The Hedge Fund Fool of Randomness Hypothesis

...The Hedge Fund Fool of Randomness Hypothesis

"The hedge fund managers, with a track record of less than 10 years, who receive the greatest amount of press coverage when the SP500 and the Dow Jones reach all time highs, are fools of randomness: they will blow-up spectacularly, or experience the greatest declines in AUM in a secular bear market."

~ Craig Chirinda

The Executives of African Airlines Should All Be Fired!

“As of a couple of years ago, there had been zero money made from the aggregate of all stock investments in the airline industry in history."

- Warren Buffett

I spent the greater part of today perusing through a voluminous collection of reports and investment research papers on the African airline industry, after which, I came to the conclusion that it is more prudent for one to invest in nascent ventures located in war-torn African countries than in African airlines. Simply put, the risk of investing in African airlines is astronomically higher than the risk of investing in a diversified portfolio of emergent ventures located in turbulent African zones.

African airlines have appalling capital structures; their balance sheets indicate that they have a burdensome debt-load. Given the high risk environments that airlines operate in, it would have been more prudent for African airlines to be predominantly (and conservatively) financed through equity instruments, and a minute admixture of the most junior debt securities.

The general rule of thumb when financing any venture is: the risk in the capital structure of the entity should be inversely related to the risk in the business environment of the venture (for the venture to be financially strong). However, with African airlines, the risks in their capital structures are directly related to the risks in their business environments: they are poorly financed. Hence, it should come as no shock that most African airlines are perennial loss-making ventures. Furthermore, it should also come as no surprise that most African airlines are in a comatose state: they are currently teetering on the brink of insolvency.

What this indicates to me, is that the functionaries of African airlines are discombobulated by issues of capital structure. They do not have a single clue on how to finance their ventures optimally. Thus, they should just be fired, as their actions, i.e. loading airlines to the hilt with the most inappropriate senior debt securities, are not in the best interests of shareholders (i.e. maximizing shareholder value). If African airline shareholders knew just how dangerously capitalized their ventures are, there would be a shareholder revolt!

...Solution

In the short term, African airlines should use the capital markets to deleverage, as was done (according to Michael Milken) by US airlines in the 1970s, by paying off these debt securities at lower, discounted prices through tax-free exchanges of equity for debt, debt for debt, assets for debt and cash for debt. Evidently, while this move would undoubtedly dilute the existing shareholders of these airlines, it would help to avoid default; which would, in turn, save the jobs of thousands of non-executive employees of the airlines.

Interestingly, if a de-leveraging exercise were to be carried out by African airlines, their share prices would rise (and not fall). This peculiar share-price dynamic can be ascertained from the de-leveraging exercises that were recently undertaken by Alcoa (NYSE:AA) and Johnson Controls (NYSE:JCI). As you probably know, both these companies were perceived to be high credit risks, and contrary to normal 'signaling dynamics', their share prices actually ROSE sharply after they issued new equity! In his essay entitled Why Capital Structure Matters, Mr. Michael Milken gives a very interesting explanation for this share price dynamic when he says: "When a company uses the proceeds from issuance of stock or an equity-linked security to de-leverage by paying off debt, the perception of credit risk declines, and the stock price generally rises." F.Y.I.: The empirical illustration with the relative price histories of Alcoa and Johnson Controls can be found below:

Click On Image For A Better View

Explanation of the illustration: The point marked a, depicts the high of the rally that immediately ensued Johnson Controls' equity issue. The point marked b depicts the high of the rally that immediately ensued Alcoa's equity issue.

Therefore, we can reasonably expect the stock of African airlines, that currently have a perceived high credit risk, to behave in a similar manner after a new stock issue.

In the long term, I believe that it is imperative for the African airline industry to consolidate intensively. I think that what Africa needs are just four good regional airlines; one that caters for North Africa; one for East Africa; one for Southern Africa, and; another for West Africa. If that is done, I am positive that the consolidated airlines would be positioned to benefit from greater economies of scale than the fragmented airlines, and would, ceteris paribus, be able to access more attractive (and sound) funding options from the capital markets.

Otherwise, the executives of African airlines should all be relieved of their duties!

Interesting Trends That You Should Know About

I found these interesting statistics in Richard Watson's Riveting Text entitled 2009+ 10 trends: Predictions and Provocations, and felt impelled to share them:

• There are now 3.3 billion mobile phone accounts globally, a figure roughly equal to half the world’s population.
• There is expected to be a 36% increase in the number of people aged 75+ in Japan between 2005 and 2015. During the same period the number of people aged under 5 years-of-age is predicted to decline by 13%.
• The Self-storage industry in America has grown more than 40-fold since the 1960s and now consists of over a billion square-feet of empty (and not so empty) space. In value terms the industry is now considerably larger than the US music industry.
• 24% of Russians expect to see a clash with the US in the near future compared with only 4% of Chinese.
• Around 80% of all news available on the Internet originates in newspapers.
• 9.5 million people now have financial assets of at least US$1 million.
• 14,000 new cars take to the road in China every single day.
• 90% of all scientists and engineers with PhDs will live in Asia by 2010.
• Of the 120,000 blogs created daily, 50% are about the same subject - the writer.
• By the year 2015, West Africa will become the world’s largest source of crude oil outside of the Middle East.
• 50% of New York University students said they would “permanently forfeit” the right to vote in exchange for a one-off payment of US$1million.
• 80% of UK wealth is held by people aged 55+
• Around 100 million people are thought to have died prematurely during the 20th Century due to cigarette smoking.
• In 2005, 40% of UK weddings involved someone that was getting married for at least the second time.
• Consumer spending by those aged 65-74 in the UK is predicted to increase by 40% by 2017.
• In 2003, the minimum wage in the UK was £4.20 per hour. In the US it was $5.15. In China it was 18 pence (29 cents) and in India it was 7 pence (11 cents).
• The number of non-food antibacterial products launched globally grew from less than 200 in 2003 to 1,610 in 2006 according to Mintel’s New Products Database.
• US $750 billion is now managed globally under Islamic or Sharia principles.
• In 2020 the dominant family type in Australia will be couples without children.
• Smoking kills 25% of all men in the developing world.
• Sales of the five major painkilling medicines grew by 88% in the US between 1997-2005.
• According to the General Social Survey (US) there has been a 300% increase in the number of Americans that have absolutely nobody to talk to about their problems.
• In 1970, 80% of British children walked to school. By 2007 the figure had fallen to 9%.
• 86% of the world’s population will live in emerging markets by the year 2050
• Britons spend 20% of their annual income on leisure, up from 9% in 1957
• To make a cotton T-Shirt requires 27,000 litres of water
• Cement production accounts for 5% of global carbon dioxide emissions.
• More than 85% of the information held by organizations is unstructured.
• In China there are 228 million Internet users compared to 217 million in the US.
• 55% of women in America dye their hair.

An Investment Strategy for the 'Third Wave' of Societal Transition

"To begin with, many of today's changes are not independent of one another. Nor are they random. For example, the crack-up of the nuclear family, the global energy crisis, the spread of cults and cable television, the rise of flextime and new fringe-benefit packages, the emergence of separatist movements from Quebec to Corsica, may all seem like isolated events. Yet precisely the reverse is true. These and many other seemingly unrelated events or trends are inter-connected. They are, in fact, parts of a much larger phenomenon: the death of industrialism and the rise of a new civilization."

— Alvin Toffer in his text entitled The Third Wave

As a self-proclaimed empiricist, I am immoderately pessimistic about the short-term future of mankind, but at the same time, I am also optimistic about the long-term future of the human race. When the preceding statement is expressed in investment jargon; I'm bearish on the foreseeable future of mankind, and bullish on the unforeseeable future of our species.

To expound succinctly on the assertion I made in the preceding paragraph, I believe that the world's short-term future will be characterized by habitual occurrences of acute economic and social pandemonium, which will disintegrate the world order as we know it. The foreseeable future represents a discontinuity in time, when the world begins to change immensely.

Interestingly, this implosion of established social structures will bring out positive changes that will guarantee long-term social stability, and enhanced social welfare for all of mankind. Hence, this simply implies that the foreseeable future will be a period in which the global society will 'incur' costs that are associated with social benefits that will accrue to the 'global village' in the unforeseeable future.

My main aim in writing this post, is to italicize the sea changes that are concomitant to the social transition that is manifesting itself in our midst, and to prescribe a general investment strategy which will enable investors to derive financial advantages (profits) from the changes.

Currently, the majority of the developed world is undergoing the Third Wave of social transition, as was propounded by Messr. Alvin Toffer in his prophetic book entitled The Third Wave. The Third Wave of societal transition is chiefly characterized by the death of industrialism and the rise of a new civilization.

In his text, Alvin Toffer asserts that the following can be regarded as signs of the beginning of 'The Third Wave' (I'll support his assertions with empirical evidence that, in my opinion, suffices):

• The assault on the nation-state from above and below. Evidence in support of this assertion: The proliferation of social networking communities in the cyberspace has enabled individuals from across the globe to form infinite online-based communities (or groups) that are unconstrained by geography, or bounded by historical nation-states. Therefore, as time progresses, online social networks will increasingly decimate, albeit indirectly, socio-cultural barriers that divide the denizens of this planet, and thus, they will consequentially challenge the notion of sovereignty of nation-states. Hence, this, in essence, will constitute an assault on the nation-state.
  

• The emergence of various high technologies, such as cloning, global communications networks, nanotechnology. Evidence in support of this assertion: Obviously, this point is self-evident and does not need further elaboration.

• The gradual eclipsing of manufacturing and manufacturing goods by knowledge-production and information-processing as the primary economic activity. Evidence in support of this assertion: To support this assertion, I will quote a passage from an essay written by Mr. Michael Milken entitled The Corporate Financing Cube: Matching Capital Structure To Business Risk. In the Essay Milken Says: "In the 1920s, when automobiles became a huge industry, 60 percent of the cost of producing a car was in raw materials and energy. For today's computer chips, it's less than two percent of the cost. Brainpower has become the 'raw material' for building companies. This human capital, combined with the social capital of democracy, open markets and the rule of law - is the basis of a prosperous economy."
  

According to Mr. Alvin Toffer, during the early generations of this socio-economic transition, we will witness the precipitation of a wide range of events and trends that will disrupt every kind of social institution. These 'unsettling events' will be fueled by a subliminal battle between those who seek to preserve industrialism and those who seek to supplant it.

Hence, evidently, the first generation of The Third Wave, i.e. the foreseeable future, will be a period of extreme pandemonium. When there is pandemonium, there is widespread insecurity and panic. When people are in a state of trepidation, the price of gold, which is the barometer for fear, skyrockets. Therefore, any investor who seeks to profit from the turmoil, that will punctuate much of the foreseeable future of this planet, should dedicate a growing proportion of his/her portfolio's assets to gold.

You can't go wrong by investing in gold!

Twitter is a Premium Source of Investment Data

To have an enduring edge in the realm of investments, one has to possess the innate ability to spot emergent trends before other market players spot them; furthermore, one also has to possess the ability to instantaneously formulate actionable investment (or trading) strategies that would facilitate the exploitation of opportunities spotted within the discerned trends; and most importantly, one also has to possess the ability to execute the said strategies at the optimal time, in order to extract alpha from the markets.

****

Purveyors of conventional investment wisdom always assert that for an investment/trading outfit to be successful, it is imperative for it to operate like a national intelligence organization. However, gathering actionable investment intelligence/data is usually a mammoth, and almost insurmountable task.

Interestingly, actionable investment data is never available from conventional sources at the optimal or right time. By the time the data pops-up onto the screen of one's [insert name here] terminal, it is usually too late to act on it. Thus, it always pays to be innovative and experimental in one's quest for investment data.

Surprisingly, online social networks have emerged as one of the premium sources of actionable investment data. Unbeknown to most market players, Twitter, among the multifarious genres of social networks, stands out as the best source of Investment data for two reasons:

• Twitter, is a relatively unbiased, heterogeneously mixed, and reasonably large sample of people who reside in advanced or developed economies (i.e., economies with the highest rate of internet penetration). Hence, this allows for reasonably accurate market inferences to be drawn-out from any reasonably large, randomly selected sample from the Twitter-sphere.

• The Twitter-sphere is not a voluminous collection of data like the Blogo-sphere, because Twitter limits its users' updates to a maximum of 140 characters per update. Hence, because of this, extraction of investment data from Twitter will not require algorithms that are too complex. Furthermore, because of restrictions in the size of Twitter updates, meaningful data can be extracted at a much faster rate from the Twitter-sphere than from the Blogo-sphere.
  

Thus, you shouldn't be surprised to know that I am now regularly prowling the vast Twitter-sphere, and stealthy commencing my mining experiments.

This is what my Twitter screen-shot looked like a few hours ago:

Funding a Seasteading Venture

Truth be told, I was largely ignorant about seasteading and Patri Friedman's unwavering endeavors to make it a reality, until I read Peter Thiel's extremely controversial essay entitled 'The Education of a Libertarian'.

When I read the essay, I was furiously befuddled by the notion of seasteading; which motivated me to do a modicum of research on it.

According to the description on the Seasteading Institute's website, seasteading is "creating permanent dwellings on the ocean - homesteading the high seas." Furthermore, the institute also defines a seastead as a "structure meant for permanent occupation on the ocean."

The Seasteading Institute's answer to the question; "Why would you want to do that?", is as follows: "Because the world needs a new frontier, a place where those who wish to experiment with building new societies can go to test out their ideas. By opening the ocean as a new frontier, we hope to revolutionize the quality of government and social systems worldwide by enabling experimentation, innovation, and competition."

From the quoted text, it is evident that Miester Friedman's 'seasteading quest' is underpinned by the desire to find a Utopian social structure that will assauge mankind of the existential despair, and pestilences that are, ostensibly, brought about by flaws in the current world order. Clearly, his quest is of an altruistic nature, but will it uncover a practical solution to the decadence and licentiousness that currently plagues this planet? Furthermore, will his experiments preserve the mental and physical well-being of the subjects that choose to participate in them? Indeed, those are difficult questions that I just cannot answer. However, I do know for certain that his concept monetizable.

The proliferation, and unprecedented success of different genres of reality-tv programmes reveals an important thing about the nature of mankind: humans beings have within the deepest recesses of their minds, a voyeuristic need that is satiated by watching others go-about their lives in unfamiliar settings. (This need could be primordial, or its origins could be recent.)

Thus, from the preceding paragraph, it should be obvious that Patri Friedman's altruistic social experiments could be monetized by conducting them within a commercialized, reality-tv framework.

I believe that people will be mystified by a reality-tv programme that: isolates meticulously-created communities in the middle of the open seas - on an oil rig-esque super-structure, and; gets their respective individual members to co-exist within experimental social structures. Clearly, the concept is definitely unique, and it is guaranteed to attract a lot of attention from television networks - who would be dying to finance it.

Hence, it is my belief that Patri Friedman should concentrate his fundraising efforts on television networks, as he'll never lose by pursuing that avenue.

Wolfram Alpha is Splendiferous!

I have spent the last three/maybe four hours fiddling-around with WolframAlpha, a knowledge based computational engine.

After this experience, I can simply assert that I am more than dazzled by the expert-level capabilities of this computational tool.

Furthermore, after I used the tool, I came to the conclusion that it is going to have a disruptive effect across a wide range of fields. I speculate that Wolfram Alpha's disruptive effects will particularly be felt most in the realm of investments; where it will grant unsophisticated investors instant (user-friendly and almost free) access to sophisticated quantitative metrics, that have the potential to enhance the quality of their investment/asset allocation decisions.

It is my conjecture, that regular usage of Wolfram Alpha - assuming that Wolfram Alpha increasingly becomes more robust, in an ad infinitum fashion - will give unsophisticated investors more confidence in their investment skills, and because of this, an increasing proportion of them may actually decide to manage their own wealth. Obviously, this may adversely affect the vitality of the wealth management industry if it fails to evolve in response to this new development.

To illuminate on the investor-empowering features of Wolfram Alpha, an illustration may be in order:

If you want to do a comparison of stocks, say a comparison of Google, Microsoft and Apple, you simply enter their stock tickers into the user-interface as follows: MSFT, AAPL, GOOG.

After you do that, you get:

(Note To Reader: Click on images for enlarged views)

1) The latest trading prices of the three stocks, categorized in an ascending hierarchical order (i.e. from the cheapest to the most expensive).

2) A table with distilled fundamentals of the companies, like this:


3) A table of returns you would get over time by going long on each of the three respective stocks, like this:


4) A line graph with the relative price history of all three stocks, like this:


5) A performance comparison table that pits the three stocks against the SP500, bonds and T-bills. From the comparison in this particular case, we can deduce that a portfolio that was short on the three respective stocks and the SP500 index, and held T-bills and bonds would have yielded positive returns:


6) A graphical projection of the future price movements of all three stocks, based on a random walk model, like this:


7) And lots more, e.g.; tabulated correlation matrices, and the current mean-variance optimal portfolio structure comprising of the three stocks.

I am sure that it is now evident that, Wolfram Alpha is also, among a wide variety of other things, a personal-instant-quantitative-investment analyst!

I love it. Wolfram Alpha is Splendiferous.

Power to the masses!

For more details on the example in this post, visit:

http://www.wolframalpha.com/input/?i=MSFT%2C+AAPL%2C+GOOG

The Harbinger of a Technological Singularity

I am exceedingly ecstatic about the launch of Wolfram Alpha tomorrow. Why? Because its launch will aver an assertion that was made by an Elizabethan-era mathematician named Sir. John Dee ( He was a trusted adviser to the British Virgin-Queen and the real 007).

As you may/may not know, Sir. John Dee was of the opinion that it is possible to manipulate abstract symbols and numerical data to solve any quandary that besets mankind... And, as you obviously suspect, it is my belief that Wolfram Alpha will be the magical tool that will manipulate abstract symbols and numerical data to solve any quandary that besets mankind.

****

I firmly believe that Wolfram Alpha will be the first revolutionary knowledge computational engine. From what I've read about the tool, I can surmise that it will have the ability to answer multifarious factual questions, from a diverse range of fields, by rapidly synthesizing a search query into a complex symbolic algorithmic representation.

After it does that, the complex symbolic representation will then be adroitly used to build a plausible answer (to the query) - from bits of innocuous data existing in an array of online knowledge databases.

Amazingly, the output of the whole process will be a detailed answer, that resembles a dense academic script; which has graphs, diagrams, charts, references, and answers to other interesting related questions. Otherwise, succinctly expressed: Wolfram Alpha will be like a thinking Wikipedia, that builds answers off-the bat; the epitome of Sir. John Dee's assertion!

Furthermore, the answers that Wolfram Alpha will produce, will actually appear like they have been prepared by a seasoned pundit, and Wolfram Alpha may actually perform better in the Turing Test, than any Web 2.0 technology that has ever been created before. (In fact, it may be the harbinger of an impending technological singularity!)

****

A message to the inveterate skeptics of the concept of an impeding technological singularity: "Now, is the time to suspend the senseless incredulity, and pause for just one moment, to contemplate the possible consequences of an inevitable technological singularity."

****

This may be bad news to Luddites, but its definitely great news to me.

The Financial Crisis Was Caused by Psychopaths (Really)

I was reading an extremely thought-provoking text entitled Snakes In Suits: When Psychopaths Go To Work by Messrs. Paul Babiak, Ph.D. and Robert D. Hare, Ph.D., when I came to the conclusion that: The financial crisis, that the world has been enduring since 2007, was caused by psychopaths.

In the book the following points are raised, and substantiated with empirical evidence and hypothetical case studies:

• The typical 'corporate' psychopath exhibits, through his/her actions, a personality disorder that is rooted in; lying, manipulation, deceit, egocentricity, callousness, and other potentially destructive traits.

• Psychopaths allow the responsibilities of leadership and the perks of power to override their moral sense.
  


• In an organizational setting, psychopaths generally can be identified by their; grandiosity, sense of entitlement, and lack of personal insight that usually leads to conflict and rivalry with bosses and coworkers, and by their impulsiveness and “live in the moment” philosophy that leads them to keep repeating these and other dysfunctional, antisocial behaviors, despite performance appraisals and training programs.


• Usually, in certain extremely risky high return environments (especially certain sales-oriented environments), some core psychopathic personality traits—call them talents, e.g. taking charge and social engineering prowess—may seem attractive in job applicants, and may actually contribute towards upward mobility in their careers.


• The modern trend towards bureaucracy-free organizational structures, makes most organizations a fecund breeding ground for psychopaths.
  

In my humble opinion, the book subtly implies, and this is just an inference I'm making, that Finance-oriented environments attract psychopaths, and that they also richly reward psychopathic behaviors. Hence the title of this post. (Note: If you're an insider, you'll instinctively understand what I mean. If you are an outsider, please read Michael Lewis' biographical text entitled Liar's Poker, after which, you should peruse through the bullet points in this script to fully understand the point that I am raising.)

Therefore, it would be prudent for the Obama administration to impose a statute that requires all people in Finance-oriented fields to undergo mandatory psychological tests that are specifically designed to weed-out psychopaths. Those who exhibit psychopathic tendencies, the psychos, should be required to undergo regular therapy sessions, and they should also be monitored closely. For the process to be transparent, the tests could be conducted through industry bodies like FINRA, or through regulatory bodies like the SEC. Surely, if this were to be done, Madoff-esque epic frauds would be fewer, and market dislocations would be rarer.

While I do acknowledge that this is an unorthodox and impractical proposal, that violates the civil liberties of people, I seriously believe that it would yield better results than the current regulatory regime.