Independentthinking
MIT economist Andrew Lo had published a paper where he reviews twenty one (yes, 21) books about the global financial crisis. In search of common explanations and themes, he found confusion instead. “After each book, I felt like I knew less. For an academic, that’s a pretty frustrating feeling.”
Seth Godin’s appearance in this talk show is constrained by the format: a talk show requires “controversial sound bites” and leaves little room for deep analysis of a given issue. That’s up to us, and the ideas he repeats here – “get ready for a ‘forever recession’ by reinventing yourself”, “learn by doing”, “go ahead and do it”, “take risks” – are worth considering during the weekend.
We’re still digesting the MF Global collapse, and we’re guessing it will be the case study for the intersection of risk management and culture/ incentive systems – not that it could ever be separated, but this was the case that really drove it home because of the inconceivable use of client funds… We highlight several articles on counterparty risk, fraud and MF Global inside.
DLD 2012 has started today in Munich and runs until Jan. 24th. In it, people as diverse as Sheryl Sandberg, Arianna Huffington, the Dyson family and Hiroshi Mikitani share their views on what matters to them. The themes are varied and the program is packed with interesting talks and panels. In the age of multi-disciplinary events, this is one of the best.
Today’s post is just an image, a scan of an Isaac Asimov 1971 short note to kids apparently getting a new library somewhere. It’s brilliant. We complement it with our post citing “anti-libraries”.
Researchers have not been able to find a link between banker compensation and short-term performance metrics. In their words, their finding “refutes the suggestion that incentive structures in banks could be blamed for the crisis”. As we were reading the study’s description, we were alarmed that the professor equated “short-term performance” with the short-term movements in share prices, which is not usually how compensation is set in banks. Then we found a post by the Epicurean Dealmaker that destroys the study precisely on these arguments.
Just as in our September 2011 post called “How to spot a fraud”, a Wall Street Journal piece tells another story about returns that look too good to be true – but in this case, “too good” means “low volatility”. The point here is the ages-old trap of equating “risk” with “volatility” and assuming that a low-volatility fund is less risky. Even ignoring the possibility of fraud, it’s a bad move.
We were initially skeptical because, as Buysiders.com readers are probably well aware by now, we view risk management as a matter of knowledge gathering/sharing and corporate culture. The excerpts inside this post explain our satisfaction with the video. It’s not enough for us to judge whether this course is a great investment for you or your company, but we have attended classes with Bob Kaplan (and other) at Harvard and we certainly got more than our money’s worth.
We continue to learn from the collapse of Jon Corzine’s MF Global. A recent article at NYT’s Dealbook highlights another lesson: ignore your chief risk or compliance officer at your own peril. While we agree that in this case it might have led to different and better decisions, such officers are still prone to all the talent, behavioral and incentives-driven traps and pitfalls. That said, the simple governance, hierarchical and process improvements the author suggests do help, and he also has the merit of recognizing that “Leadership has the right to challenge, disagree or even reject that advice.” Remember: “Culture eats Strategy for breakfast”.
Interesting food for thought on Apple’s capital allocation issues and it ties well with our last two posts on capital allocation. Just a reminder: this post is highlighted exclusively for overall capital allocation policies that might be applied to other investments. Buysiders.com doesn’t advise on specific stocks nor do we make any recommendations, as highlighted in the post.
