What they Used to Teach You at Stanford Business School

Source: http://www.Portfolio.com

Chris Wyser-Pratte, who got his MBA from Stanford in 1972 and then spent the next 23 years as an investment banker, sent me the following note last night. I’m reprinting it here with his permission:

I learned exactly seven things at Stanford Graduate School of Business getting an MBA degree in 1972. I always used them and never wavered. They were principles that enabled me to put the cookbook formulas that everyone revered in context and in perspective. I think they served my clients (and perhaps me) rather well. Here are those seven principles, and who taught them to me:

  1. Don’t use many financial ratios or formulas, and when you’ve picked the few that will actually tell you what you want to know, don’t believe them very much (Prof. James T.S. Porterfield);
  2. Remember that any damn fool can compute an IRR or DCF. The trick is to find a business that can return 20% after tax, understand its critical indigenous and exogenous variables, and then run it so it meets its return target. (Prof. Alexander Robichek.)
  3. Always ask what can go wrong (Porterfield);
  4. Never extrapolate beyond the observed points of a distribution, you have absolutely no information outside the observed range (Prof. J. Michael Harrison);
  5. Remember that you can always break the bank at Monte Carlo by doubling your bet on red at the roulette table every time you lose. The problem is it will break you first; It’s called “the takeout.” Therefore, always manage your financial structure so that takeout is not an issue. (Porterfield.)
  6. Big M (today Nassim Taleb’s Black Swan) is never a part of the optimal solution. If it shows up in the answer with any coefficient greater than zero, you have the wrong answer and have to continue to do program iterations. (Harrison.)
  7. There is never any excuse for looking through the substance of an economic transaction, whatever the accounting, and if the accounting permits you to do so, it’s wrong (Prof. Charles T. Horngren.)

Conspicuously absent from this list are Prof. Jack McDonald and his Efficient Market Theory and Random Walk, Prof. William Sharpe, Nobel Prize winning author of the Capital Asset Pricing Model (which he later acknowledged didn’t work because his data were wrong, but it’s still used everywhere and they didn’t take away his prize) and Prof. James Van Horne, who believed that the Fed actually controlled the economy through its monetary policy actions. Gene Webb — who at least tried to improve my people skills — and Ezra Solomon in International Finance deserve honorable mention.

The conclusion I derive from your interesting article is that the reason the economy was destroyed by Wall Street, which died in the fire it created, was that they violated, ignored and were probably ignorant of all seven principles listed above. They not only couldn’t do the math, they were mesmerized by its precision because they used a black box and believed in its oracular power even though they didn’t understand how it worked, believed what occurred before could be expected to occur again, hadn’t a clue about what risks were indigenous and exogenous to their own business (or which were which), how probable those risks were and what the consequences were of ignoring the takeout risk, in particular. They also thought financial sleight of hand had meaning. In short, they had their head stuck where the sun don’t shine and deserved what they got. We, the world, didn’t.

What Wyser-Pratt doesn’t mention is that in 1972, business school students largely expected to go into business, as opposed to finance. And insofar as banks hired MBAs, it was because they wanted employees who understood business. Over the following decades, MBAs, and the bankers they turned into, became increasingly expert in finance, while knowing less and less about business. Eventually we ended up living in a world where a major retail operation like Sears could be owned and run by a financial engineer who thought that the answer to any question was simply to spend yet more of the company’s precious cashflow on stock buybacks.

Essentially, we moved from a world where banks were run by businessmen, to a world where businesses were run by financiers. Let’s hope that the pendulum will now swing back (only with more women in charge this time around), and that business schools will start de-emphasizing finance in their curricula. But that might be too much to hope for. Even in 1972 students were being taught CAPM. And the vast majority of them failed to ignore it.

Read more: http://www.portfolio.com/views/blogs/market-movers/2009/03/29/what-they-used-to-teach-you-at-stanford-business-school#ixzz12JJDD2MB

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IT IS HERE AT LAST

Time to buy your ‘friendly’ telco shares

Side note:

Nice one by Gooalgle

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Some geeky updates

Some tech updates while I draft my next article.

Google Wave

For those who aren’t in the know, GOOGLE WAVE is currently opened for public use. It is probably going to be the best collaborative/email/discussion/brainstorm/chat/update tool you’ve ever laid hands on. This should have been released while I was still an undergrad. Life would have been so much easier. Anyways, everyone ought to utilize this masterpiece by Google.

A wave is equal parts conversation and document. People can communicate and work together with richly formatted text, photos, videos, maps, and more.

A wave is shared. Any participant can reply anywhere in the message, edit the content and add participants at any point in the process. Then playback lets anyone rewind the wave to see who said what and when.

A wave is live. With live transmission as you type, participants on a wave can have faster conversations, see edits and interact with extensions in real-time.

ASUS debuts 15.6-inch ROG G53 3D gaming laptop at Computex

Multimedia monster indeed

….And at the other end of the spectrum, from the visionaries (arguable) at OLPC

XO-3 Concept: A Crazy-Thin Tablet OLPC for Just $75

Not only is this not a laptop computer, one wonders how much a child can learn with what is essentially a giant iPod Touch

Tech is wonderful, but please… use it smartly.

Google Maps Lawsuit: Woman Follows Directions, Gets Run Over

by Samuel Axon

When Google Maps‘ walking directions instructed Lauren Rosenberg to walk along a very busy highway with no pedestrian walkway, she followed the directions exactly. Unfortunately, she was hit by a car in the process. Now she’s suing Google for damages, Search Engine Land reports.

The walking directions from 96 Daly Ave to 1710 Prospector Ave in Park City, Utah told Rosenberg to walk just over one half of a mile along Deer Valley Dr, also known as highway 224. The highway did not have sidewalks or any other pedestrian-friendly amenities, and Rosenberg was struck by a car driven by a man named Patrick Harwood.

Rosenberg filed suit against both Harwood and Google, claiming both carried responsibility in her injury. Her lawyers claim that Google is liable because it did not warn her that the route would not offer a safe place for a pedestrian to walk. Note that the Google Maps website actually does do that, as pictured here.

However, Rosenberg says she used Google Maps on her BlackBerry, which did not show that warning, so she’s suing for more than $100,000. She should have probably realized upon arrival that it was an unsafe place to walk, though — but isn’t that how these lawsuits always go?

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Microsoft Research toys with the cosmos… using forefinger and thumb (video)

We’ve always been suckers for Minority Report tech, and Microsoft Research’s latest attempt is not to be missed. Thought pinch-to-zoom was quaint? Try pinching the sky in this geodesic dome. Though the cardboard-and-paper-clip structure isn’t all that (unless you’re the arts and crafts type), the inside houses a projectiondesign DLP unit with a custom infrared camera system that can turn simple hand gestures into virtual interstellar travel, 360-degree video teleconferencing and more. You’ll find a pair of videos demonstrating the concept after the break, but try not to get too attached — if you’re anything like us, your poor heart can’t handle another Courier axing.

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Breast cancer vaccine proves successful in tests on mice, moves on to human subjects

Here’s a cause for optimism, albeit the cautious kind. Researchers at the Cleveland Clinic Learner Research Institute have managed to isolate a human protein that plays part in the …

Sharp Netwalker PC-T1 unboxed, now available

There can be only one. Wait, wrong franchise — this here is a Netwalker showdown. In the left corner, we have the Sharp Netwalker PC-Z1, a 5-inch Ubuntu smartbook powered by the 800MHz Freescale i.MX515 CPU, and at right, we have the Sharp Netwalker PC-T1, a 5-inch Ubuntu tablet with the exact same specs. Is the pen mightier than the keyboard? We won’t find out today — but Pocketables invite you to check out a bevy of fresh-squeezed T1 unboxing pics and comparison shots while they work on a review. See an EVO 4G make this tablet squirm at our source link, or check out our more coverage section if the juxtaposition of the words “Ubuntu” and “tablet” had you scrambling for your pocketbook three sentences ago.

Apple sells two million iPads, international launch likely the main culprit

Apple has just trotted out its latest sales milestone for the iPad: two million devices have now been sold since the slate’s launch on April 3. We promise we won’t bother you with sales figures every time another million gets rounded, but it’s notable that the company has managed to maintain the rapid pace it achieved with its hero tablet during its first month on the market. Of course, that big international launch just a couple of days ago would surely have had something to do with it as well. Ah well, good for them.

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Slim Amazon Kindle ‘Shasta’ to be first with WiFi?

You know what Amazon’s Kindle doesn’t have? No, we’re not talking about color, the other thing. Right, WiFi. That looks set to change when the rumored slimster — codenamed “Shasta” — launches in August. The screencap above displaying the results of an internal Amazon device query shows entries for “Shasta” and “Shasta WiFi.” That would seem to indicate that Amazon’s next reader will launch in two flavors: WiFi + 3G and 3G-only (our source isn’t sure). There’s even an outside chance that one could be a WiFi-only device. Another grab after the break.

Oh, and here’s an interesting footnote: the original Kindle was apparently codenamed “Fiona” after Fiona Hackworth in Neal Stephenson’s novel The Diamond Age. Many of the names in the device list above — Nell (the protagonist), Miranda (mother figure to Nell), and Turing (i.e., Turing Machines) — are all related to that very same story. What we can’t figure out is how the word “Shasta” fits into all this so lay it on us Cyberpunks if you know.

Update: Freddo411 seems to have nailed it in the comments: Shasta, Lassen, and Mazama are all volcanoes in the Cascades.

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Early Nokia N8 leak attempts to go viral (video)

Remember that viral video being made for the then secret Nokia N8 codenamed Vasco? The one leaked in a tweet. Well, here it is, a mixture of impressive foosball skill and even more …

NVIDIA GeForce GTX 465 rounds up mostly positive reviews

Well, it’s not quite June 1, but the GeForce GTX 465 reviews have come flooding out all the same. The official specs are exactly as a recent leak indicated: 352 CUDA cores running at 1,215MHz, a 607MHz graphics clock, and 1GB of GDDR5 memory operating at a 3.2GHz effective rate and exploiting a 256 bit-wide interface. With an MSRP of $279.99, this Fermi-lite GPU scored plenty of admiration for the value it offers, with one reviewer going so far as to call it “quite possibly the most powerful DirectX 11 graphics card for under $300.” Others weren’t so enthusiastic, citing the far cheaper HD 5830 from ATI as a better choice, but it’s true enough that the next best GPU, the HD 5850, tends to be at least $30 more expensive than the 465, depending on brand. You’ll want to delve into the game benchmark numbers in order to make up your mind about which card might make for the best bit, but be warned that NVIDIA’s 465 retains the GTX tradition of ravenous power consumption — something to consider if you’re rolling along with an old school 400W PSU in your rig.

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DoJ’s inquiry at Apple purportedly expanding beyond iTunes practices

Take this for whatever it’s worth (which isn’t a whole heck of a lot without any official confirmation from any of the parties involved), but the New York Post has it that the Justice Department’s inquiry into Apple‘s iTunes practices may in fact be growing. ‘Course, it’s not exactly surprising to hear that authorities are now investigating every nook and cranny of Apple’s tactics thanks to Steve Jobs’ public thrashing of Flash and his sly insistence that the world shun Adobe while hugging HTML5, but we’ve still yet to hear from the DoJ and Apple about what exactly is going on within Cupertino. At any rate, the Post notes that a number of “sources” have confirmed that the inquiry is growing, most notably to include “how the iPhone and iPad maker does business with media outfits in areas beyond music.” We’d heard whispers that things may be getting just a bit too dictator-ish in the developers Ts and Cs, and now it seems that the DoJ is “asking questions about the terms that Apple lays out for computer programmers who want to develop apps for the iPad.” It’ll be interesting to see how all of this plays out, but we can bet devs (and end-users, frankly) are hoping and praying for less restrictions in the future.

ASUS debuts 15.6-inch ROG G53 3D

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Feeling Stressed? Jump then

Seems to me that plunging to your death is the latest craze in China.

And where better to jump than Foxconn’s giant Longhua factory.

Squeeze yourself in with about 400 000 other workers where you will eat, sleep and work before your eventual jump to liberation!

To ease the journey, Foxconn offers  a comprehensive 70 hour work week program where you will work til your hands twitch at night. To further prepare you for the jump, the factory operates  strict No-talking classes where you, alongside hundreds of others in the workshop will learn to shut up and focus on the task at hand. A noisy jumper is a bad jumper they say.

Foxconn believes that a good suicide program is not only free but pays its candidates at the same time! Therefore, the plant offers each candidate 900 Yuan (USD131) a month for their efforts. For each successful complete of the program, the company pays the candidate’s family a large undisclosed amount as a reward!

So, if you are young, between 19 and 24 years of age, and looking for a high flying, brain busting and smashing good time, sign up now.

Well,

The thing about Chinese, labour intensive companies is that the management teams are usually made up of exploitative, beer-bellied apes who pay minimal wages and will not hesitate to give anyone a good whipping should things get even the slightest bit out of line. So, you are treated like a robot. And when a person gets treated like robot, he jumps.

Here’s an authentic Chinaman quote by Lin Fengxiang (robot in the making), a 23-year-old villager from Maoming, Guangdong.

“I know why all those people jumped. In here, nobody gives a damn about you. Too bad I’ve already got one foot on this boat. It’s hard to get off now.”

Most employees are migrants from neighboring  areas who are so used to slacking on the back of a cow, looking at nothing but rows and rows of wheat. Of course they will jump if you put them in a factory. Instead of of focusing on psychological issues, culture shocks or girl-boy relationships experienced by these employees, the press should really slap the management around abit.

Ah yes, the press. When your PR push can’t get your workers to stop leaping off of buildings, then perhaps it’s time to start up the censoring machine. Predictable.

Not to mention the non-suicide pact that workers were forced to sign.

So far, 10 employees have died and on Thursday, the plant saw someone trying to slit his own wrists.

Below the national average? Dude, one death is too many.

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There is no substitute for preparation.

“Give me 6 hours to chop down a tree and I will spend the first 4 hours sharpening the axe.” – Abraham Lincoln

7 Must Read Life Lessons from Abraham Lincoln

Of course, one should never buy a stock without making necessary preparations.

The first step would be to draw as much information about the company as possible. If not you will find yourself popping a truckload of sleeping pills.

A few basic questions that need to be answered before buying a stock

A stock-picker with scant regard for economic forecasts

And if you feel that a 3-7 (and above) year horizon isn’t your kind of thing and are looking for something shorter, here are  some wise words by Wong Kok Hoi from APS Asset Management – ” Act when you do not have complete information. This sounds rather counter intuitive but it is what most successful investors do. More often that not it will be too late to act when you have gotten all the information that you need to make a decision. I am not suggesting that you make decisions before doing your research. There is a world of difference between knowing just enough to make a decision and not knowing enough before making a decision”

Sounds kind of like poker.

Picking their way through

Had the privilege of having a quick chat with the fund managers from Lumiere Capital. That hour or so of coffee with them probably formed the inspiration behind my investment philosophy. Here’s an article featuring the both of them on Pulses magazine. A must read for all budding value investors.

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Web of Debt

Read the article here

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So, The greater fool theory

The world depends on fools.

Your friend gets punched in a club while drunk-touching girls. He is a fool. Others laugh.
Dude at Geylang thinks he owns the road. He is a fool. He gets rammed by a greater fool. And again, others laugh.
You sell your Dragonball card to your buddy back in primary school for 5 bucks. He (me) is a fool. You laugh your way to the bank.

We all derive some form of incentive from fools.

So, the greater fool theory, as described by good ol’ Investopedia:

When acting in accordance with the greater fool theory, an investor buys questionable securities without any regard to their quality, but with the hope of quickly selling them off to another investor (the greater fool), who might also be hoping to flip them quickly. Unfortunately, speculative bubbles always burst eventually, leading to a rapid depreciation in share price due to the selloff.

This is the reason why Japanese men hang themselves or jump from Mount Fuji.

Lesson 1 – Do not be a fool or you just might end up rotting somewhere in a forest.

So, how does the share price of a company rise other than being affected by the collective dumbness (supply and demand, sentiments) of all the other speculators?

There several  theories that try to explain why prices move the way they do. But just like every other theory that is based off the nature of human beings, none of them hold true unless there are a bunch of fixed assumptions. Even at IPO stage, prices can shoot sky high or sink to the depths of hell because valuations are also subjective.

There are, however, certain fundamentals that value investors like to look at, which will affect market sentiments and eventually share price – things like profits, future growth potential, cash flow, debt and a bunch formulas like EPS or P/E Ratio. Basically indicators of an already-good-but-could-be-way-way-way-way-better company because, like it or not, a a sweet juicy orange will always cost more if it becomes a bigger sweet  juicy orange. The whole point is to buy a piece of that orange and wait for it to grow bigger so that the other fools will start to take more notice of it.

Perhaps this is the reason why the markets are becoming more and more volatile.

Anyway, I will look more in depth into things and post them as I learn.

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