Ok, the original name of the article is "David Swensen's Guide to Sleeping Soundly"
It reminded me of the title of Phil Fisher's book - The Conservative Investor Sleeps Well.
Yale Alumni Magazine interviewed its CIO David Swensen in this article. Read it and prosper! Haha. I've ran my parent's portfolio sticking to his principles stated in "Unconventional Success" and in Burton Malkiel's "Random Walk Down Wall Street" for the past 5 years. Of course there are no fantastic returns, i'm simply glad that a noob like me managed to not lose much when others are losing their pants. I'm simply thankful that my parents have the faith in me to manage substaintially their retirement savings. There's no faster way (or high pressured way) to learn than to do the thing itself, to truly care about long term performance and to have to the fortitude to do the right thing over time.
Excerpt from the Yale Interview that i truly enjoyed reading;
Y: Given all the turmoil and uncertainty, what should individual investors do?
S: If an individual investor followed the program I outlined in Unconventional Success, they probably did reasonably well, through the crisis, thus far. They'd have 15 percent of their assets in U.S. Treasury bonds. They'd have another 15 percent in U.S. Treasury inflation-protected securities. Those two asset classes have performed well.
Of course, the other 70 percent of assets are in equities, which have not done well. With all assets, I recommend that people invest in index funds because they're transparent, understandable, and low-cost. So, the equity holdings have gone down step-by-step with the declines in the market.
I recommend that investors rebalance.
But I also recommend that investors rebalance. Rebalancing is even more important amidst these huge declines in the stock market because it presents a great opportunity. People can sell the Treasury securities that have appreciated dramatically to bring their allocation to the 15 percent target, and they can redeploy those funds into domestic equities and foreign equities and emerging market equities and real estate investment trusts, all of which are now much cheaper, and therefore have higher prospective returns.
Y: Explain this idea of asset allocation, please.
S: Asset allocation is the tool that you use to determine the risk and return characteristics of your portfolio. It's overwhelmingly important in terms of the results you achieve. In fact, studies show that asset allocation is responsible for more than 100 percent of the positive returns generated by investors.
That's why the most sensible approach is to come up with specific asset allocation targets that you can implement with low-cost, passively managed index funds and rebalance regularly. You'll end up beating the overwhelming majority of participants in the financial markets.
Y: So people should not be afraid of stocks now?
S: Not only should they not be afraid, they should be enthusiastic. One of the great ironies is that if you had talked to the average investor 18 months ago, he or she would have thought it was a pretty good idea to buy stocks. In recent months, the same investors despair about their portfolio and are fearful about putting money into the equity market.
That's 180 degrees wrong. They should have been cautious 18 months ago, when prices were much higher than they are now. They should be enthusiastic today.
LW's comment: In the heart of his investment approach, he's a sound value investor, just that his tools and assets utilised goes beyond stocks and bonds. Price is what you pay, value is what you get!
Y: Unconventional Success delivered a scathing critique of the mutual-fund industry. You rightly pointed out that the vast majority of mutual funds charge high fees, trade too frequently, and under-perform the markets. How did the industry react?
S: I've heard stories of people in the fund management business being irate about the book. That's not surprising. The mutual fund industry is not an investment management industry. It's a marketing industry. And if somebody interferes with your marketing, you're not going to like that. So I was pleased to hear that there were senior people in the industry who were very, very unhappy with me and my book.
LW's comment: Ok, my aim in the future is to irate all those pseudo experts who 'teach' people how to lose money. Those who claim that you can secure your financial future simply by sitting 15min in front of the computer every day. These swindlers and con men sell dreams that destroy futures and families deserve a special place in hell where they can feast on each others rotting waste for eternity.
Take a deep breath, count to 3...calm down.
Read the article and pay some attention to the blue box in the right side of the page. The advise is remarkably similiar to "Random walk down Wall Street" and "When markets collide". Find something that is suitable and sound for you and I think we will get rich eventually.
Tuesday, June 30, 2009
Saturday, June 27, 2009
Thank you for the music
I LOVE AJALUMNI CHOIR!!!
It's a grand night for singing,
The moon is flying high,
And somewhere a bird
Who is bound he'll be heard,
Is throwing his heart at the sky!
I think we threw our hearts to the audience and they loved it! All the hard work that went into the preperation has paid off. A wonderful experience thanks to every single member who are all committed and passionate.
Singing in choir is addictive, the high you get from creating something amazing and the work that goes into creating that something special keeps you wanting more.
Thanks to Mark that brought the choir to another level. Beyond singing, we are now performing and connecting with the audience. I can hardly imagine the level of 'shagness' he experienced every week to keep the energy level of the choir up, and he did a wonderful job conducting us on D-Day despite all the stress.
We often forget the team that did all the background work to ensure that the people in the spot light can shine. Huge huge thanks to Peiying, Whee Geok, Chee Guan, Nad, Mei Rong, Saffie and all the rest that fret and fuss over scheduling, printing, design and all the 'zap ba lang'stuff that makes a performance possible.
To the best basses in the world (ok, at least my world), Guowei, Joel, CG, and Jing Kang, super awesome to sing with u guys, and i think for many songs the basses sounded like a united super Bass!
Can't wait for Gerald's video recording of the concert. H1N1 begone! Let Gerald out so he can compress and edit the video. haha...
Ajalumni choir is a place where i feel safe and happy. No need to be someone elses version of myself. It would be a sad day when i can no longer sing with the wonderful people.
It's a grand night for singing,
The moon is flying high,
And somewhere a bird
Who is bound he'll be heard,
Is throwing his heart at the sky!
I think we threw our hearts to the audience and they loved it! All the hard work that went into the preperation has paid off. A wonderful experience thanks to every single member who are all committed and passionate.
Singing in choir is addictive, the high you get from creating something amazing and the work that goes into creating that something special keeps you wanting more.
Thanks to Mark that brought the choir to another level. Beyond singing, we are now performing and connecting with the audience. I can hardly imagine the level of 'shagness' he experienced every week to keep the energy level of the choir up, and he did a wonderful job conducting us on D-Day despite all the stress.
We often forget the team that did all the background work to ensure that the people in the spot light can shine. Huge huge thanks to Peiying, Whee Geok, Chee Guan, Nad, Mei Rong, Saffie and all the rest that fret and fuss over scheduling, printing, design and all the 'zap ba lang'stuff that makes a performance possible.
To the best basses in the world (ok, at least my world), Guowei, Joel, CG, and Jing Kang, super awesome to sing with u guys, and i think for many songs the basses sounded like a united super Bass!
Can't wait for Gerald's video recording of the concert. H1N1 begone! Let Gerald out so he can compress and edit the video. haha...
Ajalumni choir is a place where i feel safe and happy. No need to be someone elses version of myself. It would be a sad day when i can no longer sing with the wonderful people.
Mmmm....I think my mom would want Zhengkai, Ryan and Mark to be her son. Vastly more talented and better looking then me. She asked which batch Ryan is from, and after telling her that he's from MY batch, she said something along the line of ' 'wah, one look so young and the other look soo....'' i shall not go into THAT. Haha.
On our performance itself, i must say that i enjoyed our 2 John Rutter songs the most. I was especially surprised by What Sweeter Music. When the girls started singing, it was so pure and innocent, and i simply closed my eyes and enjoyed the Sop-Alto duet. And it was even more surprising (cuz we nv sounded like that) to me when the guys started 'dark and dull night....' We sounded so warm and mellow. The dynamics was natural and the whole choir sound like ONE. Ahh....its like enjoying a molten chocolate cake - warm, smooth, sweet and have you wanting more. I'm definitely an addict.
Thursday, June 25, 2009
The Pros
Are you a prostitute or are you an auditor?
1. You work very odd hours.
2. You are paid a lot of money to keep your client happy.
3. You are paid well but your pimp gets most of the money.
4. You spend a majority of your time in a hotel room.
5. You charge by the hour but your time can be extended.
6. You are not proud of what you do.
7. Creating fantasies for your clients is rewarded.
8. It's difficult to have a family.
9. You have no job satisfaction.
10. If a client beats you up, the pimp just sends you to another client.
11. You are embarrassed to tell people what you do for a living.
12. People ask you, "What do you do?" and you can't explain it.
13. Your client pays for your hotel room plus your hourly rate.
14. Your client always wants to know how much you charge and what they get for the money.
15. Your pimp drives nice cars like Mercedes or Jaguars.
16. Your pimp encourages drinking and you become addicted to drugs to ease the pain of it all.
17. You know the pimp is charging more than you are worth but if the client is foolish enough to pay it's not your problem.
18. When you leave to go see a client, you look great, but return looking like hell (compare your appearance on Monday AM to Friday PM).
19. You are rated on your "performance" in an excruciating ordeal.
20. Even though you get paid the big bucks, it's the client who walks away smiling.
21. The client always thinks your "cut" of your billing rate is higher than it actually is, and in turn, expects miracles from you.
22. When you deduct your "take" from your billing rate, you constantly wonder if you could get a better deal with another pimp.
23. Your pimp seems to often abuse you, forgetting that without you, he would not have a business.
24. You do all the real work, but the pimp has a higher stigma and more money, and really just has to "coordinate" the work for you. Sometimes, you wonder if you could just make more money pimping out yourself.
25. You get so brainwashed into the lifestyle, that you don't realize that life can be better, until it is too late.
26. Personal time, or a work/life balance, is meaningless to your pimp, all he cares about is satisfying the clients, despite how many times he tells you he loves you.
27. After a few years, you find that all your non-prostitute friends are no longer your friends, because you lost touch and your schedule and lifestyle was difficult to manage, and you find that you associate primarily with other prostitutes.
28. The turnover rate is ridiculously high. Everyone thinks they can do it for a few years, no problem, but after just a few clients railing you, many break under the pressure, or quit for a better life.
29. Most of the time, your job could be performed by a well-trained monkey.
30. You thought college was a waste of time.
1. You work very odd hours.
2. You are paid a lot of money to keep your client happy.
3. You are paid well but your pimp gets most of the money.
4. You spend a majority of your time in a hotel room.
5. You charge by the hour but your time can be extended.
6. You are not proud of what you do.
7. Creating fantasies for your clients is rewarded.
8. It's difficult to have a family.
9. You have no job satisfaction.
10. If a client beats you up, the pimp just sends you to another client.
11. You are embarrassed to tell people what you do for a living.
12. People ask you, "What do you do?" and you can't explain it.
13. Your client pays for your hotel room plus your hourly rate.
14. Your client always wants to know how much you charge and what they get for the money.
15. Your pimp drives nice cars like Mercedes or Jaguars.
16. Your pimp encourages drinking and you become addicted to drugs to ease the pain of it all.
17. You know the pimp is charging more than you are worth but if the client is foolish enough to pay it's not your problem.
18. When you leave to go see a client, you look great, but return looking like hell (compare your appearance on Monday AM to Friday PM).
19. You are rated on your "performance" in an excruciating ordeal.
20. Even though you get paid the big bucks, it's the client who walks away smiling.
21. The client always thinks your "cut" of your billing rate is higher than it actually is, and in turn, expects miracles from you.
22. When you deduct your "take" from your billing rate, you constantly wonder if you could get a better deal with another pimp.
23. Your pimp seems to often abuse you, forgetting that without you, he would not have a business.
24. You do all the real work, but the pimp has a higher stigma and more money, and really just has to "coordinate" the work for you. Sometimes, you wonder if you could just make more money pimping out yourself.
25. You get so brainwashed into the lifestyle, that you don't realize that life can be better, until it is too late.
26. Personal time, or a work/life balance, is meaningless to your pimp, all he cares about is satisfying the clients, despite how many times he tells you he loves you.
27. After a few years, you find that all your non-prostitute friends are no longer your friends, because you lost touch and your schedule and lifestyle was difficult to manage, and you find that you associate primarily with other prostitutes.
28. The turnover rate is ridiculously high. Everyone thinks they can do it for a few years, no problem, but after just a few clients railing you, many break under the pressure, or quit for a better life.
29. Most of the time, your job could be performed by a well-trained monkey.
30. You thought college was a waste of time.
Wednesday, June 24, 2009
Sheep
A teacher asked his class the following question: There are nine sheep in a pen, and one jumps out. How many sheep are left?
Everyone got it right, and said eight are left.
A boy alone said none are left.
The teacher said you don’t understand arithmetic, and he said ‘no you don’t understand sheep’.
~Charlie Munger at 2008 Wesco annual meeting
Everyone got it right, and said eight are left.
A boy alone said none are left.
The teacher said you don’t understand arithmetic, and he said ‘no you don’t understand sheep’.
~Charlie Munger at 2008 Wesco annual meeting
Tuesday, June 23, 2009
Twilight...Cullens' investment strategy
Ok...i admit that i've committed the sin of reading the first 3 books of the twilight series and is waiting for my cousin to finish the last book so i can grab it from her.
Reading Twilight is like eating those bad dessert, you feel good while you're at it, but hate yourself afterwards. I don't think i'll ever re-read these books, but i can't not read the last one...argghhh.... It is so unlike the Harry Potter series which is so well crafted that you'll find this muggle going back to it again and again.
While i'm on twilight, here's a funny video featuring James the 'bad' vampire in the first movie vs. TWEENS....very scary tweens.... don't mess with crazy teen girls!
The Cullens are the good vampires in the book. They are 'vegetarians', vampires that don't drink human blood. The cullens are filthy rich vampires who in their spare time shop a lot, save life, fight other vampires and sometimes seduce young girl. All these takes MONEY, so where does the money comes from? According to the book, they INVEST. But they cheated cuz Alice can see the future...so i'm just thinking what should be done if there is no one to predict the future.
The most important advantage that the cullens have is that they DON'T DIE...ie LONG COMPOUNDING PERIOD.
Given that Future value = Present Value (1+ rate of return)^years, having VERY long years = HUGE Future value. But we also know that anything x ZERO is zero. So their first rule would still be NOT TO LOSE CAPITAL permanantly.
Edward Cullen is over 100 years old. If he had lived through the craz 1920s boom, the great depression, the world war period, the electronic boom and bust, the 1970s hyper-inflation, the 1980s great economic expansion, dotcom bubble and bust, real estate bubble in the early 2000s, the birth of all those exotic intrument, the deleveraging of the economy since 2007 and all those financial institution going belly up.
BUT he has the luxury of time, so all he has to do is run a balanced portfolio and let it compound over time, he would not need to depend on his 'dad' 's money...spoilt brat... at 6% return, a dollar invested compounds into 339 in a hundred years!!!
In frenzied investment world where results are meaured in days and months, those of us in our 20s could be considered immortal. Lets keep our head and not be greedy. Compound at a reasonable rate and not lose money. We may not live forever, but we should invest as if we do. Cuz that the only way to think long term. To keep our sanity in a crazy world.
Reading Twilight is like eating those bad dessert, you feel good while you're at it, but hate yourself afterwards. I don't think i'll ever re-read these books, but i can't not read the last one...argghhh.... It is so unlike the Harry Potter series which is so well crafted that you'll find this muggle going back to it again and again.
While i'm on twilight, here's a funny video featuring James the 'bad' vampire in the first movie vs. TWEENS....very scary tweens.... don't mess with crazy teen girls!
The Cullens are the good vampires in the book. They are 'vegetarians', vampires that don't drink human blood. The cullens are filthy rich vampires who in their spare time shop a lot, save life, fight other vampires and sometimes seduce young girl. All these takes MONEY, so where does the money comes from? According to the book, they INVEST. But they cheated cuz Alice can see the future...so i'm just thinking what should be done if there is no one to predict the future.
The most important advantage that the cullens have is that they DON'T DIE...ie LONG COMPOUNDING PERIOD.
Given that Future value = Present Value (1+ rate of return)^years, having VERY long years = HUGE Future value. But we also know that anything x ZERO is zero. So their first rule would still be NOT TO LOSE CAPITAL permanantly.
Edward Cullen is over 100 years old. If he had lived through the craz 1920s boom, the great depression, the world war period, the electronic boom and bust, the 1970s hyper-inflation, the 1980s great economic expansion, dotcom bubble and bust, real estate bubble in the early 2000s, the birth of all those exotic intrument, the deleveraging of the economy since 2007 and all those financial institution going belly up.
BUT he has the luxury of time, so all he has to do is run a balanced portfolio and let it compound over time, he would not need to depend on his 'dad' 's money...spoilt brat... at 6% return, a dollar invested compounds into 339 in a hundred years!!!
In frenzied investment world where results are meaured in days and months, those of us in our 20s could be considered immortal. Lets keep our head and not be greedy. Compound at a reasonable rate and not lose money. We may not live forever, but we should invest as if we do. Cuz that the only way to think long term. To keep our sanity in a crazy world.
Wednesday, June 17, 2009
1,2 Step
No...this is not a post on the Ciara and Missy Elliot song...this is regarding a simple 3 step formula presentated by George Soros in today's Financial Times entitled "My three steps to financial reform."
"Banks should pay for the implicit guarantee they enjoy by using less leverage and accepting restrictions on how they invest depositors' money; they should not be allowed to speculate for their own account with other people's money."
"The issuance and trading of derivatives ought to be as strictly regulated as stocks. Regulators ought to insist that derivatives be homogenous, standardised and transparent."
"Custom-made derivatives only serve to improve the profit margin of the financial engineers designing them. In fact, some derivatives ought not to be traded at all. I have in mind credit default swaps. Consider the recent bankruptcy of AbitibiBowater and thatof General Motors. In both cases, some bondholders owned CDS and stood to gain more by bankruptcy than by reorganisation. It is like buying life insurance on someone else's life and owning a licence to kill him. CDS are instruments of destruction that ought to be outlawed."
"Banks should pay for the implicit guarantee they enjoy by using less leverage and accepting restrictions on how they invest depositors' money; they should not be allowed to speculate for their own account with other people's money."
"The issuance and trading of derivatives ought to be as strictly regulated as stocks. Regulators ought to insist that derivatives be homogenous, standardised and transparent."
"Custom-made derivatives only serve to improve the profit margin of the financial engineers designing them. In fact, some derivatives ought not to be traded at all. I have in mind credit default swaps. Consider the recent bankruptcy of AbitibiBowater and thatof General Motors. In both cases, some bondholders owned CDS and stood to gain more by bankruptcy than by reorganisation. It is like buying life insurance on someone else's life and owning a licence to kill him. CDS are instruments of destruction that ought to be outlawed."
Thursday, June 11, 2009
Simple but not Easy
Investing is not hard. The secret is to put in money today, and get back more in the future. Haha. If it is only as simple as that.
Value investing is simple. Find companies selling below intrinsic value, and wait for Mr Market to recognise its true worth and sell it back to him.
Buffett told us to invest in our 'circle of competence', and Munger said that it is the wise that operate within their circle of competence.
Circle of competence in my understanding, is to truly understand the business you're investing in. Its like if you're the 100% owner of the business, do you know what forces affects you business and what is your company's edge? Phillip Fisher has laid out all the 'steps' and questions to ask to help individual investor ask the right question. Yet for the past 2-3 weeks, after attending numerous analyst meeting, i realise few analyst cared about the business, but more about the financials.
People asked questions on sales growth, margins, SGA, ROE...but few questions was asked regarding what give rise to these numbers. Accounting and financial figures are simply a way of trying to express BUSINESS in a manner that every one agree upon. If we don't understand the business that is underlying those numbers, any sort of financial analysis or projection is not meaningful.
Furthermore, if numbers are expressed in a way that almost NO ONE understands, then what's the point of disclosing the numbers in the first place? Thus accounting principle should be reasonable and generally followed.
Read this article on Royal Sporting House on its weird line items in the income statement. Kudos to Jamie Lee, the reporter that covered this story. And boohoo to all those companies that have WEIRD accounting policy (that follows FRS but expressed in a convoluted way) and those pple who stayed in their aircon room and dream up weird accounting policies (yaya...those economist who want to 'fair value' every thing).
Re-reading Fisher's Common Stocks and Uncommon Profits. See new things that i've never seen before. Btw, i think as a general rule, if u see that cash flow from operations and income statement has NO RELATION,buyers bewares!'
...mmm....off to memorise choir scores. So happy that our Ajalumnichoir sounds like a choir now. haha. Amazing amazing.
Value investing is simple. Find companies selling below intrinsic value, and wait for Mr Market to recognise its true worth and sell it back to him.
Buffett told us to invest in our 'circle of competence', and Munger said that it is the wise that operate within their circle of competence.
Circle of competence in my understanding, is to truly understand the business you're investing in. Its like if you're the 100% owner of the business, do you know what forces affects you business and what is your company's edge? Phillip Fisher has laid out all the 'steps' and questions to ask to help individual investor ask the right question. Yet for the past 2-3 weeks, after attending numerous analyst meeting, i realise few analyst cared about the business, but more about the financials.
People asked questions on sales growth, margins, SGA, ROE...but few questions was asked regarding what give rise to these numbers. Accounting and financial figures are simply a way of trying to express BUSINESS in a manner that every one agree upon. If we don't understand the business that is underlying those numbers, any sort of financial analysis or projection is not meaningful.
Furthermore, if numbers are expressed in a way that almost NO ONE understands, then what's the point of disclosing the numbers in the first place? Thus accounting principle should be reasonable and generally followed.
Read this article on Royal Sporting House on its weird line items in the income statement. Kudos to Jamie Lee, the reporter that covered this story. And boohoo to all those companies that have WEIRD accounting policy (that follows FRS but expressed in a convoluted way) and those pple who stayed in their aircon room and dream up weird accounting policies (yaya...those economist who want to 'fair value' every thing).
Re-reading Fisher's Common Stocks and Uncommon Profits. See new things that i've never seen before. Btw, i think as a general rule, if u see that cash flow from operations and income statement has NO RELATION,buyers bewares!'
...mmm....off to memorise choir scores. So happy that our Ajalumnichoir sounds like a choir now. haha. Amazing amazing.
Wednesday, June 3, 2009
Free stuff
Ok. I'm a cheapo.
Here's a link to read Wall Street Journal for free. Think it works for Barrons too, but I have no luck accessing FT.com Lex.
http://www.businessinsider.com/how-to-read-the-wsj-for-free-online-2009-6
-----------------------------
Read another recent Stanford Lawyer interview with Charlie Munger; read full article here.
As we look at the current situation, how much of the responsibility would you lay at the feet of the accounting profession?
I would argue that a majority of the horrors we face would not have happened if the accounting profession developed and enforced better accounting. They are way too liberal in providing the kind of accounting the financial promoters want. They've sold out, and they do not even realize that they've sold out.
Would you give an example of a particular accounting practice you find problematic?
Take derivative trading with mark-to-market accounting, which degenerates into mark-to-model. Two firms make a big derivative trade and the accountants on both sides show a large profit from the same trade.
And they can't both be right. But both of them are following the rules.
Yes, and nobody is even bothered by the folly. It violates the most elemental principles of common sense. And the reasons they do it are: (1) there's a demand for it from the financial promoters, (2) fixing the system is hard work, and (3) they are afraid that a sensible fix might create new responsibilities that cause new litigation risks for accountants.
Can we fix the accounting profession?
Accounting is a big subject and there are huge forces in play. The entire momentum of existing thinking and existing custom is in a direction that allows these terrible follies to happen, and the terrible follies have terrible consequences. The economic crisis that we're in now is, in its triggering circumstances, worse than anything that's ever happened.
LW: the last paragraph sounds like what Prof JJ would say. I think it is so crucial to at least be aware of all forces that influence accounting policies....thanks to SMU's Accounting Theory course , i can at least guess where Munger is coming from when he said "there are huge forces in play".
How and why do you think economists have gotten this so wrong?
I would argue that the economists have not been all that good at working concepts of good and evil into their profession. Nor do they understand, at all well, the economic consequences of bad accounting.
In fact, they've made a profession of driving value judgments out of the subject.
Yes. They say it's not economics if you think about the consequences of good and evil, and good and bad business accounting. I think what we're learning is that when you don't understand these consequences, you don't have an adequately skilled profession. You have big gaps in what you need. You have a profession that's like the man that Nietzsche ridiculed because he had a lame leg and was very proud of it. The economics profession has been proud of its lame leg.
So in order to cure the lame leg, you would lean more toward an approach to economics that takes human nature into account?
If you totally divorce economics from psychology, you've gone a long way toward divorcing it from reality.
The same could be said of psychology. If you divorce economics from psychology...
That's what's wrong with psychology professors. There are so few of them that know anything about anything else. They have this terribly important discipline that all the other disciplines need and they can't communicate that need to their fellow professors because they know so little about what these other professors know. This is not an unfair description of much of academia.
You've often said that one of the keys to your success has simply been to avoid making the garden-variety mistakes that you see other people make.
Warren and I have skills that could easily be taught to other people. One skill is knowing the edge of your own competency. It's not a competency if you don't know the edge of it. And Warren and I are better at tuning out the standard stupidities. We've left a lot of more talented and diligent people in the dust, just by working hard at eliminating standard error.
Here's a link to read Wall Street Journal for free. Think it works for Barrons too, but I have no luck accessing FT.com Lex.
http://www.businessinsider.com/how-to-read-the-wsj-for-free-online-2009-6
-----------------------------
Read another recent Stanford Lawyer interview with Charlie Munger; read full article here.
As we look at the current situation, how much of the responsibility would you lay at the feet of the accounting profession?
I would argue that a majority of the horrors we face would not have happened if the accounting profession developed and enforced better accounting. They are way too liberal in providing the kind of accounting the financial promoters want. They've sold out, and they do not even realize that they've sold out.
Would you give an example of a particular accounting practice you find problematic?
Take derivative trading with mark-to-market accounting, which degenerates into mark-to-model. Two firms make a big derivative trade and the accountants on both sides show a large profit from the same trade.
And they can't both be right. But both of them are following the rules.
Yes, and nobody is even bothered by the folly. It violates the most elemental principles of common sense. And the reasons they do it are: (1) there's a demand for it from the financial promoters, (2) fixing the system is hard work, and (3) they are afraid that a sensible fix might create new responsibilities that cause new litigation risks for accountants.
Can we fix the accounting profession?
Accounting is a big subject and there are huge forces in play. The entire momentum of existing thinking and existing custom is in a direction that allows these terrible follies to happen, and the terrible follies have terrible consequences. The economic crisis that we're in now is, in its triggering circumstances, worse than anything that's ever happened.
LW: the last paragraph sounds like what Prof JJ would say. I think it is so crucial to at least be aware of all forces that influence accounting policies....thanks to SMU's Accounting Theory course , i can at least guess where Munger is coming from when he said "there are huge forces in play".
How and why do you think economists have gotten this so wrong?
I would argue that the economists have not been all that good at working concepts of good and evil into their profession. Nor do they understand, at all well, the economic consequences of bad accounting.
In fact, they've made a profession of driving value judgments out of the subject.
Yes. They say it's not economics if you think about the consequences of good and evil, and good and bad business accounting. I think what we're learning is that when you don't understand these consequences, you don't have an adequately skilled profession. You have big gaps in what you need. You have a profession that's like the man that Nietzsche ridiculed because he had a lame leg and was very proud of it. The economics profession has been proud of its lame leg.
So in order to cure the lame leg, you would lean more toward an approach to economics that takes human nature into account?
If you totally divorce economics from psychology, you've gone a long way toward divorcing it from reality.
The same could be said of psychology. If you divorce economics from psychology...
That's what's wrong with psychology professors. There are so few of them that know anything about anything else. They have this terribly important discipline that all the other disciplines need and they can't communicate that need to their fellow professors because they know so little about what these other professors know. This is not an unfair description of much of academia.
You've often said that one of the keys to your success has simply been to avoid making the garden-variety mistakes that you see other people make.
Warren and I have skills that could easily be taught to other people. One skill is knowing the edge of your own competency. It's not a competency if you don't know the edge of it. And Warren and I are better at tuning out the standard stupidities. We've left a lot of more talented and diligent people in the dust, just by working hard at eliminating standard error.
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