stock price changes have the same distribution and are independent of each other, so the past movement or trend of a stock price or market cannot be used to predict its future movement.

Of course, this blockbuster idea (the book was initially written in 1973) was met with plenty of harrumphs from the Wall Street corporate types, and cheers from the anti-Wall Street types. Go figure. Either way, the most important thing you can do to save your sanity is to simply ignore the noise. Turn off the TV. Go for a walk. Stop and smell the roses. I promise everything will be waiting for you when you get back. The point is that checking your investments every half hour will do nothing but drive you insane.

Over the long run stock prices tend to go up; that’s all you need to remember. Buy and hold a diversified portfolio of stocks and bonds, and if things run similarly in the next 100 years as they have in the past 100, you’ll be up in the long run. The short run is another matter – and that’s why it’s important that you not panic. Individual stocks, of course, can take a dive and be gone forever should the company close its doors. That’s why you should avoid them like the plague. Indexes, which are a basket of stocks or bonds put together, will always be around, simply because they have the ability to add a new company once an old one has gone bankrupt.

I know it’s difficult, but try your best not to buy into the hype, the noise, the yelling, the screaming, the cajoling, the day in day out huge stream of pressure to get you to make a move. Buying or selling a security is how your broker make money. Find a good fee-based financial adviser that works with you to create a comprehensive plan for your retirement and your money in general. That’s the best advice I would give to anyone who asks what to do right now. Till next time!

companies at the top 20% of the the American Customer Satisfaction Index (ACSI) greatly outperformed the the stock market, generating a 40% return.

The study starts out by stating that it has found a strong relationship between customer satisfaction and market value of an equity. That basic assumption does make sense; if customer’s weren’t satisfied with a particular company, factors such as word of mouth spread by the Web would start to undermine that company’s sales. That gradual reduction in sales because of a persistent lack of customer satisfaction would then begin to negatively affect the stock price of that company. The confusing part of it all, to me anyway, is what exactly constitutes a happy customer? It means different things to different people, and each industry.

After asking that question, I decided to go poke around the American Customer Satisfaction Index’s web site, in hopes of better understanding how it maintained its listing and what got a company into the top 20% of the index. According to the methodology page, the ACSI is compiled by

The American Customer Satisfaction Index uses customer interviews as input to a multi-equation econometric model developed at the University of Michigan’s Ross School of Business. The ACSI model is a cause-and-effect model with indices for drivers of satisfaction on the left side (customer expectations, perceived quality, and perceived value), satisfaction (ACSI) in the center, and outcomes of satisfaction on the right side (customer complaints and customer loyalty, including customer retention and price tolerance).

(Check out the Methodology page for more info)

So it’s econometrics – which I was informed was the most hated of all economics classes as a college student! Either way while I would certainly agree that higher customer satisfaction is one element that can help a company to isolated itself from its peers and stand out; I’m not sure if that’s going to always lead to higher stock prices. I certainly wouldn’t make an investment modeled after that idea.. it’s too easy to look back at what happened and find reasons for it, and there’s no guarantee this reasoning will hold up in the future! But you should really read the study for yourself and decide…

Here is a link to the study in PDF if you want to read it for yourself!

Businesses Try to Make Money and Save the World, in the NY Times, is an article by Stephanie Strom all about a new type of investment firm: one owned by a non profit organization. The company she profiles is called Altrushare, and one of its owners says:

We’re a for-profit institutional brokerage, and we have to compete on execution and commissions and do so with the same technology and talent you would expect from a top-tier firm,” said Peter Drasher, a founder of Altrushare, which is based in Bridgeport, Conn. “What makes us different is our nonprofit ownership and our mission, which is to support struggling communities with our profits.

What an interesting idea.. using profits from a brokerage firm to better support struggling communities.

Does it even matter if the U.S. has a cold? is another New York Times article, this one by Daniel Gross, discussing how world markets are no longer so thoroughly tied to U.S. markets; when the U.S. economy doesn’t grow as fast as the rest of the world, such as in first quarter 2007, the rest of the world marches on.

Western Europe is benefiting from rising trade with Eastern Europe, Russia, Asia and the Middle East. As a result, the euro zone, America’s largest trading partner, is simply not as reliant on the United States as it used to be, Mr. Setser said. “Europe is clearly no longer growing on the back of U.S. domestic demand growth,” he said. As other economies increasingly trade with one another, the United States plays a diminished role.

Jason Kelly published an article on Bloomberg.com entitled “HAL 9000-Style Machines, Kubrick’s Fantasy, Outwit Traders”. The piece is all about how the emergence of Artificial Intelligence in financial markets has the possibility to drastically change the playing field. He says:

Dhar says AI programs typically start with a human hunch about the markets. Let’s say you think that rising volatility in stock prices may signal a coming “breakout,” Wall Street-speak for an abrupt rise or fall in prices. Dhar says he would select market indicators for volatility and stock prices, feed them into his AI algorithms and let them check whether that intuition is right. If it is, the program would look for market patterns that hold up over time and base trades on them.

The last piece is a blog post called Hedge Fund Borrowing Propping Up the Dollar and Stock Market, which was not written this weekend, but I just read it so I thought I’d throw it in. It’s about hedge funds, Renaissance’s Medalion fund in particular, and how they earn such high returns (Renaissance’s Medalion fund earned a return of 79% last year (44% after fees).

RogerRafter ends the post by saying:

Renaissance is taking on a very high degree of risk. With over $47 billion leveraged into the stock market, they won’t have a fun time trying to get out once the market finanally turns ugly. How deeply the bias toward risk is represented in the core mathematical models is a question for the PhDs. Simons has reportedly collected around $3.2 billion in compensation during the last 2 years alone. When most people see those kind of numbers the reaction is that nobody could possibly deserve to make that much money. In my view, Simons has created a brilliant business model that takes advantage of flaws in the system. To the extent that he is profiting from the mistakes of other traders there is no real harm done to the economy. Indeed Simons has done a lot of good through his charitable contributions. However, to the extent that Renaissance is creating systemic risk by (possibly) playing the Yen Carry Trade, creating excess liquidity and promoting malinvestment Simons may be doing substantial economic damage to this country and the world.

Great piece; it’s long but read it all if you get the chance.

Have a great weekend, and I’ll have more posts for you later on this week!

First off, before I begin this retort, I’d like to point out that there is a comment system setup for people to actually comment on my posts and start a discussion. And if you are going to write something like this, common courtesy would have you inform the writer so that he had the opportunity to respond to any criticisms. But I digress; I had to read about Adam’s post through the magic of Technorati. As soon as this is posted I’m going to leave a comment and send an email letting him know about my post.

He starts off with this statement, in response to when I wrote: Why is it when you put a random collection of people together the discussion inevitably shifts towards a baseline that all people can understand, and why in our society does that baseline revolve around celebrities, movies, and sports?

One: do those discussions inevitably shift towards a common baseline? Do they really? Is there never a time when people tell their personal stories, which the others enjoy but did not exactly partake of? Do conversations always go towards some general common denominator like the movies or sports? Seems like kind of a massive generalization to use as one’s starting assumption.

Two: even if it’s granted that there is a general tendency to go for the common denominator, how exactly does one demonstrate that a “baseline” “revolves” around sports or movies or celebrities or anything, for that matter? If this guy’s any indication, I guess you don’t–you just treat it as a given.

Well I don’t know Adam, they certainly have shifted towards a common baseline most of the time I see people interacting with one another. I do know that according to James Q. Wilson in The Moral Sense, “Just as Labradors are born to fetch, we are born to bond.” Obviously I have not done a rigorous study claiming either way, and since I don’t see any material published by you to the contrary, I have to assume that you are, in fact, simply giving your opinion. For further reading, perhaps you could read Dr. C. George Boeree’s discussion of Defensive Conformity, which “is usually brought on by social anxiety — fear of embarrassment, discomfort at confusion, a sense of inferiority, a desire to be liked, and so on.” Perhaps the discussions centering around topics globally uniform to our society is a form of defensive conformity within a group setting. Again, I speak of a baseline because I draw from personal experiences such as the night I referenced at the beginning of my post, when it seemed people were most comfortable interacting through stories and ideas revolving around such society-wide concepts as sports or celebrities.

Next, Adam talks about my discussion of corporations pushing products we don’t need to us in order to increase their bottom line and my contemplating of the effects on our economy if we didn’t wastefully consume at such an aggressive pace.

The fixation of some people on the “bottom line” and “profits” as if they were the prime mover of everything is kind of hilarious. So what, Ryle, the fact that a company will go out of business unless it makes a profit somehow compels consumers to feel the need to support those companies…or are you arguing that the companies have somehow brainwashed people into buying their products, something that would not occur if we didn’t live in this fictitious “consumption drive society” you’ve concocted? What exactly is a “consumption driven society”?

Well Adam, I personally do not feel as if the bottom line and profits should be the prime mover, but I believe the literature out there supports that it is. An article in the magazine Frontline entitled Capitalisism Recycled states, “Global business firms are ultimately interested in one thing: profit“. Or perhaps the Wikipedia article on Capitalism, which reads: “From this perspective, in process of self-organization, the profit motive has an important role. From transactions between buyers and sellers price systems emerge, and prices serve as a signal as to the urgent and unfilled wants of people. The promise of profits gives entrepreneurs incentive to use their knowledge and resources to satisfy those wants.” (This quote is itself cited at the bottom of the entry as: Herbert Walberg, Joseph Bast. Education and Capitalism, Hoover Institution Press (2001) p. 87-89 ISBN 0-8179-3972-5). Therefore profit is in fact what drives the economic engine currently pushing us all forward known as Capitalism.

Of course consumers aren’t feeling pity for these corporations, I never said that. They are however inundated with shows such as MTV’s “Cribs”, which shows how the rich and famous live (awash in goods) and imply that goods are in fact what people need to be considered wealthy and prosperous. That is why people take out home loans they cannot afford (leading to the current subprime lending crisis), or car leases that make no economic sense. They feel as if when they have a nice car or a nice house that they are economically well off and thus more important members of the community. The fact that this is all over television gives credence to Marshall McLuhan, who in 1967 argued famously that the “medium is the message”. By this Marshall meant that it didn’t matter what you watch on television, just that you watched television. The ads and shows would do the work, regardless of which particular ones each individual chose to view.

The concept of a consumption driven society/economy is not all fictitious, and again a simple Google search could have saved you Adam. In an article entitled “The US Economy” published in the Indiana Business Review, Willard E. Witte, Associate Professor of Economics at Indiana University wrote, “From the end of the recession in 2001 through the end of 2005, consumption spending accounted for 78 percent of the increase in output”. Professor Witte later wrote “Consumption has held up pretty well during the past year, comprising 70 percent of growth in the first three quarters of 2006.” 70 percent of growth during the first three quarters of 2006 – that sounds like a pretty consumption driven economy to me. If 70 percent of our growth was taken away during 2006 you can bet that a lot of people would be out of work. Therefore our society is consumption based and does in fact need consumers to maintain high levels of consumption to drive the economy.

Adam then appears to go nuts over a few big assertions he wants to point out, so let’s discuss them, shall we:

1: Americans are afraid to contemplate social issues with our neighbors (true BECAUSE I TELL YOU IT’S TRUE DAMMIT)

2: We are so afraid that we allow terrible things to keep happening

3: American foreign policy caused September 11th. This one book I’m reading proves it, but I’m not really going to bother to elaborate on how.

1) How about this Common Dreams article, which discusses the issue of evolution in schools. It has a quote from Dr. John R. Christy, a climatologist at the University of Alabama at Huntsville, “Teachers are afraid to raise the issue … and they are afraid to discuss the issue in public.” Here’s a line from a website called Freepreach.org under their issues section, which states “It’s not only politics that ministers are afraid to discuss in their sermons”. This is under a heading called Hate Speech Laws.

2) In Hunter S. Thompson’s article Fear and Loathing on the Campaign Trail in the Rolling Stone, Hunter pontificates, “That is how it works in the victory business. You see it every time. The Weak will suck up to the Strong, for fear of losing their jobs and their money and all the fickle power they wielded only twenty-four hours ago. It is like suddenly losing your wife and your home in a vagrant poker game, then having to go on the road with whoremongers and beg for your dinner in public”. The point I was trying to make is that fear paralyzes us and drives us towards making decisions that we otherwise would not have made at a rational moment, such as the passing of the USA Patriot Act by members of Congress without having actually read the act – they were so scared by the thought of terrorism that they decided to grant the executive branch extraordinary powers in an attempt to quell the fear passing through themselves and their constituents. Or how about this quote from an article published by two Michigan State University students stating “Underlying the skepticism about the motivations of Ashcroft and Ridge in issuing warnings and changing the official threat levels has been a more general concern about the use and meaning of terrorism alert warning system. On at least two earlier occasions the threat level was raised to orange in the absence of any publicly obvious event.” Now why would that occur? Maybe it was to keep the climate of fear running strong and reinforce the need for a strong executive branch to save us from the terrorists. Maybe Not. Either way, they raised and lowered the threat levels all the time, and what do you know, but we elected George W. Bush to be our president again. Hmph.

3) Here is a fabulous article which states the case far better than I could, called Blowback: The Cost and Consequences of American Foreign Policy. Check this portion out: “Most Americans find it extremely difficult to accept the proposition that terrorist acts against the United States can be viewed as revenge for Washington’s policies abroad. They believe that the U.S. is targeted because of its freedom, its democracy, its modernity, its wealth, or just being part of the West. But government officials know better. A Department of Defense study in 1997 concluded that: “Historical data show a strong correlation between US involvement in international situations and an increase in terrorist attacks against the United States. In addition, the military asymmetry that denies nation states the ability to engage in overt attacks against the United States drives the use of transnational actors [that is, terrorists from one country attacking in another].” Hmmmmm!

In conclusion, I am certainly not trying to elect myself as some sort of superior human being or pretentious bastard who has all the answers and carries the moral high ground. I am simply trying to jumpstart a discussion on what is important in our lives, and whether those things we value have historically been the same things and/or are really what matters. I could have done a better job of sourcing the post; that much I agree with Adam. However, I think that my conclusions are still at least worthy of discussion and I am glad Adam has taken the opportunity to do so. I await your response, brother. – Ryle

Now there are many people that use time management programs such as Getting Things Done (GTD), but what I’m proposing is a system combining the concept of time management (whichever way you want to do it) with educating yourself about the world around you with the free time you create through excellently managing your time. So to start things off, you need to make sure none of your time is wasted. None of it. Now I understand that everybody needs recreation time to chill and relax (believe me!) so that should be considered a valid use of your time. What I want you to think about is those moments when you’re at home, your buddies have taken off, and you have nothing to do. Maybe you’ll just turn on the TV for an hour or two, flipping through channels in a desperate attempt to keep yourself entertained. Stop! This is the perfect moment to allow you to get started with your education. While there are some education shows on television (Discovery, National Geographic, CSPAN, etc.), the problem with television is that it’s a passive medium, not an active one like reading. If you feel like learning about trade deficits with China, you have to hope that something or someone is talking about it on some channel, which could take a while to find. Now if you instead decided ahead of time what you wanted to learn about (by itemizing a list of relevant topics for your current career and what was important to your life in general), you could use that list to prepare yourself for free time wisely.

Everybody learns differently, so here are a few suggestions for you learners out there.. If you prefer reading, then go take a look at your public library. In Los Angeles, the system is absolutely fabulous, letting you reserve books and send them to whichever library is closest to you. If you’re not sure where to start, let me recommend a few books. The Four Pillars of Investing by William Bernstein is one of the best financial do it yourself books I have ever read (and I’ve read a lot!). Revolutionary Wealth by Heidi and Alvin Toffler (author of Future Shock) is an excellent look at the way our society is shaping up to morph into during the 21st century. Check Amazon or other online booksellers that contain book reviews by customers for more ideas. The point is, there are more books than anyone could read in an entire lifetime available, and most of them for free for three whole weeks!

Image by: DongWoo Lee

If you don’t like reading, there’s another excellent way to continue learning – podcasts! Podcasts are those radio programs you can download off the Internet, through programs such as iTunes. You then transfer the mp3 files over to your mp3 player of choice, and voila! Radio shows that talk about what you want to hear. One of my favorite podcasts is Bloomberg on the Economy, a top notch discussion regarding a huge range of economic issues. The episodes are short (5-10 minutes), but there are dozens and dozens made per month. You can use a podcast directory such as Podcast.net to locate a podcast about anything your heart desires. But Ryle, I don’t have time to listen to my mp3 player all day, you say. I bet you do – a great many people commute to work everyday, and listen to either the radio or some music while driving. There’s nothing wrong with music, but think about switching to a podcast every once in a while. Again, the different is between a passive medium such as radio (where content is pushed to you), and an active medium such as listening to podcasts (where you choose what to hear) is huge! Another great idea would be to listen to university courses on your mp3 player while driving to work – believe it or not many schools post lectures in podcast form for free. Check out UC Berkeley Webcasts which has course podcasts for the current semester, all downloadable! Classes range from Economics to Biology to Philosophy to Legal Theory.

Things you read or hear can open your mind to new ideas, new ways of doing things, and altogether increase your understanding of the world around you. This is so important, and something so many people I know neglect, that I hope everyone reads this and walks away thinking about what they want to learn and what they can do to better themselves. I only touched on a few ways of continuing education, others include classes at your local community college, online courses, joining a group of people that meet up to discuss everything from politics to photography, or even reading blogs! The point is, keep your eyes and ears open and ready to learn, and you’ll be in a much better off position, both in terms of personal development and career development.

To me, the answer to both questions revolves around the consumption driven society we live in and the need for corporations to continue to push products and services to us, so that they can increase their bottom line and keep profits rising. If the American people collectively decided they were not going to rush out and buy the latest US Weekly to find out about what Paris is doing, or to spend $12 at the movies to be entertained for a few hours, or even to buy $200 tickets to a football game so they can see their favorite players in person, what would it do to our economy? Well the way things are setup now the economy would certainly suffer. Therefore, corporations have setup vast noise machines to ensure that what they feel should be relevant to Americans is relevant – and these noise machines are working.

Furthermore, human beings being inherently social animals, we feel a certain comfort in social interaction with our peers. The easiest way to establish ourselves as relevant members of the community is to show that we have just as much knowledge as other people in regards to what society considers important enough for everyone to have to pay attention to – in this case, celebrities, sports, and movies. (Obviously there could be many more, but those get the point across). Therefore we can sit and have a wonderful discussion about the latest big movie with just about anyone in America. This is also possible because we are all fed the same movies, celebrity news, and sports – someone in LA and someone in New York can watch the same movie, the same news about Paris Hilton, and the same NCAA championship game and converse about it.

Image by: Lee Prouten

However, that doesn’t go all the way to explaining the second question – because it seems as if the discussion (as it does in many other countries) would shift to something that has an impact on our everyday lives such as healthcare, taxes, or the next election. In America we are so afraid to contemplate real social issues with our neighbors for fear that we would offend one another and lose that social bond that we love so much. We sit complacent about war, money wasted, lack of healthcare, and a myriad of other problems currently affecting our great nation; and while these might not seem to have a direct affect on our lives, say that to the people who died on September the 11th. Those deaths were the result of American policies perpetuated by the Government designed to increase America’s status as a superpower and relegate lesser countries to mere pawns (This is further proved by the book I’m currently reading called Confessions of an Economic Hit Man – good so far!).

So what can we do? The only solution is to bring back coherent discussions on what truly affects and shapes our lives. We cannot afford to be fixated upon drunken celebrities stumbling around hopelessly trying to find a purpose for their own meager lives; instead we should focus on those politicians and people who have the true power to use America’s great wealth for the betterment of her people and not for the betterment of the “corporatocracy” (As John Perkins puts it). So go out, say hi to your neighbor, and ask them if they favor universal health care, something that every other developed country in the world has for its citizens. Or ask them if they favor billions in non-compete contracts for Halliburton and Kellogg, Brown, and Root – I bet I know the answer!

Of course, the credit for the original concept is largely given to Neal Stephenson, whose book Snow Crashpresented the first virtual world (Stephenson called it a “Metaverse”) where people simply logged in from home and through a headset visually interacted with other people in a 3D environment.

What could the advent of Home and A Second Life do to our civilization? Perhaps it could make it a more bearable, enjoyable world to live in, if people could work regular jobs during the day (Stephenson’s main character, Hero Protagonist, starts off the novel as a pizza delivery guy) and jack-in to these virtual worlds at night to relieve the stress and anxiety they carry with them in the real world. Virtual worlds would be an excellent environment for psychologists to test out new ideas about how people interact with one another and a plethora of other ideas.

This new technology is amazing, and the virtual environment within Second Life looks very realistic – predictably, the two biggest industries are sex and gambling (from a cursory look at the most popular locations) but since the users themselves generate the content, the possibilities are limitless. Reuters has even setup a journalist to monitor events within Second Life and started a Second Life News Bureau. While Home requires a Playstation 3 which may be out of reach for a great many people, Second Life has a free basic account that simply requires a computer and a broadband internet connection, something which many people worldwide already have. Indeed, according to Second Life’s website, the service already has over 4.5 million residents, 1.6 million of which have logged in during the past 60 days. The biggest question to me is, is our society ready for something like this? It would be all too easy to build up a virtual life that is a great deal better and more fulfilling than our regular lives, and simply stay jacked in as long as possible. Reports of gamers becoming addicted to various online multiplayer games such as World of Warcraft (called MMORPGs, or Massively Multiplayer Online Role Playing Games – say that 5 times fast!) are already becoming widespread, and this element of a virtual life would take the possibility of total immersion and addiction to your computer one step further.

However, in the end, this is an extremely viable business model, which at the same time would enable millions, even billions, of people worldwide to interact in a never before possible manner. New monetary systems, political frameworks, and educational endeavors would all be possible. Business meetings between people on opposite ends of the Earth would be easy and even fun. I’m cautiously optimistic about the future of online virtual environments and the upsides/downsides of interacting within one, but in the end, this just has too much potential. In Part 2 of this post, I will examine the financial/business side of Second Life specifically (since Home has not yet been released) and how it has the potential to revolutionize world commerce!

PS. For more information, check out the Wikipedia entry on Second Life or the Wikipedia entry on Playstation’s Home.