Wednesday, February 4, 2009

Risk Analysis & the Tyranny of Others: Freedom to Engage in Risk Analysis/Is the Failure to Learn from History Consistent with Conservatism? Sold FII

If I was that turkey that Taleb talks about in his book Black Swan, possibly it would occur to me sometime during the first 1000 days that those humans were just too good to be true and I would fly the coop or take a hike since turkeys may not be the best flyers. 

Some of Taleb's analogies go too far.  The terrorist attack was a Black Swan event for most people in the U.S. but not all.  This is not to say that anyone anticipated the precise events on 9/11. There were people who believed an attack by Al Qaeda was coming, and some even anticipated the use of planes in an attack. So, the attack was a relative Black Swan event.  I do agree with Taleb that anyone foreseeing the possibility of an attack would never have been able to convince those in power, or the American public for that matter, to install reinforced cockpit doors and to take other expensive precautionary measures before the attack.   

Similarly, the threat posed by Bin Laden was appreciated prior to 9/11 and many fault Clinton for not taking him out before 9/11. But it would be one thing to send troops into Afghanistan or the Sudan before 9/11 and an entirely different matter after 9/11.  Before the attack, it would have been impossible to secure the cooperation of Pakistan or any other country to permit a military incursion into Afghanistan.  Pakistan would certainly not have agreed to permit over flights by  aircrafts.  

Several politicians, like Arlen Specter, complained when Clinton sent a bunch of cruise missiles into Afghanistan trying to kill him, telling the American public that Clinton was just trying to distract the public from the Lewinsky affair in a Wag the Dog scenario. My purpose in raising this historical issue is not to defend Clinton but to highlight that responding to known risks can be hampered by issues other than the assessment of the risk itself. The risk may be known but can not be dealt with effectively for a variety of reasons unrelated to the existence and recognition of the risk itself.  In the financial area, severing the consequences of taking the risk from the rewards for assuming it creates its own risk and restrains at a minimum a thorough risk analysis.  When the reward is connected to taking the risk, while the consequences will be assumed elsewhere, the incentive is built into that system to ignore or downplay risks.   For an individual, there are no constraints other than self-imposed ones. 

Free yourself from as many self-imposed restraints on risk assessment as possible, including those where information is screened pursuant to a pre-existing ideological prism or previously held and even cherished opinions. I do not have to secure anyone's consent or permission to sell or to buy securities based on my personal assessment of the risk. Since I bear 100% of the consequences of every risk taken and 100% of the potential rewards, I have the freedom to do what I believe needs to be done. So this makes it different for me than a politician faced with a potential threat to the economy or to national security, or to a risk manager trying to restrain the wizards in a Wall Street firm without having the support of management. This is not to say that all risks can ever be identified, nor can the future be predicted with anything close to 100% accuracy. 

But the individual, acting alone, unrestrained by his own pre-existing prejudices or opinions or the opinions and requirements of others, always alert to the existence of potential risks, may be in the best position to engage in appropriate risk analysis.

Besides making a concerted effort to free my mind of opinions that prevent the assimilation of new data, or more importantly even looking for it,  I realize that I have to make an honest assessment of my own limitations.  I know that I have no training in accounting, medicine, technology, or science for instance.   

Perhaps, my early training in philosophy prepared me more for what I do now more than anything else that I could have done in college.  I learned early in my adult life to question virtually everything, to be skeptical,  to look for all the angles, to think without emotion and with as little involvement by my ego as humanly possible, and to probably follow a scientific method of analysis better than many scientists. But still, I know when evaluating a company like ISIS or SNTA, I have no training in medicine.  I have to take that lack of knowledge into account when making a decision.  I have to know when I am just ignorant.  I allow for those massive gaps in my knowledge base by limiting the money that I will invest in a company like SNTA or ISIS. I would be more comfortable investing in many Tech companies than a biotech, since I at least understand the products made by Apple or Hewlett Packard better than I do a new drug to treat melanoma.  I simply do not understand a company like Qlogic (QLGC)  as much as EMC.  What exactly is a host bus adapter?  I certainly have a better grasp of Kraft's business than that of EMC.  

It is just important to recognize your limitations and adjust your investing to minimize mistakes caused by being just plain ignorant about a lot of things. I heard many years ago that if you could not a explain the business in an intelligent manner, then why are you investing in it.  

Obama says that a catastrophe is coming without a stimulus package.   

Is that true, is it a fact?  Actually, a catastrophe has already arrived, with many individuals, for reasons that defy rational explanation, refusing to even recognize that the bear is wrecking the china as we dicker and delay.  It is a process in flux but it has already arrived. Will the stimulus package prevent a depression is the better question. Maybe so, maybe not but it is better than anything else on the table now that is likely to pass.  Is it sufficient? Probably not, and more needs to happen like now to shore up the banking system before there are more massive failures. I am curious why that is not hard to see.  What has happened over the past year starting with the collapse of Bear Stearns? What is the market signaling now about the health of the American banking system? It seems obvious to me.   

There are people who call themselves conservative who are opposed to most, if not, all regulations.  I personally do not view that position as consistent with conservative ideology as I define it.  

True Conservative would be a student of human nature, recognizing the many frailties of human beings proven over and over again by the centuries of our existence.  Do I expect all people to put the health and safety of the public before profits? Where have you been living all your life, in an ivory tower, the WSJ editorial room maybe? Do you expect Wall Street firms to look out for your best interest? Do you think an industry would choose to pollute the air or water or dispose of hazardous chemicals if allowed to do so? Will someone working for a Wall Street firm place their own interest ahead of the firm's interest and are they capable of regulating themselves without a rule playbook? After looking at how humans actually operate in the real world it is hard to equate being a conservative to being a advocate for no regulation.   

A conservative is not someone who refuses to learn from history. That is just another reason most Republicans are not true conservatives.  

Frequently, it is not the absence of regulation that causes a problem, but the failure to adequately enforce the regulations that are already on the books, as witnessed by the many failures of the FDA. The most recent example is that peanut butter factory. So it would hardly make sense to abolish the regulations promulgated by that agency as a means to protect the public but to beef the agency up. Some would say that is a liberal idea but I would say it is a conservative one. It is based on the knowledge gathered from history that many people will not do what is right particularly when money is involved. 

One of the issues that I recently added, which I do not really care about owning or holding, is Federated Investors.  BUY OF FEDERATED INVESTORS I bought some shares at 17.32 and have just been thinking about selling them at around the current price.  he stock is ex dividend today. I decided to let her go with a market order filled at  20.81.  

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