Archive for November, 2010

Fisher Investments Analyst’s Book Review: Overhaul and Crash Course

November 26, 2010 Leave a comment

Crash Course: The American Automobile Industry’s Road from Glory to Disaster by Paul Ingrassia

Overhaul: An Insider’s Account of the Obama Administration’s Emergency Rescue of the Auto Industry by Steven Rattner

Well, Halloween passed, and I couldn’t let it go without doing some reading of the macabre variety. So I read about the history of US autos. There’s enough zombies, witches, and Frankensteins (The Ford Expedition! It’s alllliiiivee!!!) in there to keep you from sleeping for a week.

Of particular, gory interest is the way US autos came to be politicized and unionized through a decades-long decline. It’s not atypical for big industries, closely thought of as national assets to become so. Pundits hemmed and hawed over this in the US the last few years, but on the global scene nationalization and “protection” of jobs via big companies is about as old as the corporation itself. Still, the plight of the US auto industry is truly a unique tale. Make no mistake—these companies should have been bankrupted, totally refashioned, de-pensioned and de-unionized, and generally revamped years ago, and would be far more competitive today if they had. We’re not talking 3 years ago, we’re talking 25 or 30. The ironic part is that while politicization surely contributed to the inexorable decline of US autos—awkwardly and lumberingly and often bizarrely—it also helped these undead zombies stave off true death for a very long time.

The US automakers—between CAFE laws and scores of costs heaped on by the United Auto Workers (UAW)—just don’t have a fighting chance and haven’t for a long time. Foreign automakers totally missed the SUV craze of the ‘90s, and Toyota dealt with braking system fiascos in the last couple years—a misstep means lower earnings for them, not doom. These days, a bad product offering or an economic downturn means utter catastrophe for GM. So when you hear auto execs and politicians saying they need tariffs or better negotiations to buy parts to remain competitive, or when they whine it was the recession and financial crisis that caused their ruin…don’t believe any of it. US automakers’ cost per car manufactured is higher than basically anywhere else because of politicization and the costs of unionization. Toyota makes a lot of cars here too—they just don’t have the same UAW-related costs GM does.

All of this is starkly apparent in Paul Ingrassia’s Crash Course. The book’s bulk centers mostly on the last 10 years and emphasizes the bailouts, but the first few chapters are a sort of “CliffsNotes” to US auto manufacturing history—tightly written and often entertaining. This concise history provides a necessary framework for understanding the bailout. Crash Course argues the seeds of US auto death were planted decades ago and calls the “corporate oligopoly and union monopoly” of US autos a “recipe for disaster.” Indeed. Ingrassia adeptly recreates the feeling that so many still hold: the very fabric of the US economy is tied to GM, Chrysler, and Ford. That view hails from when the US economy was less diverse and manufacturing still king. These days autos aren’t all—not even close—but our attachment to the auto legacy drives them to be heavily politicized.

Crash Course is filled with fun details. To read about Robert McNamara’s start at Ford before he got to the Pentagon, the Corvair debacle and the rise of Ralph Nader as a political persona, important industrial innovations like the catalytic converter, the machismo and hubris of Lee Iacocca—these and many other tidbits we all know but don’t frequently remember are vital to understanding the state of automakers today.

By contrast, Steven Rattner’s Overhaul skips those details and speaks directly to the transactions and politics of the 2009 auto bailouts. Put the two books together, and it’s a ripping good (but often harrowing) tale.

Malcolm Gladwell recently reviewed Overhaul in the New Yorker. He points out that Rattner, the “Car Czar” of the Obama administration, is two things: A finance guy (a dealmaker) and a political wannabe. A third thing: As the Car Czar, he was the Van Helsing to GM’s Dracula. But those two facts explain a lot about Overhaul. As accounts of financial deals go, Overhaul is adequate. But it’s a very “safe” book. It reads like a political memoir of someone who expects to hold office again. To Rattner, Larry Summers and Tim Geithner are really nice guys, Obama is nothing but brilliant and courageous, and no one is much of a bad guy except Rick Wagoner—the former GM CEO whom Rattner deposed and the safest guy to trash. Maybe it’s all true, but don’t we read these “insider” accounts to get insight on how these folks really operate and speak? It’s too much to believe they’re all angels.

Those who’ve written professionally know that editors can sometimes give odd instructions to gussy up the prose (finance writing isn’t generally as exciting as romance novels). One envisions Mr. Rattner’s editor asking for more gritty details folks will relate to. Rattner seems to have complied by recounting the things he and his colleagues ate. Every couple pages we’re told about McDonald’s sandwiches that were scarfed or breakfast burritos consumed in the wee hours. But otherwise, personal detail is scarce. That’s probably because Mr. Rattner published this book in the midst of a personal legal battle, so he sticks to the facts.

All this no doubt defangs the book some, but doesn’t fully nullify it. Big Macs aside, Rattner describes complex capital structures, negotiations with unions and bondholders, and the process of finding a new CEO for GM precisely but in terms non-finance wonks will understand. It’s striking, in fact, how similar Rattner and Ingrassia’s adjectives describing the nonchalance and arrogance of GM management are.

Chrysler is now basically owned by Fiat and the unions, a revamped GM will go public soon, and Ford managed to survive and seems to be okay. A frightful tale. Autos have done pretty well in 2010—at least they’re on the mend—but I’d wager trouble’s in their future again. Maybe the next recession, maybe not. But sometime. Defined benefit pension plans and powerfully influential unions rank among the most ambitious social experiments of the 20th century, but they’re still far overwrought today. Unless US autos can reform those parts, they’ll rank among the undead again.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

Rare Earths: Not So Rare

November 23, 2010 Leave a comment

Maybe you’ve seen Steve Forbes’ latest “Energy Crisis: Over!”. Well, consider this part two:

According to a recent report by the USGS, the US alone has 13 million metric tons of rare earth metals vs an estimated US annual consumption of 10,000 metric tons. So, at current consumption rates, that’s equivalent to 1,300 years of reserves. The deposits are also relatively common in number throughout the US , with significant deposits in 14 different states.

On a global basis it estimated reserves at 99 million metric tons, with 36% of reserves in China and 13% of reserves in the US . The report also says that “during the past 50 years outside of China , there has been little Rare Earth Element exploration and almost no mine development”. Therefore there may be significantly more than currently estimated world wide.

Contrary to media headlines to the contrary of late, rare earth metals aren’t all that rare and any supply squeeze is likely to be short-term.


Fisher Investments Analyst’s Book Review: Choice 2-Pack

November 5, 2010 Leave a comment

How We Decide proves Jonah Lehrer ranks among the best active science writers, while Sheena Iyengar’s The Art of Choosing is a sometimes cluttered but broader meditation on the act of choice in our lives.

When you get right down to it, most newfangled studies of behavior are getting at a single thing: choice. How do we choose, and why? If you can figure that out, understanding why we make mistakes and similar questions are easier.

Of course, understanding choice is the $64,000 question of the neuroscientific era (but it’s nothing new—philosophers have grappled with it forever too). We don’t even all agree that we get to choose at all! To this day, some psychologists contend choice is instinctual, unconscious, out of our control.

In my own investing travails, I’ve less asked the question, “How are we irrational?” and instead asked, “How do we choose?” Of course we’re all irrational at times, but why? It’s a question for the individual as well as the crowd. As often argued in this space, the crux of the issue, ultimately, is self knowledge. Psychology (the kind that doesn’t include pill-popping) is at core about exploration and understanding yourself, and that’s the thing leading to greater control and awareness. We too often shun this basic fact because a dominant feature of irrationality is the illusion of control—we believe our reason, our consciousness, can rule the roost. It can’t. Our minds are much larger than just our awareness. From where does love or hate come? Surely not reason. Yet those are as important as any datum and foundational to choice, whether we like it or not.
Enter Jonah Lehrer’s fantastic, and pithy, How We Decide. Like his debut, Proust Was a Neuroscientist, this book is a tour de force of lucid, simple explanations about how our brains work, yet is bursting with ideas and insight. Lehrer is one of the only popular authors to consistently offer deep thinking on contemporary neuroscience, not just reductive conclusions. Anyone interested in the psychology of investing, or popular psychology in general, should read this book.

Lehrer, unlike behavioral economists, doesn’t care about explicit irrationality. That is, he doesn’t have an agenda to disprove classical economics. This frees him to tackle issues of behavior in ways economists mostly don’t. He tells us the subconscious brain also “thinks,” and emotions are in fact a kind of thinking—they are “messages” from the unconscious parts of our brain delivered to our awareness. More, that the neocortex (where reason happens) is one of the weakest and smallest parts of the brain! In fact, the unconscious works faster, and is often more right, than reason (à la Malcom Gladwell’s study of intuition, Blink). To access the vast power of the full brain, there must be room made for the emotional unconscious—to actually listen to, but not necessarily follow, those messages.

In a shrewd move, Lehrer describes the brain’s neocortex (where our “reason” resides) as being the regulator of our brains—to provide a circuit breaker for emotional impulses that might be wrong. It’s less likely our neocortexes were designed for actual forward-thinking reason, though that’s what we generally use them for. This idea of regulation rather than reason is a hugely important perspective for investors. True masters, with reason and experience on their side, understand how to allow all parts of their brains to have their say. Different parts of the brain will disagree with each other; the brain sends mixed signals and is rarely harmonious. Simple awareness of this ought to allow us to override what “feels” right but we know isn’t.

For investors, intuition sometimes serves us well, but more often leads us astray. Why? For one thing, intuition tends to fail because the stock market is a really tricky feedback mechanism—it prices in what people learn and anticipate, so it’s tough for a brain’s lower functions to really home in on anything consistently right. Nevertheless, Lehrer reminds us that over-thinking can lead to as many wrong decisions as relying on the gut alone. But at times, he can be too reductive—it’s not right to say Garry Kasparov makes all his chess judgments based on past experiences. Though it’s certainly true that great chess players use their intuitions, their faster-computing unconscious minds, to quickly pare available moves down to a set of the best choices.

Lehrer finds that the brain can’t handle the complexity and non-intuitive parts of the market, and therefore no one should ever try to beat it. He would’ve done better to examine the psychology of those who have in fact consistently beat markets as opposed to speaking to the lowest common denominator. Still, he offers a handful of worthy insights: Fear of losses (loss aversion), for instance, makes people more willing to accept a measly rate of return directly after they feel losses (like a big bear market). This is why investors often miss the first parts of stock bull markets even though that’s a spot where the biggest gains can be.

Meanwhile, Sheena Iyengar’s Art of Choosing is a broader meditation on the issue of choice in everyday life. Iyengar is adept at weaving current psychological findings into little stories and anecdotes, but often veers too far from topic. Too much time is spent on cultural relativism, issues of equality, and so on, that can be tangential to choice but aren’t explicitly about it. Still, in relief to Lehrer, the book is quite a good complement, offering reinforcement and treading territory Lehrer doesn’t. Perhaps Iyengar’s best contribution is the idea that interpretation of information is as important to choice as anything. Simple perspective can make two people interpret the same event differently. Investors should always keep this in mind, and it is specifically why MarketMinder’s front page links to perspectives from a variety of sources each day—both those we agree with and ones we don’t. You can’t make a good choice if you interpret the situation wrong to begin with.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

Fisher Investments Analyst’s Book Review: Travel Reading Diary

November 4, 2010 Leave a comment

After a long business trip, a few reading suggestions.

New Yorkers get a bad rap. They aren’t jerks, they just want things to keep moving—quickly. They mind their own business, and when/if you need something or get in their way, they don’t mind telling you about it. Otherwise, they’re as courteous (often more so) as anyone. But in their own way. They’re the most self-interested folks on the earth, but they respect that the many millions around them are self-interested too, all going about their day. So let’s keep it moving; we’ve got things to do, and so do you—NOW. There’s no better place for the epicenter of capitalism.

Anyway, I had the privilege of spending a week recently in Manhattan meeting with clients, and, between two long flights and a little downtime, got some reading done.

The Pleasures and Sorrows of Work—Alain de Botton

I assumed I’d hate this book, but didn’t. It’s a philosophical discourse on work. But it’s not overly abstract or conceptual—Mr. de Botton scrutinizes the workplace via real offices, warehouses, and people. Thus, it’s often more like journalism—and about half of the story is told through pictures.

De Botton doesn’t just deride modern work, as many in his position (intellectual outsider) might. He spends quite a lot of time on the aesthetics of business—the sheer grandeur of a giant warehouse, the elegant complexity of a logistical center, the creative genius behind today’s robotics, the grit and stamina of those who do repetitive tasks all day yet with high quality results. He could tell us what to think of these things but doesn’t, preferring to appreciate and analyze—a clever move because didactics here would only produce disdain from working readers. But he does also take time, in quite lively and well crafted prose, to highlight work’s inherent absurdities. (Just what, exactly, does an accountant actually do in that tiny cubicle all day? Moving numbers from one side of the ledger to the other? Has anything, you know, existentially, really changed?) He’s still a philosopher, after all.

Ultimately, the effect is to raise the idea of work and industry in our consciousness; to really see these mundane things (the biggest and often most transparent parts of our lives) in a new way. The effect is well worth the while. A favorite passage on the problems of socialism upon the author touring a cookie factory:

Their self-indulgence has consistently appalled a share of their most high-minded and morally ambitious members, who have railed against consumerism and instead honored beauty and nature, art and fellowship. But the premises of a biscuit company are a fruitful place to recall that there has always been an insurmountable problem facing those countries that ignore the efficient production of chocolate biscuits and sternly dissuade their ablest citizens from spending their lives on the development of innovative marketing promotions: they have been poor, so poor as to be unable to guarantee political stability or take care of their most vulnerable citizens, whom they have lost to famines and epidemics. It is the high-minded countries that have let their members starve, whereas the self-centered and the childish ones have, off the back of the doughnuts and six thousand varieties of ice cream, had the resources to invest in maternity wards and cranial scanning machines.

So, this guy is pro-capitalist, right?

Good to Great and Why the Mighty Fall: And Why Some Companies Never Give In—Jim Collins

I often get asked for good books by which to judge great companies to invest in. There are none, really. Great companies are, of course, the foundation to great stock investments, but there is so much more than just that for investors to contend with. Markets and company performance often enough are different things in the short and medium term. Great investors must understand capital markets as much as they do the companies.

That said, if you want to witness the ethos of what great companies do, there are few better studies than Jim Collins’ Good to Great. This is a book about how disciplined, usually humble, determined companies focus on their core competencies and become the best in their fields. Collins at times comes off a bit like a bombastic business book guru, but the substance is there. His more recent, How the Mighty Fall—about how companies fail and how some regain greatness—is a lesser achievement but still along the same lines as Good to Great.

Theatre—David Mamet

Most will know Mamet from his screenwriting for movies like Glengarry Glen Ross. Oh, there is so much more. This is Mamet’s book on the actual craft of theatre—acting, directing, and so on. But it carries lessons every business manager should heed.

Mamet, to my view, ranks among the best living playwrights. This is, principally, because he’s been among the few who do not condescend to audiences with petty political rhetoric or piteous social messaging. He is a meticulous student of human motivation, its frailties, and the masks we wear to cover them (which is opposite of, say, the constant social/moral haranguing that is a Jonathan Franzen novel). Mamet is free of moralizing—here is human interaction, as it is, writ large, starkly. And often with a dose of comedy to boot.

Thus, he is one of the few fiction writers today that has much to teach us about human behavior in a non-didactic, non-tedious way. As Mamet says, art is, at core, entertainment. A few favorite quotes:

Drama is about lies. Drama is about repression. And that which is repressed is liberated—at the conclusion of the play—the power of repression is vanquished, and the hero (the audience’s surrogate) is made more whole. Drama is about finding previously unsuspected meaning in chaos, about discovering the truth that had previously been obscured by lies, and about our persistence in accepting lies.

The theater is, essentially, a deconstruction of the repressive mechanism, which is to say, of the intellect and its pretensions…Those who can accomplish this trick are known as artists; those who cannot may find for themselves another name, and indeed, they do, presenting themselves as professors and critics…

Both, in their own way, seem germane to stock investing.

Clutch—Paul Sullivan; Choke—Sian Beilock

I recently choked. Public speaking’s been a part of my job for years now, and I always wondered (and dreaded) when the day would come that I just sort of…forgot what I was saying mid-sentence. It finally happened a few weeks ago—I was talking, talking, talking…and then…nothing. In front of the whole audience. A trifle embarrassing.

I lived to tell the tale, but I figured now was the time to do some reading on current studies in the field of performance under pressure. After all, an investor is, in some sense, always under such pressure to perform, to make the right decisions. And the stakes are usually high.

Both of these are fine enough books—Clutch deals with the principles of performance under pressure via anecdote and qualitative study, mostly.Choke is a hardcore synthesis of modern, science-based psychology.  On both counts, though, it’s striking how little there really is to say about this topic. Neither book does much better than tell us to do things like “focus,” prepare/practice adequately and try to replicate pressure-filled situations, and don’t over-think things. One hopes most regular performers already intuitively knew most of these things.

In the end, this just isn’t the territory for science or logic, and no empiricist is going to explain the fortitude of Michael Jordan down to some root principles. But it’s surprising how much reticence there is to speak of determination, courage, and their role in performance. As if those aren’t topics fit for serious intellectual discourse any longer, and thus not applicable for study of grace under pressure.

*The content contained in this article represents only the opinions and viewpoints of theFisher Investments editorial staff.

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