The word “algorithm” comes up a lot these days. We’ve spoken before about the origin of this word, in the name of Muhammad ibn Musa al-Khwarizmi, author of The Compendious Book on Calculation by Completion and Balancing.
written around 820 CE in the city of Baghdad.
The man from Khwarizm.
The Khwarazam region today doesn’t look too great.
The Vibes Speculator
You hear about two schools of investing. Value investing, and growth investing. First, value investing.
Value investing involves generating a number for what a company’s intrinsic worth might be, comparing that number to the price the company’s shares are trading for on the stock market, and buying when there’s a discount (plus a margin of safety to account for the risk). You want to buy stocks that are cheap, on sale, and wait for their prices to return to what they should be.
Howard Marks, in his new memo “Something of Value” for Oaktree Capital, has a great definition of value investing, and we’re taking that as our text today. We would quote it extensively, but there’s a stern disclaimer on it. After an email correspondence with Oaktree Capital, I appreciate their denial of my request for permission to use lots of quotes in this piece.
We encourage third parties that are interested in sharing Howard’s memos with an audience to write their own summary/article about the memo and then link to the memo in its entirety on our website. Howard’s memos are meant to be read/viewed in their entirety and removing specific quotes can lead to them being taken out of Howard’s intended context. Also, as we operate in a highly regulated business, we are required to include our legal disclosures to Howard’s writings, and removing portions of his writing without the disclosures attached goes against our internal policies.
as Leia Vincent of Oaktree put it to me in an email. I see their point.
Check out Marks summary of value investing, paragraph four.
investing was pioneered by Benjamin Graham, whose teachings were transcribed by David Dodd, Graham taught Warren Buffett. There’s a lot to love about value investing. It’s bargain hunting. It almost feels virtuous. You must be rational to be a value investor. You must have emotional discipline as the market goes up and down.
Value investing is widely preached. Aswath Damodaran of NYU, who wrote a little book on the topic, will teach you on YouTube. Shawn Badlani spoke about his training as a value investor on episode 8 of my podcast, Stocks: Let’s Talk.
Value investing thinking has served Shawn pretty well. Every investor would be wise to study valuation.
As Marks acknowledges though, value investing has significant downsides. You’ve got to do a lot of calculating of discounted cash flow for one thing. Math, which is maybe not that hard, but tedious. There are computers, which can help you with the math. I like Guru Focus (you gotta pay to be a member) which can do shorthand estimates for you, like this one for Tesla:
but that can only get you so far, and it also reveals another problem. Value investing has imbedded in it both an attraction for the rational and a torture for them: stocks aren’t always trading for what they should be worth.
That is, their price isn’t always what it “should” be. That’s supposed to be an advantage, if you buy them when they’re cheap, and wait for the equilibrium that must come, when their true value will be revealed.
But what if that never happens? Consider the angst of Value Stock Geek, a smart writer on this subject. How long do you wait for the stock to achieve the correct price?
Not only that, but for all that math, you’re still just guessing! All your calculations are only as good as your inputs, some of which are guesses!
Plus, you’re competing against Warren Buffett, Munger, Aswath Damodaran, Shawn, Value Stock Geek, and literally one million other people. Wall Street has been sucking off physicists, computer scientists, “quants” of all kinds, taking them away from useful work and putting them into complex valuation shops. Their computers are faster, more powerful, and more expensive than yours, I guarantee. Their computers blow your puny computer out of the water. They’ve got an Alienware Aurora R11 with Intel Core i9 10900KF and an Nvidia GTX 1650 Super – RTX 3090, with 2TB M.2 PCIe SSD + 2TB SATA HDD and you’ve got an Epson 512K with 5.25 inch floppy disc. Who’s gonna kill if you’re playing Red Baron?
So much for value investing.
Then there’s growth investing.
The story of Marks’ memo is of how spending time during the pandemic with his son Andrew has opened his eyes to the second major school: growth investing. Marks memo describes how now he has his son Andrew living with him, and Andrew is opening his eyes to the thinking of a growth investor.
Growth investing is about assigning a valuation to a company that may not yet have shown its value, but whose growth, as measured by one metric or another, has a potential to grow into cash flows of great value.
Recently, growth chasing has worked out very well. The one quote I’ll lift from Marks:
the performance of value investing lagged that of growth investing over the past decade-plus (and massively so in 2020)
It’s easy to understand why that might be. The speed at which the fast growing companies grow is almost incomprehensible. In 2002 the so-called facebook at Harvard was a physical book the college handed out with pictures of faces in it. In 2020, eighteen years later, one young person’s lifetime, $FB has two point five billion people using it every month. Facebook has swallowed up billions of dollars in advertising, helped wipe out at least two thousand local newspapers, and influences world events, from elections in the USA to ethno-religious violence in Burma.
Scary stuff, if you’re an innocent citizen. Groovy if you’re a shareholder of Facebook (I am not).
Or take Amazon:
For a sense of scale, it took Amazon more than 14 years—58 quarters after its May 1997 initial public offering—to make, cumulatively, as much profit as it produced in the latest quarter alone. Keep in mind that Amazon consistently lost money for its first several years as a public company.
(first article when I Google “when did Amazon finally make a profit?” ) From Wikipedia:
The company finally turned its first profit in the fourth quarter of 2001: $0.01 (i.e., 1¢ per share), on revenues of more than $1 billion.
A traditional value investor would not have been into Amazon in 2001.
The endgame for growth investing is you grow so big you’re the biggest animal in the pond and you have no competitors, only, in this pond example, small frogs to amuse you, and minnows to tickle your feet, and perhaps birds, and someone (local villagers? customers?) just keeps bringing you food because they have to. Or even want to? Or because of a curse? The example fails at this point but you get the idea.
Picking those winners can be hard. You need to choose what metrics of growth to focus on. The important metric may not be how much money you’re making. This seems to defy logic and economics and years of Wall Street lore, but that is how the market has reacted. The word is out that even if a company is not only not making money but is losing more and more money, that can in some cases be fine, that can still be fine, as long as they’re swallowing market share.
(This has created some funny wins for the consumer, like MoviePass).
So: value and growth. Marks’ memo is lucid well-expressed thinking on how his thinking is evolving about the blend of these two schools.
i just read the memo and agree, it is really good. love the idea that value investing just means buying something for less than it’s worth, even if that thing you’re buying is a fast growing company with a high current p/e multiple.
Now, there’s also technical investing, which seems to be people studying candlestick charts, and then trying to reverse-divine the algorithms that make automated trading decisions in Flash Boys style scenarios. I admire these folks, and there’s probably something to it, but it’s not for me.
There’s also momentum investing, where you chase where you think the herd is going, based on anything from complex systems of pattern recognition to just what people seem to be talking about and what’s in the headlines. I used to study this school, and it’s very fun.
What I’d like to propose is a new school.
Vibes Investing we discussed on episode 7 of Stocks: Let’s Talk, with the legend Liz Hall.
We believe Vibes Investing has a bright future.
Is vibes investing even investing? Is growth investing investing? Most definitions of investing say something about “an expectation of achieving a profit,” or “a reasonable expectation.” What we’re talking about here may be something more like speculating. A different and perhaps equally noble pursuit.
The vibes speculator would not compete against the quants and the computers. The vibes speculator would look for signals the computer couldn’t see, invisible, unquantifiable signals. The vibes speculator would look for growth, but not according to any metric that might be spotted by a million growth investors. The vibes speculator would feel the growth.
I’ll have more to say on the topic of vibes speculating. I’ve considered launching a prestigious and expensive newsletter, The Vibes Speculator. Or perhaps a small book on the topic. I’m not sure if the book would be in the category “business” or “humor.”
If you control a budget at a well-funded company I’d consider giving a talk on vibes speculating for an extravagent fee.
If you have thoughts on vibes speculating, get in touch. It’s an exciting conversation.
(Disclaimer: none of what I say is investment advice of any kind. These are the musings of an enthusiastic amateur. If anything the sign that amateurs are talking about the stock market is a classic signal of a market top.)
But here is a rough sense of how some senators see things. They are leaders in a sharply, at times violently divided country and represent a party half of whose base is fed, daily, algorithmic incitements to suspicion and anger. The president leads this, fans it, gains from it. They lack the credibility with Mr. Trump’s base that the president has. They don’t want to jeopardize themselves over something that will be resolved through time. So hold off, lower the temperature, support the system. Recounts and court decisions will reassure some voters that every effort was made to get at the truth. This can buttress confidence in democratic processes and encourage a sense of their fundamental soundness. Taking time to get it right will have the effect of tamping down a destructive stabbed-in-the-back mythology among Trump supporters inclined in that direction.
Here’s Peggy Noonan in her column, setting up the position of Republican senators who want a safe space, snowflake, sensitivity to their defeated voters, lest the facts hurt their feelings.
It’s 1588. You walk into a play-house. A guy walks out on stage and says:
O for a Muse of fire, that would ascend the brightest heaven of invention, a kingdom for a stage, princes to act and monarchs to behold the swelling scene!
Then should the warlike Harry, like himself, assume the port of Mars; and at his heels, leash’d in like hounds, should famine, sword and fire crouch for employment.
But pardon, and gentles all, the flat unraised spirits that have dared on this unworthy scaffold to bring forth so great an object: can this cockpit hold the vasty fields of France?
or may we cram within this wooden O the very casques that did affright the air at Agincourt?
O, pardon! since a crooked figure may attest in little place a million; and let us, ciphers to this great accompt, on your imaginary forces work.
That’s how Henry V opens.
That ref to the wooden O is (as I understand the only time) we hear about the Globe Theater from Shakespeare himself’s mouth or pen or whatever. Got to thinking about it in London in May.
Shakes is so good. That “o for a muse of fire” is so good. Like a Jimi Hendrix moment:
A dude who’s gone so far in his art that he’s got nothing left to do but scream at Heaven to let him ascend.
One time Yang saw this at my house and said, “is Shakespeare good?” Solid question. To answer it I suggested we watch:
which, I think is pretty good. Yang pointed out that in this version, the music does do a lot of the work.
By the time Shakespeare wrote Henry V he’d already done Romeo & Juliet, Richard III, A Midsummer Night’s Dream, Merchant of Venice, Henry IV Part 1, Henry IV Part 2, Much Ado About Nothing, and thirteen other plays.
That’s if you believe the story.
There was a def a real guy Shakespeare, a real person who was born and died. In his own lifetime this Will Shakespeare was famous for writing plays. Pirate editions of plays with Shakespeare’s name on them would be sold like scripts of The Godfather on the streets of New York.
Far as I can see, Will Shakespeare gave no evidence of giving a shit about the text/publishing of his plays. Didn’t appear to care. The fact we are reading them now would’ve probably shocked him or else he also wouldn’t have cared about that. What he cared about was like getting a coat of arms.
Is this headline correct? I dunno, I think he wasn’t exactly a nobody in Stratford.
There’s much bureaucratic evidence that Will Shakespeare existed. Probably at least sometimes he was a semi-gangster.
He was around brothels and bars. The last hot young playwright got stabbed to death in a bar.
Read this book recently:
I agree with some of the points in this New Criterion hammering of it. There’s a lotta coulda woulda shoulda. But then again if there wasn’t the book would be like five pages long.
Did Shakespeare really write all those plays?
The evidence suggests to me that yeah, real guy Will Shakespeare wrote at least most of them.
Top piece of evidence: in Shakespeare’s lifetime, real guy Shakespeare was known for writing these plays. His name was on ’em.
Well, some of ’em.
I don’t see Shakespeare’s name in the “bad quarto” of Henry V.
The scholars tell me that’s fine. Consider the folios! Put together by Shakespeare’s friends after his death! Henry V is in there, perhaps typeset from the “foul papers” of Shakespeare himself in fact! It counts.
Second best piece of evidence: Shakespeare’s fellow writers were jealous of him.
Catty remarks from the time are recorded.
He also turns up in a contemporary diary getting off a pretty good joke about boning a groupie.
Third best evidence: there’s a “voice” to the Shakespeare plays. You can feel if if you read a bunch of the best plays. I admit I haven’t read all of ’em. But I’ve read maybe a third, and I’ve read some Christopher Marlowe plays and some Ben Johnson plays, and you can tell a difference. The plays marked Shakespeare are better. In fact half the time that’s how they decide whether to include one or not.
That’s the weakest evidence, who knows what kinda bias my brain is bringing to the table when they’re presented as Shakespeare plays. Some computer/AI type analysis of word usage and so on suggests maybe he didn’t write the Henry VI ones but those suck anyway I’m told.
I think you have to admit Shakespeare wrote some of Shakespeare’s plays, right?
Not everyone agrees:
Rylance thinks now that William Shakespeare was most likely a front for a small band of writers, perhaps headed by Francis Bacon, which included, among others, Lady Mary Sidney. He argues that in the seventeenth century it wouldn’t have been appropriate for persons of rank to write for the public theatre; therefore they would need to do so anonymously. “If you even suggest that Shakespeare would have had to be at court, it’s heretical,” van Kampen said. “It’s a metaphor, and it’s about Englishness.”
(from this New Yorker profile by Cynthia Zanin).
The idea that Shakespeare was really Francis Bacon feels to me like someone five hundred years from now claiming
perhaps Barack Obama wrote Dave Chappelle’s routines and Kendrick Lamar’s raps.
it’s possible Hillary Clinton wrote Shonda Rhimes’ shows.
“I want to be Shakespeare,” he told us. “You should all want to be Shakespeare, too.”
That’s Denis Johnson. I think that quote got me back into Shakespeare.
Shakespeare scholars are not usually people who are in the habit of cranking out scripts on tight deadlines or have necessarily been around showbiz.
The experience of seeing how scripts get writ makes me wonder if Shakespeare was a showrunner. If we should think of him like Aaron Sorkin or Shonda or Ryan Murphy. Both himself a wildly talented craftsman but also a quality controller supervising and directing other writers.
Shakespeare is a happy hunting ground for minds that have lost their balance
Joyce has Stephen say in Ulysses.
I’ve spoken before of my love of Raven Maps. Shoutout to Professor McHugh for putting me onto them.
Recently I had some correspondence with them. With their permission I share it with you.
Name: Steve Hely
Their Questions or Comments: Hi! Big fan of your maps, have bought several. I was interested in learning some cartography basics so I can make a topo map of a small (five square miles) area of the world I inhabit and love. Do you have or know of any resources for learning these skills! Thanks!
(That’s what I wrote, on their form).
Raven Maps replies:
Steve Hely,Well, that’s a good question. The old techniques have long-since been reduced to algorithms and interred in software. All maps are now produced digitally, but I assume you want to just enjoy learning your area in the way that mapping it allows? You don’t need to become a GIS / Cartography tech for that.My suggestion: get the printed USGS 1:24,000 scale 1:7.5′ map of your area (perversely, an area you are interested in often turns out to be at the edge of two, or at the corners of two or three, in that case get all the sheets you need), or print them out from an on-line digital source); get tracing paper (or polyester drafting film), and start tracing the features you are particularly interested in– and just keep at it. Many iterations, probably many dozens. That’s OK, tracing paper is cheap. Colored pencils cost more but you won’t need all that many. Remember that every completed map has a great many more layers and classes of features than you probably care about, and probably does not show the ones you DO care about– and that’s where the fun starts, as you figure out what to leave off, how heavy / what color the lines are, how to identify the features you care about, and so on.For an area of 5 miles on a side, differences in projection (among various source maps, which you will probably start consulting) will be only a very minor problem, you can probably ignore. Scale differences can be corrected at your local FedEx copy shop.And always, keep on hand some sample map you especially like, so that you can see how that map handled the particular issue you are wondering how to solve. (There’s a reason you see aspiring painters closely studying the classics in museums– first, learn how THEY did it.)Hope this helps,Stuart AllanRaven Maps
Ray Dalio, billionaire founder of Bridgewater Associates, one of the world’s largest hedge funds.
That’s a 30 minute video he made about how the economy works, nbd.
A brilliant person with an atypical mind who lays out their worldview in a kind of manifesto can pretty much always get my attention.
Three of his Dalio’s beliefs:
- “algorithmic decision-making is coming at you fast”
- evolution is good
- to achieve success you must face and accept harsh realities
A lot to think about in Ray Dalio’s Principles.
BUT: let’s limit our discussion today to one moment in his TED Talk above. We’re going to talk about a joke and the audience reaction to it.
You’ll have to watch about one minute of the talk. Start at 14:30.
Dalio is describing a complex system where everyone in his company rates each other and is radically transparent with each other. Everyone can rate each other, in different areas. Even a lowly employee can rate Ray, creating charts like this:
At 14:46 he says that because of this, at Bridgewater there is no politics.
Which: Ray Dalio is 100x smarter than me, but I’ll bet ten dollars there are indeed politics at Bridgewater Associates, probably insane, high-order, wildly weird politics.
At 15:13 Ray Dalio makes a joke. This being his TED talk, no doubt a joke he had practiced. Radical transparency, he says, doesn’t apply to everything.
You don’t have to tell somebody their bald spot is growing or their baby’s ugly.
People laugh a little bit. Dalio continues.
I’m talking about the important things.
People laugh a LOT.
Dalio seems even thrown by how much the audience laughs at the second part, not the intended punchline.
The audience laughs because Dalio is missing the point.
Dalio inadvertently reveals he doesn’t know what the important things are to most people.
What are “the important things?” Making sound investment decisions? Tweaking the algorithm properly? Workplace communication?
Whatever, yes, in theory.
But really? No. To most humans whether your bald spot is growing and whether your baby is ugly are the important things. It would hurt way worse to be told either of those than that you’re ineffectively communicating in the meeting. That pain is a measure of importance.
The audience is expressing laughter / disbelief at the fact Dalio assumes workplace discussion is more important than stuff like whether your baby is ugly.
Perhaps Ray Dalio doesn’t get it because he’s trained himself not to feel that kind of sensitivity. That’s one of the points of Principles, to train your mind to get that nonsense out of the way. It’s served him very well as an investor.
But it’s a little robotic, and a little detached, and a little inhuman.
If I worked for Dalio, I suspect I’d rate him low in the category of “empathy / compassion / understanding for what matters to people / sensitivity.”
But then, are those categories even in the algorithm?
Oh btw James Comey used to work for Ray Dalio, and also Dalio recently recommended allocating 5-10% of assets to gold.
looked it up at Online Etymology, my new fave site.
algorithm (n.)1690s, “Arabic system of computation,” from French algorithme, refashioned (under mistaken connection with Greek arithmos “number”) from Old French algorisme “the Arabic numeral system” (13c.), from Medieval Latin algorismus, a mangled transliteration of Arabic al-Khwarizmi “native of Khwarazm” (modern Khiva in Uzbekistan), surname of the mathematician whose works introduced sophisticated mathematics to the West (see algebra). The earlier form in Middle English was algorism (early 13c.), from Old French. Meaning broadened to any method of computation; from mid-20c. especially with reference to computing.
The man from Khwarizmi.
Few details of al-Khwārizmī’s life are known with certainty.
He worked in Baghdad as a scholar at the House of Wisdom established by Caliph al-Ma’mūn, where he studied the sciences and mathematics, which included the translation of Greek and Sanskrit scientific manuscripts.
I gotta read this new book by the amazing Tyler Cowen:
In the book, you write that algorithms might urge us to go out with apparently unlikely partners—they might even guide us during our dates, monitoring our heart rates and sending us text messages like “Kiss her now!”
Maybe most of the time it won’t go very well—you’ll get rejected quickly or you’ll look like a fool—and it’ll feel wrong to us. But if that risky behavior increases your chances of connecting with the right person quickly enough, before they end up meeting someone else, it might nonetheless be good.
And there will be Luddites of a sort. “Here are all these new devices telling me what to do—but screw them; I’m a human being! I’m still going to buy bread every week and throw two-thirds of it out all the time.” It will be alienating in some ways. We won’t feel that comfortable with it. We’ll get a lot of better results, but it won’t feel like utopia.
(reminding me of: Boyle’s horrifying impression of a fourteen year old girl about to get kissed. painting)
Most people who write about inequality write in a tone of moral outrage, and make suggestions about how we might reverse its growth. You seem to have deliberately avoided that; you’ve written about it in purely predictive terms.
I do, in numerous places, point out things we might do to make inequality problems less severe. (Mostly we’re not doing them.) But I think that to dispassionately lay out the facts is often the best first thing to do, to open up that dialogue—to step back first, and view things more analytically, and then to apply our judgments.