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Other Recent CSC Thoughts and Ruminations That Did Not Fall Into a Coherent Narrative for Our June Strategy Letter

Risk—the extent of loss that a person or an organization can withstand without having to significantly change spending habits. THIS drives a lot more market activity than a Sharpe Ratio.

The new Edward Thorp biography, “A Man for All Markets” is interesting if you don’t understand who he was and how many years he was ahead of what is happening today. One such quote that predated George Soros’ Theory of Reflexivity:

“Horse racing and the stock market are different, because you can’t compute the probabilities and because other players’ bets affect the payoffs.”

“What is my idea of earthly happiness? To be vindicated in my own lifetime.” — Christopher Hutchins

On the subject of formerly-heralded UK fund manager Neil Woodford, age 57: “Our analysis showed his alpha capability had peaked.”

— Michelle McGrade, CIO at TD Direct, which removed Woodford’s equity fund from its recommended buy list “some time ago”

The ratio of company executives buying shares to those selling has slumped to a 29 year low. — Wall Street Journal, April 2017

“Amazon has changed the relationship between companies and investors by replacing profit with growth and vision. Loss is the new black. You can argue this might not end well…but the reality is retail investors love this model.”

— Scott Galloway, NYU marketing professor and founder of digital research platform L2, citing the willingness of upstarts like Uber to lose steep and growing sums at an April 2017 conference

Uber and Theranos: Is this a new world where established industries are upended overnight? Or is this an idiot world where zero rates create zero hurdles for any alternative scheme, and money is breathlessly thrown into absurd valuations with little more than a pitchbook, charisma, and prominent board members?

“Small caps are seen as something of a barometer for Wall Street’s enthusiasm for the Trump administration since they typically face higher tax rates than large caps and are also thought to be more exposed to the domestic economy.” — Financial Times May 2017

After printing yet another dismal Q1 GDP number, we have the same result, different process. The prior administration just unmasked a direct pummeling to the face of business through regulation, taxing, and demonizing. This administration commits an entirely different set of sins—daily 180’s on crucial policies that make it nearly impossible to make large economic and investing decisions.

There is an old joke on Wall Street that asks, “How do you know an economist has a sense of humor? He/she uses a decimal point.”

A Clip from “Wait: The Art and Science of Delay” by Frank Portnoy:

If we are novices, by the time we have only seconds left to make a decision, it is often too late. The best decisions made in time-pressured situations are hose we have prepared for in advance. The real challenge is to anticipate those situations in which we, as experts, might suddenly become novices, and then train for those scenarios. Klein suggests that people prepare by doing a “premortem.” Whereas a postmortem reviews lessons learned after a decision, a premortem imagines that a future decision has failed and asks why. Assume we lost the game, shot the wrong plane, or died in the fire. Why? Which assumptions were wrong? Were we braised? Were we working with flawed data? Premortems take longer than seconds. They should be done early, before a time-pressured crisis hits.

With all of this research, we now have something approaching a general theory of procrastination, in two parts. First, our discount rates are the key variables. If they are reasonable and we delay some action, we really shouldn’t call that procrastination, not in any pejorative sense. Instead, procrastination occurs when we use a discount rate that is too high, that is, when we discount the future too much. High discount rates are one of our biggest problems as decision-makers. High discount rates lead to the bad kind of procrastination.

Second, procrastination is closely related to impatience. Their kinship is based on discount rates and our bias toward the present over the future. Both are examples of the human tendency to over discount future events. In both impatience and procrastination, we overweight the immediate. The main difference between the two is whether the immediate thing we are overweighting is a benefit or a cost. When what is immediate is a benefit, we are impatient gluttons, overindulging and consuming more than we should. But when what is immediate is a cost, we are procrastinators, putting off activities we should get done today.

Overindulgence and procrastination are two sides of the same coin. Preproperation is the term for acting when we should wait. Procrastination is the term for waiting when we should act. When scientists test preproperation and procrastination together, they find that both are associated with the same variable: high discount rates.

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