Sunday, June 22, 2008

(my pic)

Put a check in that box. I finished Mauboussin's book, More than You Know: Finding Financial Wisdom in Unconventional Places.

There is much to like love about this book as it is a survey of many other disciplines and how those disciplines affect investment and investment behavior. In fact he models E. O. Wilson's notion of Consilience and brings statistics, complexity theory, psychology, sociology and and a myriad of other disciplines into short, approachable chapters. I've mentioned in this space before that when I read the summary of the book, I immediately thought of Wilson--lo an behold, the opening message in the book is a quote from Wilson.

As time permits, I'll flow chart the book with Free Mind and give you a link. Until that time, I'll share a few things in posts--in no particular order but my whim. Even with that qualification--Chapter 17 seemed particularly important. The title of the chapter is: Is There a Fly in Your Portfolio? What an Accelerating Rate of Industry Change Means for Investors. This chapter resonated with me as I immediately recalled three books I've read and some of their salient points: Tipping Point (Gladwell); Singularity is Here (Kurzweil); and The Living Company (de Geus).

In this chapter, Mauboussin discusses the concept of "clockspeed" as defined by Charles Fine in Clockspeed: Winning INdustry Control in the Age of Temporary Advantage .In general, clockspeed is "a measure of cycle time, on multiple levels.: (p. 120). More specifically to a corporate environment, there are three facets:

  • Product Clockspeed: how quickly an industry launches a new product and how long products live.
  • Process Clockspeed: the process for creating and delivering a good or service.
There are several industries listed under fast, medium and slow clockspeed industries. As you would imagine, personal computers, toys/games, semiconductors would be in the fast category. Automobiles, machine tools and pharmaceuticals in the medium category. Finally, in the slow clockspeed industry one finds commercial aircraft, tobacco, petrochemicals and paper.

The point is this. . .
~
Today's companies need to generate economic returns on investment over a shorter time horizon than they did a generation ago. (p. 120)


Additionally, there are chapters in the book about slowing down of economic returns as companies both get older and get bigger--a concept in both Tipping Point and The Living Company. In fact, we are tempted to think that bigger and older is better, but if the average life span of a Fortune 500 company is 40-50 years, the probability of long-in-the tooth companies joining the historical has-been ranks is rather high. In fact deGues states that 1/3 of the Fortune 500's in the 1970's were gone by 1983.

Think about the implication of Mauboussin's statement in addition to longevity (or lack of!) relative to commonplace investment advice of buy and hold, importance of value investing (low p/e's) and the like. It gets thrown out the window. (interestingly, Mauboussin has little regard for p/e's, and I'm beginning to share his view on that).

The antidote to all of this for Mauboussin is diversification. He also states that "investors spend more time understanding the dynamics of organizations change." Frankly, understanding these dynamics relative to a specific company would be beyond the reach of most investors. It's hard enough for insiders to understand the dynamics. So, I'll lodge a major quibble on that point.




3 comments:

nice said...

2nd, and any others intereted in the Shanghai market... you may be interested in this article...

http://tinyurl.com/42p2ml

Local players saying:
"And now there is no bottom in this market."

And leave it to China to always have a 'Chinese Way' of doing things:

"on the Shanghai Stock Exchange. Losing stocks are green, gainers are red."


Oddly enough I once visited a primitive Chinese stock market in Hubei Province

... it consisted of one room with a few blackboards, a few tables, and a lot of pencils and chalk...
... kinda reminded me of a kindergarten school...

nice

Anonymous said...

nice-

thanks for the link...how far away can capitulation be?

losers green/winners red-> they also read right to left...;)

can you imagine driving in china if stop was green and go was red...

2nd

Leisa said...

I couldn't figure out how to do a link, but here is a video on Bloomberg: Fung of Hang Seng Bank Sees Challenges for China Stocks (If you enter those key words hopefully you can get to it.)