Thursday, May 29, 2008

Who Says Big Ideas Are Rare?

How useful is it to have a group of really smart people brainstorm for a day? When Myhrvold started out, his expectations were modest. Although he wanted insights like Alexander Graham Bell’s, Bell was clearly one in a million, a genius who went on to have ideas in an extraordinary number of areas—sound recording, flight, lasers, tetrahedral construction, and hydrofoil boats, to name a few. The telephone was his obsession. He approached it from a unique perspective, that of a speech therapist. He had put in years of preparation before that moment by the Grand River, and it was impossible to know what unconscious associations triggered his great insight. Invention has its own algorithm: genius, obsession, serendipity, and epiphany in some unknowable combination. How can you put that in a bottle?

But then, in August of 2003, I.V. held its first invention session, and it was a revelation. “Afterward, Nathan kept saying, ‘There are so many inventions,’ ” Wood recalled. “He thought if we came up with a half-dozen good ideas it would be great, and we came up with somewhere between fifty and a hundred. I said to him, ‘But you had eight people in that room who are seasoned inventors. Weren’t you expecting a multiplier effect?’ And he said, ‘Yeah, but it was more than multiplicity.’ Not even Nathan had any idea of what it was going to be like.”

The original expectation was that I.V. would file a hundred patents a year. Currently, it’s filing five hundred a year. It has a backlog of three thousand ideas...

Sunday, May 25, 2008

Time Is Not Money

While on vacation in the Caribbean, a buddy of mine brought up an interesting point last night: time is NOT money. The statement is a gross misconception. With money, you know how much you have. You have a multitude of options which are readily comparable through price tags. You can get more of it by doing work, and you can use it at your discretion. A man can hold off on a purchase and be fairly confident that the option to purchase that good will still be there tomorrow. His inaction will even be compensated.

People treat their time in a similar manner. They often try to forestall their their life and business, believing that these actions can always be done later. But time is not money. Every second, it is being used. Patience with it does not yield any rewards because every second is worth as much as the next. You do not know how much of it you have, but you do know it is always decreasing. And even the hardest working individual can not earn himself more time. All he can hope for is to make the best use of the time he is given.

In short, seize the day.

Thursday, May 15, 2008

Wait... What?

From Freddie Mac's 1st Quarter Earnings Release:

Fair Value of Net Assets

The company's attribution of changes in fair value relies on models, assumptions and other measurement techniques that evolve over time.

At March 31, 2008, the fair value of net assets was ($5.2) billion as compared to $12.6 billion at December 31, 2007, reflecting a net after-tax reduction of $17.8 billion. This change in fair value of net assets includes the payment of preferred and common stock dividends during the first quarter of 2008.

The change in fair value of net assets includes a pre-tax reduction in fair value of $28.8 billion as a result of net mortgage-to-debt OAS widening, partially offset by a pre-tax increase in fair value related to core spread income in the first quarter of 2008. In addition, the company estimates that the change in fair value of its credit guarantee activities resulted in a pre-tax reduction of $3.0 billion.

So using market prices as its determinant, Freddie Mac is now in negative equity. But rather then let that reflect into the income statements, the company has changed its accounting rules to more appropriately match its business expectations...

I'm reminded of what Buffett and Munger keep repeating about how two parties are entering into derivative contracts and then both sides are reporting gains. You know the person on the other side of Freddie's transactions aren't discounting their gains to conform with Freddie's models. Some time in the near future, one of them is going to find themselves much poorer than they think they are.

Saturday, May 10, 2008

Justification-Deterioration Model?

From Buffett's speech to the Tuck Investment Club:
Q: What is your view on the leverage in the economy?

A: We are currently an enormous debtor to the rest of the world. The danger is that our children and their children will not want to pay this debt, or said another way, will reject the costs that servicing this debt will impose on society. Let's say that during the Revolutionary War, the colonists were offered a choice: instead of fighting a bloody war that will cost thousands of lives, you can simply agree to pay King George 5% of total national income for perpetuity in exchange for full independence and political freedom. Now to the colonists this would have been a great deal, potentially having their lives spared and gaining freedom for only 5%/year. Decades later their children may not think it's as good a deal but will still have heard stories from their parents and will probably pay the fee. But eventually, three or four generations down the line, enough Americans will forget the original rationale for the deal and will in some way demand a change in terms - possibly go to war with England again to halt the payments. The danger today is that future generations of Americans will be unwilling to continue paying for today's spending and force political action with potentially negative consequences.
I think this example itself deserves its own mental model (although I'm having trouble giving it a proper name). But as I was reading this, I thought of another similar case. Let's say a foreign company offered to make a large factory investment in a developing country. Now at first, the country would praise the opportunity for bringing more production and job opportunities into their country. But as time goes on, children will start to wonder why some of the value of their labor is going to these companies abroad. Eventually, tensions build and the original rationale is lost, leading the people to demand nationalization of the factory.

I don't know what the call this tendency, but I experienced it for myself through my investment in Harvest. It appears destined to keep coming up in the future.

Tuesday, May 06, 2008

"To Strive Together"

It's been a busy few days of school, and it has prevented me from posting in nearly a week. Rest assured that a lot has been learned in that time, and there is a heavy backlog of ideas to write upon. (One great lesson which I'll expand on later: have a clear vision of how shareholder's will get a hold of profits. No more majority owned firms with dicey managements. Sure, they are cheaper, but that is rightfully so. Most of those managers would never like you to see that cash. And with a large block of shares, they can make sure it stays that way.)

Yet for now, a friend of mine told me something interesting today. The Latin root for competition, when translated, means "to strive together". Competition existed as a means of improving their skills and themselves. That meaning seems to get lost sometimes today, overshadowed by a focus on the winners or losers. But to me, the older definition is in the right. The outcome is not necessarily as important as what you take away from the process.