Peter Levin’s Rethinking Markets

March 27, 2008

More inconspicuous consumption

Filed under: Culture — Peter @ 9:46 am

There are really good sociological analyses of luxury around, including my current favorite, Rachel Sherman’s Class Acts. One of the more interesting things to think about is how luxury becomes singular in a sea of reproducibility. Kevin Kelly’s post Better than Free catches this trend well, and I’m sure everyone will talk-about-without-reading-in-a-Malcolm-Gladwell-way Chris Anderson’s next book, “Free“.

The flip side is the irreproducible, and here I like the example noted in the NYT today, about Tomas Maier:

…the muted logo-free look that is the brand’s signature is widely regarded as the standard-bearer for a new kind of luxury: subtle, long-lasting and recession-proof. In such a climate, Mr. Maier himself has emerged as a hero, albeit a reluctant one — and, to his admirers, even something of a prophet…

…While competitors were churning out look-alike handbags made of coated canvas, bearing hefty hardware and equally hefty price tags, Mr. Maier perfected his specialty: the Intrecciato series of hand-woven bags, some that take two days of labor to make (compared with about 80 minutes for a standard-issue designer bag). Signature products, devoid of initials, they typically sell for $1,200 to as much as $4,500.

While other designers were producing dart-free baby-doll dresses as if they were so many Fords, he concentrated on deceptively simple, painstakingly constructed styles priced from about $1,200 to $6,000 for an evening dress. The dressmaker touches — ruching, serpentine seaming, hand-beading and elaborate pleats — are recognizable to a small but informed clientele.

It’s cat and girl all over again, that elite means not just displaying wealth for everyone to see, but displaying wealth in such a way that it appears to most people that you are not displaying wealth, but it appears to the right people that you are displaying wealth and taste. The mint on the pillow and the carefully folded toilet paper roll, unobtrusively placed with no presence of an actual serving staff (per Sherman). Thomas Keller rolls this out at the French Laundry, according to Anthony Bourdain’s Cook’s Tour: “More often than not, he’s taking something refined and giving an ordinary - even cliched - name (the best examples being his famous ‘coffee and doughnuts’ dessert, the ‘Caesar salad,’)…” The former being cinnamon-sugared doughnuts with a cappuccino semi-freddo, the latter being Parmigiano-Reggiano custards with Romaine lettuce, anchovy dressing, and parmesan crisps. Huge labor, small sign - if you need to ask, you can’t afford. But better if you don’t even know it’s there.

It’s time to revisit conspicuous consumption and class.

March 25, 2008

Housing CMO Primer

Filed under: Markets, Prices — Peter @ 4:05 pm

I want to re-tell a story from Frank Partnoy’s F.I.A.S.C.O., but a bit of background on Collatoralized Mortgage Obligations is first in order. CMOs, and their generalized cousin Collatoralized Debt Obligations (CDOs) are the current culprits in the sub-prime meltdown, so this is probably useful to know practically as it is to know theoretically. Also, I’m participating in a conference on Crisis, Emergency, and Global Processes, and I’m thinking about incorporating some of this thinking into that. This is a long post, and kind of technical, but probably not too much. There is a nice visual at Portfolio Magazine, so if this whole primer doesn’t help, perhaps that will. (more…)

March 18, 2008

Not about markets - photos!

Filed under: Ramble — Peter @ 4:19 pm

In Central Park, not far from where I live, I shot this photo - if it looks familiar, it’s because it’s been shot about a gazillion times by people looking over the West Side from the West 70s:

I ran across a lovely tutorial, which allowed me to transform that photo into this:

I’m proud of it, it’s possibly the coolest photo I’ve taken myself. That’s right - sociological, socially awkward, and on the rarest of occasions, artistic (but no whimpster, thank you very much).

Photo credits? Me. Me. Me.

March 17, 2008

High finance and you…

Filed under: Markets — Peter @ 1:17 pm

Funny story: about a two and half years back, my mother-in-law’s financial advisor suggested to her that she could edge up a point or two of interest income by investing some of her money in Puerto Rican municipal bonds. This was the late spring of 2006. In May of 2006, Puerto Rico went bankrupt, and its bonds were downgraded to Baa3 - effectively, one step above junk bonds. Interestingly, a look at Moody’s ratings suggests that PR bonds had been consistently downgraded in spring 2006. So it was not a shock that the slightly higher premium paid to PR bonds were due to risk of default. He just didn’t disclose that to my mother-in-law. She took a pass on the opportunity, by the way.

I didn’t say anything at the time, and I still don’t make a big deal out of it, because to do so would throw into question whether my mother-in-law can trust her financial advisor. But this person - who, incidentally, wins prizes for being one of the best financial advisors in the state of Hawaii - is a bad man. And his advice was, and is, morally reprehensible. Or rather, it’s not the man, it’s the structural position of being a financial advisor for a large financial services firm. Because I can guess what really happened back in 2006. His firm - Merril Lynch - owned a bunch of Puerto Rican municipal bonds, and a call went out to salespeople to offload these losers to their customers. PR munis have high tax-exempt status, which gives them a great selling point, especially when you can obfuscate the rest.

Why do I relate this story? Let me be as clear as possible: the interests of Wall Street are not your interests. Let me say it again: the interests of Wall Street are not your interests. The main interest of Wall Street is to use your bank account to enlarge their own. There are, quite simply, no exceptions to this rule, no nice guys who are different and have your interests at heart. Puerto Rican munis. Puerto-Rican-frickin-munis.

So what’s a person to do? Here’s what I think:

1) You can’t beat the market. Theoretical discussions of the Efficient Markets Hypothesis aside, you don’t have the technology, time, and tools to beat the market. Your cognitive biases and lack of experience make you likely to trade too much, to herd, to fail to take gains, and to fail to minimize losses. Believe this in your heart. You can beat the market like you can win at poker. Someone can win at poker, but it ain’t you.

1a) They have access that you don’t. The reason why investment banks and hedge funds can beat the market is less due to their brilliance - though they are sometimes brilliant - and more due to the availability of opportunities they have that you don’t. You’ve heard of private equity. Notice that this is not public equity. Private equity is the purchase, sale, investment in, privately held firms. My brother runs a legal loan sharking business. Investment in his business will yield you 15-20% returns. But you can’t get it. Investment banks have a better shot at getting stuff like this. It’s not the same as saying that they are better stock traders than you are.**

2) Fees kill. Buy a passively managed fund, because active funds = more involvement by a fund manager = more opportunity for you to get hosed by a moron with an MBA (or a PhD!). But even relatively passively managed funds have variation. These are two mutual funds, vanilla investment vehicles, both directed towards mimicking the broadest market:

JP Morgan’s Institutional US Equity Fund (JMUEX) has fees of .64% (1-year expenses of $56.65 on $10,000). And over the course of 10 years, for a minimum of $3M and $225,000 in fees. Their performance over 10 years was 3.42% compared with 3.06% for the S&P as a whole.

The Vanguard Total Stock Index fund (VTSMX) has fees of .19% (1-year expenses of $16.74 on $10,000). Over the course of 10 years, with a $3M investment - though their minimum is $3000 - you pay $70,000 in fees. Their performance over 10 years was 3.92% compared with 3.06% for the S&P as a whole.

And these are both passively managed index funds. A hedge fund can have fees of 2 and 20 - 2% of assets and 20% of gross profits (performance fee). Woot! When someone tells you ‘2 and 20 is standard’, point and laugh at them. Or write them a check. Or better yet, write me a check! When they offer to show you track records, ask that management fees and performance fees be included in a bar graph. Besides, none of their derivatives obligations are on the books, so you likely won’t really know how to interpret their track record anyhow.

2a) Transaction fees are fees. Your financial advisor wants to move money, since they make money when money moves. Repeat this over and over. Your financial advisor is not your friend. S/he is your adversary. S/he wants your money.

3) Stocks, bonds, cash. 40% bonds, 40% total US stock market, 20% international stock market. When stocks go down, bonds go up, and vice versa. By ‘bonds’ I mean ‘total bond market’ or ‘treasuries’ - not crazy-ass multi-tiered mortgage swaps. Think the dollar sucks? Berkshire Hathaway has been betting against the dollar for years, go ahead and buy a share of Class B - it’s like buying a slightly riskier mutual fund with high fees, run by Buffett (though he won’t live forever). Or buy a materials (i.e. gold) fund. Again, higher fees, more volatility. If you are more risk averse, 80% bonds, 15% stock market, 5% international. The point is, invest in lazy funds.

4) Stuff I don’t know but I know. It’s better to forgo 1-2% investment income and reduce spending by 1-2%. Less risky by a lot.

It is often good to own a house - we don’t but we live in NYC. I have no idea if this suggestion holds up under current housing market conditions.

Volatility means that randomness can be ascribed to real market movement, but that movement can also just be randomness. That is, check your portfolio once every month or two or six, not every day. If the volatility is making you crazy, move most of your money to cash or treasury bills. And get some sleep, I hear that it is more important that we think.

5) People versus positions. I know a number of people in financial services, and I’ve studied them as well. Wicked smart, not necessarily nice but certainly not moral reprobates. The problem is, the rules are tilted. It’s not about whether Steve, or Jenny, or Chet is trying to steal from you. But it is a system that benefits you and benefits financial firms more. There was a time in history when I would defend high finance; I might still. But it seems ripe for a New Deal-type re-visioning.

**When my uncle went to college, my grandmother sent him an allowance for food, clothing, books, spending money. She arrived at a figure by asking his roommate’s mother if she sent an allowance, and if so, how much. She matched that figure. Of course, the roommate’s mother sent the allowance, and also paid for food, clothing, books. Even with a job, my uncle went through school relatively poor, and with my grandma’s unshakable belief that since he never had enough cash, he must have been spending it all on drugs. Investment banks are like the roommate - they may look like you, but they have resources behind the scenes that you don’t have.

March 11, 2008

It doesn’t have to be a motto

Filed under: Ramble — Peter @ 7:53 am

From Making Light:

Act now! Act without thinking! WORK LIKE YOU WERE LIVING IN THE EARLY DAYS OF A BETTER NATION.

This is good advice.

March 7, 2008

Moderation

Filed under: Ramble — Peter @ 6:40 pm

For me, moderating this blog is not a problem. There’s something like a dozen people who have commented, most of whom I knew or know, not a really wide readership, certainly not a wide commentariat. But at BoingBoing, one of the larger readerships on the net (at least blog-wise), the hijacking of comments by morons, wackos, and trolls eventually resulted in their disappearance.

Enter Teresa Nielsen Hayden, an editor at Tor and co-curator of the magnificent Making Light. She took on the job of community moderator for boingboing some months ago.

As a result, you get aggressive disemvowelling (pllng th vwls frm nnyng cmmntrs) and, every once in a while, a gorgeous anti- or at least skeptico-authoritarian smackdown. It’s long, about the TSA, and worth seeing how it’s done.

March 6, 2008

Shirttails flapping in the breeze behind them, like unambitious dragons

Filed under: Ramble — Peter @ 12:52 pm

Now that’s pizza.

How do you know what you like? Netflix prize edition

Filed under: Culture — Peter @ 8:56 am

The Netflix prize has provoked a blizzard of data-mining response to this question: how, given knowledge about how you have rated movies in the past, will you rate particular movies going forward? The main goal of the prize, which is ongoing and worth a million bucks if you can do it, is to ‘improve’ the Cinematch algorithm they currently use to make guesses about what you like. As this fascinating Wired piece notes, it’s the difference between saying, You liked Squid and the Whale? Here’s Margot at the Wedding - as opposed to a fishing documentary on Jacques Cousteau or Moby Dick. A 10% reduction in error will net you $1M.

To that end, Netflix has put a ginormous data set up for your pleasure to work with, and your aim is to ‘mine’ that data and then produce an algorithm that will ‘predict’ what people will rate on their test data set. So they’re basically giving you 9 years of a 10 year data set, and asking you to predict how people rated movies in year 10.

So, data mining heaven. As the Wired article points out:

Many of the contestants begin, like Cinematch does, with something called the k-nearest-neighbor algorithm — or, as the pros call it, kNN. This is what Amazon.com uses to tell you that “customers who purchased Y also purchased Z.” Suppose Netflix wants to know what you’ll think of Not Another Teen Movie. It compiles a list of movies that are “neighbors” — films that received a high score from users who also liked Not Another Teen Movie and films that received a low score from people who didn’t care for that Jaime Pressly yuk-fest. It then predicts your rating based on how you’ve rated those neighbors. The approach has the advantage of being quite intuitive: If you gave Scream five stars, you’ll probably enjoy Not Another Teen Movie.

BellKor uses kNN, but it also employs more abstruse algorithms that identify dimensions along which movies, and movie watchers, vary. One such scale would be “highbrow” to “lowbrow”; you can rank movies this way, and users too, distinguishing between those who reach for Children of Men and those who prefer Children of the Corn.

Of course, this system breaks down when applied to people who like both of those movies. You can address this problem by adding more dimensions — rating movies on a “chick flick” to “jock movie” scale or a “horror” to “romantic comedy” scale. You might imagine that if you kept track of enough of these coordinates, you could use them to profile users’ likes and dislikes pretty well. The problem is, how do you know the attributes you’ve selected are the right ones? Maybe you’re analyzing a lot of data that’s not really helping you make good predictions, and maybe there are variables that do drive people’s ratings that you’ve completely missed.

BellKor (along with lots of other teams) deals with this problem by means of a tool called singular value decomposition, or SVD, that determines the best dimensions along which to rate movies. These dimensions aren’t human-generated scales like “highbrow” versus “lowbrow”; typically they’re baroque mathematical combinations of many ratings that can’t be described in words, only in pages-long lists of numbers. At the end, SVD often finds relationships between movies that no film critic could ever have thought of but that do help predict future ratings.

Fair enough. What’s interesting is that a psychologist working by himself out of him home seems to have pulled from nowhere into something like 5th place. What he’s been doing is exploiting knowledge about bias effects into his model - in other words, he has a better SVD reduction. As the article puts it, “…The computer scientists and statisticians at the top of the leaderboard have developed elaborate and carefully tuned algorithms for representing movie watchers by lists of numbers, from which their tastes in movies can be estimated by a formula. Which is fine, in Gavin Potter’s view — except people aren’t lists of numbers and don’t watch movies as if they were.”

I think what is most responsible for the breakthroughs of the psychologist is that he has a theory of taste, not just a data-mined algorithm. The math is the math (he has his 17-year-old daughter running the calculus), but if you matched a better theory of taste with some elbow grease, it may be possible to beat the bigger data-miners. Any takers?