Nassim Taleb. Commencement Address.

Nassim Nicholas Taleb gave a Commencement Address to the American University in Beirut in 2016. Taleb has written "a philosophical and practical essay on uncertainty (Antifragile , The Black Swan, Fooled by Randomness, and The Bed of Procrustes), a (so far) 4-volume "investigation of opacity, luck, uncertainty, probability, human error, risk,and decision making when we don’t understand the world, expressed in the form of a personal essay with autobiographical sections, stories, parables, and philosophical, historical, and scientific discussions in nonoverlapping volumes that can be accessed in any order." More on Taleb.

His Commencement Address has some interesting life thoughts and as someone seemingly fond of aphorisms he ends on this:

The following are no-nos:

Muscles without strength,

friendship without trust,

opinion without risk,

change without aesthetics,

age without values,

food without nourishment,

power without fairness,

facts without rigor,

degrees without erudition,

militarism without fortitude,

progress without civilization,

complication without depth,

fluency without content,

and, most of all, religion without tolerance.

My highlights from his speech below. The full text is here.

For I have a single definition of success: you look in the mirror every evening, and wonder if you disappoint the person you were at 18, right before the age when people start getting corrupted by life. Let him or her be the only judge; not your reputation, not your wealth, not your standing in the community, not the decorations on your lapel. If you do not feel ashamed, you are successful. All other definitions of success are modern constructions; fragile modern constructions.

(I am happy to report, I'm pretty sure my 18 year old self would not be disappointed with me)
...

...the courage to do something unpopular. Take risks for the benefit of others; it doesn’t have to be humanity...The more micro, the less abstract, the better.

Success requires absence of fragility. I’ve seen billionaires terrified of journalists, wealthy people who felt crushed because their brother in law got very rich, academics with Nobel who were scared of comments on the web...

...But self-respect is robust –that’s the approach of the Stoic school, which incidentally was a Phoenician movement. (If someone wonders who are the Stoics I’d say Buddhists with an attitude problem, imagine someone both very Lebanese and Buddhist). I’ve seen robust people in my village Amioun who were proud of being local citizens involved in their tribe; they go to bed proud and wake up happy....


...Now a bit of my own history. Don’t tell anyone, but all the stuff you think comes from deep philosophical reflection is dressed up: it all comes from an ineradicable gambling instinct –just imagine a compulsive gambler playing high priest. People don’t like to believe it: my education came from trading and risk taking with some help from school....

...I skipped school most days and, starting at age 14, started reading voraciously. Later I discovered an inability to concentrate on subjects others imposed on me. I separated school for credentials and reading for one’s edification...Greed and fear are teachers. I was like people with addictions who have a below average intelligence but were capable of the most ingenious tricks to procure their drugs. When there was risk on the line, suddenly a second brain in me manifested itself and these theorems became interesting. When there is fire, you will run faster than in any competition. Then I became dumb again when there was no real action....
...I discovered along the way that the economists and social scientists were almost always applying the wrong math to the problems, what became later the theme of The Black Swan. Their statistical tools were not just wrong, they were outrageously wrong –they still are. Their methods underestimated “tail events”, those rare but consequential jumps. They were too arrogant to accept it. This discovery allowed me to achieve financial independence in my twenties, after the crash of 1987.
So I felt I had something to say in the way we used probability, and how we think about, and manage uncertainty. Probability is the logic of science and philosophy; it touches on many subjects: theology, philosophy, psychology, science, and the more mundane risk engineering...

...The second break came to me when the crisis of 2008 happened and felt vindicated and made another bundle putting my neck on the line. But fame came with the crisis and I discovered that I hated fame, famous people, caviar, champagne, complicated food, expensive wine and, mostly wine commentators. I like mezze with local Arak baladi, including squid in its ink (sabbidej), no less no more, and wealthy people tend to have their preferences dictated by a system meant to milk them. My own preferences became obvious to me when after a dinner in a Michelin 3 stars with stuffy and boring rich people, I stopped by Nick’s pizza for a $6.95 dish and I haven’t had a Michelin meal since, or anything with complex names. I am particularly allergic to people who like themselves to be surrounded by famous people, the IAND (International Association of Name Droppers). So, after about a year in the limelight I went back to the seclusion of my library (in Amioun or near NY), and started a new career as a researcher doing technical work. When I read my bio I always feel it is that of another person: it describes what I did not what I am doing and would like to do...

I am just describing my life. I hesitate to give advice because every major single piece of advice I was given turned out to be wrong and I am glad I didn’t follow them. I was told to focus and I never did. I was told to never procrastinate and I waited 20 years for The Black Swan and it sold 3 million copies. I was told to avoid putting fictional characters in my books and I did put in Nero Tulip and Fat Tony because I got bored otherwise. I was told to not insult the New York Times and the Wall Street Journal; the more I insulted them the nicer they were to me and the more they solicited Op-Eds. I was told to avoid lifting weights for a back pain and became a weightlifter: never had a back problem since.

If I had to relive my life I would be even more stubborn and uncompromising than I have been.

One should never do anything without skin in the game. If you give advice, you need to be exposed to losses from it. It is an extension to the silver rule. So I will tell you what tricks I employ.

• Do not read the newspapers, or follow the news in any way or form. To be convinced, try reading last years’ newspaper. It doesn’t mean ignore the news; it means that you go from the events to the news, not the other way around.
• If something is nonsense, you say it and say it loud. You will be harmed a little but will be antifragile — in the long run people who need to trust you will trust you.

When I was still an obscure author, I walked out of a studio Bloomberg Radio during an interview because the interviewer was saying nonsense. Three years later Bloomberg Magazine did a cover story on me. Every economist on the planet hates me (except of course those of AUB).

Treat the doorman with a bit more respect than the big boss.

If something is boring, avoid it –save taxes and visits to the mother in law. Why? Because your biology is the best nonsense detector; use it to navigate your life.

The No-Nos
There are a lot of such rules in my books, so for now let me finish with a few maxims. The following are no-nos:

Muscles without strength,
friendship without trust,
opinion without risk,
change without aesthetics,
age without values,
food without nourishment,
power without fairness,
facts without rigor,
degrees without erudition,
militarism without fortitude,
progress without civilization,
complication without depth,
fluency without content,
and, most of all, religion without tolerance.

Read more on Taleb and his discussion of ethics and Cross fertilise. Read about the autistic mind here and ideas on the arts here.

Oglivy. Principles of Management.

In 1968, David Ogilvy set this down:

"...Nor do I seek to freeze the style of Ogilvy & Mather after I retire.

[To me this resonates with the idea that a set of rules or regulations can tend to only freeze best ideas at that time.  Innovation will always conflict with regulation, as rules ossify.  See my commentary on John Kay.]

I hope that future generations will improve upon the Principles I enunciate in this paper...

1. To serve our clients more effectively than any other agency.
2. To earn an increased profit every year
3. To maintain high ethical standards
4. To run the agency with a sense of competitive urgency
5. To keep our services up-to-date
6. To Make Ogilvy & Mather the most exciting agency to work in
7. To earn the respect of the community

On Profit:   in business to earn a profit through superior service... we must pursue profit - not billing. The chief opportunities for increasing profit lie in:

... separating passengers without delay... discontinuing boondoggles and obsolete services:

To keep your ship moving through the water at maximum efficiency, you have to keep scraping the barnacles off its bottom. It is rare for a department head to recommend the abolition of a job, or even the elimination of a man; the pressure from below is always for adding. If the initiative for barnacle-scraping does not come from Management, barnacles will never be scraped

[is this Ogilvy recommending zero based budgeting before ZBB became a management movement?  "I've never heard a budget that can't be justified"  one CEO told me.]

Avoiding duplication of function - two men doing a job which one can do... reducing wheel-spinning in the creative area  [easier said than done though]

On Morale:   Ad agencies are fertile ground for office politics. You should hard to minimise them, because they take up energy which can better be devoted to our clients; some agencies have been destroyed by internal politics.

• Always be fair an honest in your own dealings; unfairness and dishonesty at the top can demoralise an agency.
• Never hire relatives or friends.
• Sack incurable politicians.
• Crusade against paper warfare. Encourage your people to air their disagreements face-to-face [I think we've lost this battle on Twitter etc.]
• Discourage secrecy.
• Discourage poaching
• compose sibling rivalries.

I want all our people to believe that they are working in the best agency in the world. A sense of pride works wonders.

The best way to "install a generator" in a man is to give him the greatest responsibility.  Treat your subordinates as grown-ups - and they will grow up. Help them when they are in difficulty. Be affectionate and human, not cold and impersonal.

It is vitally important to encourage free communication upward. Encourage your people to be candid with you. Ask their advice - and listen to it.

Hard work never killed a man. Men die of boredom, psychological conflict and disease. They do not die of hard work.

While you are responsible to your clients for sales results, you are also responsible to consumers for kind of advertising you bring into their homes. Your aim should be to create advertising that is in good taste. I abhor advertising that is blatant, dull, or dishonest. Agencies which transgress this principle are not widely respected.

Some different quotes from this work found on Papova's Brainpickings.  More from me in an earlier post on advertising.

Global Equity Active Manager Performance. Academic Study.

I take a look at this paper also published in the CFA journal by David Gallagher (professor of finance at the UNSW Business School), Graham Harman (Russell Investments, Sydney), Camille Schmidt and Geoffrey Warren.

"We use portfolio holdings data to examine the performance of 143 global equity funds over the period 2002 to 2012. We find that the average global equity manager outperforms their benchmark by 1.2% to 1.4% per annum before fees. Attribution analysis reveals that the prime source of excess return relates to selecting stocks that beat their local markets. Modest contributions arise from country selection, most notably in emerging markets; while currency effects are mixed. Our findings support giving consideration to active management in global equity markets, at least for institutional investors who pay fees below 1% per annum."

There is evidence that some funds are "closet trackers" and not truly "active".  In 2016, Esma, the European markets watchdog, said that up to a sixth of actively managed equity funds sold on the continent were potential closet trackers. If this is the case then possibly the average results for truly active managers should be better than what is reported too. It would be interesting to know the active share of the funds although I note this work has not been done in this case.

However it does seem that "retail investor" fees can be above 1% and that would negate the outperformance gained seen here. But institutions should be able to do better. The authors quote 70bps (0.7%) as a typical institutional fee. My reading of the literature would suggest moderately large institutional buyers can be paying a much lower rate than that.

"According to Mercer Investment’s Fee Survey 2006 (i.e. around the middle of our sample period), the average fee for global equity core segregated funds was 0.74% per annum for a US$25 million mandate and 0.50% per annum for a US$200 million mandate."

There has only been fee pressure since 2006.

"This article contributes to the understanding of active management in various ways. First, the finding that active managers generate significant outperformance in global equities calls into question whether the uninspiring performance of active management in US markets applies in other contexts. Second, we uncover evidence that the outperformance of global managers primarily relates to stock selection skill. Third, the fact that managers can source significant excess returns from emerging markets raises the possibility that the degree of market efficiency or segmentation might influence the capacity of active managers to outperform."

So Global managers do seem a different breed than US only managers according to this research.

"Regressions of fund excess returns on international factors suggest that benchmark-relative outperformance remains robust to common factor exposures, although loading towards small stocks appears to make a positive contribution"

This is also an interesting finding as it suggests that Global Managers could blend well with quantitative funds that make returns by accessing common factor exposures (for instance "smart beta" funds or those seeking exposure to a "value" or "volatility" or other common factor). Although I note the analysis in this respect was with a smaller sample and more (what I would call) exploratory.

To conclude:

"This study provides support for considering an active approach in global equity markets, subject to the fee paid by the investor and perhaps the ability to identify and access skilled managers. Given the evidence that the prime sources of excess returns relate to stock selection and emerging markets, there appears to be a case for considering managers that adopt a bottom-up approach and have emerging market capabilities. In contrast, the case for investing with top-down managers who focus on country selection as a driver of returns remains to be established. While it is still possible that a top-down approach could be successful, our analysis suggests that these skills are not broadly held across global equity managers."

The authors leave it as an open questions as to whether top-down eg global macro funds, can add any returns.

Another caveat is that I assume the database is the Russell Investment database and how selective that database might be could also be a cause of bias, which is not explored in the study.
 

Pensions. An Absurd Play. UK Advice Services.

Mothers + Pensions + Sons = Arguments in Alien Languages
Me: Money money money. Money. Yak. Yakity yak yak's milk smoking budget budget budget utilities after tax gym
Mum: Are you saying you don't want me to keep fit at the gym?
Me: No. I'm trying to assess must-have expenses like water bills to possibly variable expenses like gyms so I can match super reliable income money money money smoking
Mum: That's why I go to the gym to be healthy...
Me: In this case the upside to smoking is that there are better annuity rates so death death death
Mum: You saying I'm going to die soon? You know the genes in my family...
Me: Yak's milk.
Mum. Eat your food up
Me. Muuuuuuuuum.

(O. What are Dad and Grandma talking about? A: Pensions. O: Do pensions make people angry? S: Let's go for Trains.)

We make a Pinter play seem positively non-absurd.

This area is complex enough that it has taken me days to reach a place where I can make some sense of it. I'm still having to convince that a proper annual expense budget is going to be needed so I can try and match reliable income to it, under uncertain assumptions of size of pot and also ever changing UK pension rules (pension drawdown) and tax rules (dividend tax allowance, savings tax allowance)

Given the life expectancy forecasts (all in the up) and my new found understanding (especially of the human decision making part) I'm now putting pensions alongside healthcare, climate change, and (forced) migration as serious and systemic problems which partly due to their long term nature and complexity are poorly dealt with by humans overall.

Many would point to using an IFA (independent financial adviser) at this point.  However in my view, in the UK, I would recommend you first contact these two government sponsored services.

The Money Advice Service which has a good (if somewhat too balanced, in my view) website as well as offering phone advice and a webchat advice.

The Pension Wise service which will give you 45 to 60 minutes of advice (if you are over 50 and in a money purchase defined contribution scheme.)  

You should also find out what your State Pension is likely to pay you.

Furthermore, before contacting these two services you should also fill out this money check guide (from Money Advice Service) and to be ruthlessly honest on it (eg don't hide your cigarette expense from it). That should help the majority of people, if after that you still need advice then look up an IFA which both services can direct you towards as well, although it is likely word of mouth on that work might better.

*

A theoretical case study.  Goal to match the approx gross £28,000 UK Median wage. This is approx £22,000 after tax. Purely, back of the envelope, rough calculations (mistakes quite probably made!)  There is an BBC News / Actuary calculation here for various type of ages and income, though it puts money only into an annuity at the end.

The State Pension is worth £8,300 pa. You have a £11,500 personal tax allowance. We will secure another £3,000 in yearly income via an annuity. For simplicity, we will take this straight.

For the typical 65 year old this will take a pot of about £60,000  (gender, smoker, guarantees, inflation links will all vary that).  

We now need to generate another £11,000 after tax.   In the UK, you do not pay tax on the first £5,000 in dividends (this may change, but it seems likely a reasonable idea for governments to keep this).  Several equity income type funds will pay approx 5p in the £1 while attempting to maintain capital, this might slightly draw down over time, but with some skill (or luck) could even appreciate.  This would take approx £100,000 if you had it in savings outside your pension pot, or used some of the lump sum tax free amount (25% of pot) on taking your pension.  We are now at after tax £16,000 (and we've used £60,000 buying the annuity, and have £100,000 in equity income funds).

We need another £6,000 after tax.    Here's where it becomes trickier.  One of the most things efficient things to do here is to earn this either in an ISA which is tax free, or with some interest income (where you also have a £5,000 tax allowance limit).  So if you happened to have another £120,000 sitting in an ISA, you are  approximately done  and reached £22,000 (although there could be some variation as money tied up in a equity income fund, and as we all know the equities can go up and down, but hopefully they can stick to near the right yield for you)    Else, if you have £120,000 sitting in a pension pot you can also get close with a mix of drawdown and income, but your pot would slowly erode over time so it might not feel comfortable.  Or you can buy an annuity, but although £120,000 would buy £6,000 or so, this would be pre-tax and not inflation proof.  A pot of £200,000 would be needed to feel comfortable and if turned into annuity would also get you close to a 3% pa escalation on about £6,000.

So that's quite a lot:  £60,000 spent on an annuity; £100,000 in equity income funds; then between £120,000 to £240,000 more needed in a vehicle either ISA or pension pot in drawdown, the £240,000 for the most comfort, the £120,000 being in the realms of possibility but not comfortable.  Suggesting a min figure of about £300,000 in a mix of savings/pensions at 65 now (2017) to generate around £22,000 in after tax income. These figures will likely only increase with time.

Infant Mortality, SDG - what the data says

Infant mortality.  What does the data say? In a series of thoughts on what human development data is suggesting, I examine the good, the bad and what might be missing.

Infant Mortality rate is measure per 1,000 live births. It measures  the number of deaths of children under one year.  Many factors contribute to infant mortality, such as the mother's level of education, environmental conditions, and political and medical infrastructure. Medically, Premature birth is the big contributor with other leading causes birth asphyxia, pneumonia, and term birth complications.

It would come under #SDG Goal 3 and is often considered a measure of human development.

The good news the world average has been cut in half over the last 25 years from50 to 24. The bad news is that still leaves many poorer nations still a far ways off the richer nations. There is the opportunity to accelerate here. Tunisia goes from 44 to 12 during this time.  Brazil goes from 51 to 15.

The US improves but the pace of its improvement lags many other developed nations. Slovenia improves faster. Slovakia over takes the US. This pattern is reflected in many other indicators suggesting that on many measures the US is slipping.  The UK joins the US in slipping in the HDI (Human Development Index), but not on this measure.

I’ll come to systemic risks such as climate change and forced mass migration in future thoughts, but looking at these patterns and some of the underlying drivers (improved health and education) there are reasons to be optimistic that we should still see improvements over the next decade, although my sense is that the US is likely to continue to slip or stall relative to its peers.

Sources:    see http://hdr.undp.org/en  also I’m a fan of Hans Rosling’s works, his legacy can been seen here   https://www.gapminder.org/   and his TedTalk here  (11.9m views) https://www.ted.com/talks/hans_rosling_shows_the_best_stats_you_ve_ever_seen

The HDI is brought to life by google using  google explorer.

Team Work. What Google found.

Effective teams are not a magic algorithm.  Dependability. Clarity. Work Meaning. Work impact and most of all Psychological Safety:  Feeling secure to ask questions and take risks without feeling embarrassed or insecure. Google did find these traits most important.

Who is on a team matters less than how the team members interact, structure their work, and view their contributions. So much for that magical algorithm.

Google learned that there are five key dynamics that set successful teams apart from other teams at Google:

1. Psychological safety: Can we take risks on this team without feeling insecure or embarrassed?
2. Dependability: Can we count on each other to do high quality work on time?
3. Structure & clarity: Are goals, roles, and execution plans on our team clear?
4. Meaning of work: Are we working on something that is personally important for each of us?
5. Impact of work: Do we fundamentally believe that the work we’re doing matters?

The important of the security of risk taking might be surprising but it was the strongest result that Google found.  

Think about it.  If you want to ask "What's really the goal of this project?"  But you don't want to sound stupid... if you don't feel secure, you'll never ask and either (i) you'll be left out the loop and not contribute as much or (ii) the project really didn't have goal and the whole is about to waste the rest of the day in meandering nonsense...  

The questions to think about on a team level:

(Organizational behavioural scientist Amy Edmondson of Harvard first introduced the construct of “team psychological safety” and defined it as “a shared belief held by members of a team that the team is safe for interpersonal risk taking.”  Look up her work for more on this; also links to the Google work below)

1. If you make a mistake on this team, it is often held against you.
2. Members of this team are able to bring up problems and tough issues.
3. People on this team sometimes reject others for being different.
4. It is safe to take a risk on this team.
5. It is difficult to ask other members of this team for help.
6. No one on this team would deliberately act in a way that undermines my efforts.
7. Working with members of this team, my unique skills and talents are valued and utilized.

Google have a tool you can customise to address these questions and issues.  The Manager Work actions are here.  The Team effectiveness guide is here.    All work is originally Google's.   And Amy Edmondson has a Ted talk on it.  My views on it obviously not endorsed by Google etc.

Vaclav Smil, energy expert. Awesome.

Vaclav Smic is a world leading authority on energy systems and usage. I had the fortune to hear him speak at a CLSA event this week.

See his work and academic credentials here.  His books give more data and insights. These two pieces on energy here (2017 Annual Energy paper with JPM) and here, (A skeptics look at alternative energy) also expand on these notes below in more detail. Bill Gates is a fan. 

My brief impressions are:

We are heading for >2 degree world. Too much is already baked into the pipeline. I] It is unlikely we will bend human behaviour enough by 2050. Energy transitions as can be seen throughout history take a long time (decades).

We need to be prepared to deal with negative catastrophes in places like Bangladesh and Florida. Conversely, it is possible that much of Russia will benefit. One could argue Russia might want to ensure at least a +3 degree warm happens if it was only self interested.

We should think about consuming less. The impact of eating 50 percent less beef in the Developed world would be significant. Turning vegetarian for one day a week could also be very significant in terms of carbon impact.

Smil views improving battery technology as incremental. He cites 100 years of progress since Edison made an improvement. He does not view mass efficient energy storage of the type needed to power a city for one day as likely to come on to the market in the next 20 years. He cites near term the biggest to be completed in 2021 in California as being insufficient to power most cities for more than a few hours.

Smic is optimistic on the impact that moving to natural gas could have. Both in terms of pollution, but also in terms of efficiency. Gas is still FF though.

There are no viable alternatives for producing fertiliser, steel, plastics, and much of the basic materials of the modern world; and flying planes other than fossil fuel use. This leaves likely FF to make up at least 50 percent of worlds energy requirements on an ongoing basis.

Fusion. Commercially - The most optimistic assessment would be "Not in our life time" or perhaps "Never". He cites two world fusion experts.

Cities don't really sleep. However solar and wind in most places are not reliable. This is why even though Germany which now has renewable capacity to match its fossil fuel capacity has not impacted meaningfully its FF use, not its carbon emissions from Energy use.

In many places in the world the grid is not connected. One can't send energy from San Francisco to Texas. Or from Texas to Canada. In some places it can work, Denmark can obtain hydroelectric power from Norway when the wind is not blowing. Few people want high energy transmission lines traversing their backyard or landscape, so the situation is unlikely to rapidly improve.

In discussion, as an aside - We will cure more cancers before we solve the mass electricity storage problems  (I happen to agree with this view on the cancer side, I'll have to rely on Smil on the storage problem)

The return on vaccines is at least 44x.  Eradicating polio has been an amazing world benefit. As an advisor to Bill Gates, this is not a surprise to have this view. The Gates foundation has worked on this for a while now.  Many world human development metrics have vastly improved over the last 25 years (As my infant mortality post shows as well, hopefully more data on this).  You can see the Gates work here and a Smil article on it here.

Infant Mortality, Slovakia catches up to US over 25 years.

I take a look at infant mortality trends in a few developed nations.  3 patterns to note.  

1. All countries have improved, you can see this globally (data to come, or see HDI data).  

2. Certain countries like Slovakia have made vast improvements over the last 25 years

3. While the US has improved, its improvement lags that of many of its peers.  Slovakia catches up in 25 years. While US is a rich nation on many measures eg GDP/capita, it lags on many HDI measures and continues to slip behind on overall HDU.  (UK to some extent as well, though not so much on infant mortalilty)