly becoming obsolete. And that loss hits us hard — not just as music retailers, but as music fans.” Again, while it’s heart wrenching that someone’s life creation is becoming obsolete, you can’t stop technology. Too bad that you share your lot with the buggy drivers, but that’s life. You can’t blame the major record labels for this. Change is an inevitable part of our world, better learn how to handle it. Finally, we should also keep in mind that recorded music, the basis for the CD shop business (the entire music business actually), was enabled by a technological advance. Some times these advances are good for you, some times they’re not.
Finally, as self-described “music fans”, these guys should be happy with the change. What it really means is more music in the hands of more people. Business has nothing to do with it.

April 14, 2007

How the book market should be: Author to Reader, Direct

Filed under: business,Copyrights,ebooks,economy — Elad Kehat @ 9:40 am

Chris Anderson points us to the long tail characteristics of the romance novel market.

What caught my eye was the following quote:

“One told me that at $4.99 she felt her novel was “priced wrong”. I nodded sympathetically at that shameful discounting. Wrong. She felt she was priced too high.”

Most of those $4.99 go to the retailer, the publisher and various other middlemen, so she probably makes $1 or less per novel sold, and still she things it is only right to go down further. Wouldn’t it be great when she sells those novels in digital format, from her website direct to her readers, for $.49?

Also worth noting is that in the current system the author has no control over the pricing of the fruit of her labor. It is sold for what some MBA thinks is “right”. A better system would leave that decision to the creator. Better still, if it is reached through a dialog between her and her readers.

April 13, 2007

Future of books: Objets d’art

Filed under: art,ebooks — Elad Kehat @ 1:37 pm

Cara Barer, a photographer, shows us what the future might hold for paper books.

She crumples them, soaks them in the bath tub, and photographs them in interesting positions.

The following quote is quite telling:

“In my parent’s mind, a set of encyclopedias was mandatory for a good education, and shameful not to provide it, and a trip to the library was the only way to research a paper. Now, however, that same sort of emphasis is placed on owning a computer, and connecting to the internet. A student’s research now can be done without ever leaving their desk. I have fully embraced that technology, and would not want to be without it, but, I also fear that it is slowly leading us to rely less and less on the reference books common in the last two centuries. “

April 6, 2007

Comic Books Quandary and Possible Solution

Filed under: Copyrights,ebooks,economy — Elad Kehat @ 5:48 pm

Steven Grant writes in “Speaking of bit-torrenting comics” about how downloads of scanned comic books through bit torrent hurts the business and jeopardizes the existence of many comic series that sell just enough to justify their continued publication. What Grant suggests is that artists beg file-sharers to go out to a store and buy a copy of titles they enjoyed, in order to ensure that the economics keep working.

I think he’s terribly wrong. When the economics turn against you, begging free-riders to shell out cash when they don’t really have to just doesn’t work. The first reason is that online consumption is free fast and easy, and you get instant gratification (or nearly instant, in the case of bit torrent). Going out to buy stuff adds the non-instant gratification (by actually requiring you to go out, or simply by keeping you waiting for delivery in the case of orders from amazon) insult to the cost injury. The second reason is that there’s so much content out there these days, that most consumers don’t really feel threatened by the idea that some title might go away – unless they’re true enthusiasts for the specific title (and as a rule these are the minority of customers) they can always find something else to replace it.

Instead, why not try to adapt to the changing marketplace and adopt a new business plan?

It’s clear that the market is still there – if people download and share the stuff then they’re obviously reading it. Moreover, the new medium opens up any comics title to a potentially far greater market reach. Finally, it seems that these people don’t mind reading the stuff off their computer screens (printing it in good quality would cost far more than simply buying).

See where I’m getting at? Why don’t comics artists put up a website and publish their own work there?

Here’s how the economics for you, the artist, might work:

You don’t need Marvel to publish your work, so you can cut the entire printing and distribution costs and the retailer’s margins. That has to translate to a serious reduction in price.

Put advertising on your site to generate revenue. If that doesn’t work, i.e. you don’t have enough visitors to generate significant revenues, try charging a very low price, i.e. an iTunes-like $.99 per title. As Apple had proved, it works. You could provide free access to the first few pages, to whet potential customers’ appetite, then charge for full access.

For your best fans who simply have to have a copy on paper, you could use a service like to print and ship the stuff.  If you look at the little they skim off the list price you have to realize that Marvel is screwing you.

You could even use bit torrent to promote yourself. Pick some of your works, add a first page that links back to your website and tells people there’s much more there, and start sharing it.

Maybe there’s even a business here for some aggregator  – a website that manages the whole thing and lets comics publishers publish their work thus. If there’s interest, I could build one 🙂

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