Archive for August 2007

Fooled by Randomness

I’ve been reading Fooled by Randomness and its followup, The Black Swan. Both are must reads for anyone that has money in the financial markets.

There are several themes in the first book, but the two that stood out the most for me are: 1) Stock prices basically behave as a random process; and 2) Humans are hard-wired to recognize patterns, even where there are none. A couple of the more humorous stock market patterns you may have heard about include the Hemline Theory (prices are correlated to the length of skirt hemlines), and the Vanity Fair ad pages (prices are inversely correlated to the # of VF ad pages). These two theories sound pretty absurd, but they illustrate that if you look hard enough it’s possible to correlate a random process with just about anything.

Some of the more “legitimate” stock price pattern recognition algorithms out there include poring over financial statements (a.k.a. fundamental analysis), drawing trendlines on historical charts (a.k.a. technical analysis), or maybe something more exotic like custom written AI algorithms. All of these have some degree of success, but anyone who has actually tried to use techniques such as these can attest to the fact that correlations may hold up for a subset of the random data, but the pattern undoubtedly fails.

The important point that gets almost zero focus in any kind of financial media is that success in the stock markets depends very little on the quality of your pattern recognition algorithm. The difference between having one that’s 70% accurate and one that’s 99% accurate is moot, because they will both fail eventually. The larger factor that determines long-term success in the markets is what’s done to manage the risk for the failure case.

One of the most common schemes that gets touted as risk management is to diversify and have a long term investment horizon. The argument is that historically, the stock market indexes have consistently returned something like 7% per annum for periods of time measured in decades. That sounds like a pretty compelling argument, but that leads to one of the themes in the second book, The Black Swan.

Consider for a moment, the hypothetical scenario of the allies losing World War II and the west never becoming the technological and economic superpower that it is today. Imagine what the 20-30 year returns would look like for somebody who bought the North American indexes in 1945. This is the kind of “highly improbable event with a massive impact” that the second book discusses. The point being that proper risk management should not rely solely on something that in theory has a very low probability of occurring, because it probably has a higher probability than you think.

Both the books are well-written and easy to read. They don’t give specific financial advice, and in fact there’s very little content that’s actually finance related. They’re more general interest than anything and can thus be applied to other areas. I just found them enlightening when applied in the context of the markets. Highly recommended, check them out if you have a chance.

One Year Later

It’s been roughly a year since the RIM acquisition, so I thought I’d give a little post-mortem.

I successfully avoided working for big companies up until last year, until I wasn’t really given a choice. The avoidance wasn’t due to do a bad firsthand experience, just a combination of what I’d heard and how I pictured it would be. Well I’m sorry to say, firsthand experience wasn’t able to disprove the theory.

In no particular order, the top 3 things I don’t enjoy about working for RIM:

  1. Middle management. I’ve found the stereotype very true, at least for many of the groups I deal with at RIM. Maybe not as bad as David Brent, but still very noticeably lacking. It’s compounded by the fact that RIM has very hands-on, very technical executives on the software side. So instead of middle management functioning as leaders of their autonomous units, they really just act as more of a time-delayed, lossy proxy. The corollary to this is this weird culture of fear and worship of the execs. The trumping argument often goes something like, “Well, MikeL/DavidY said so, therefore that’s the way it has to be.”
  2. Specialization. I get the theory, specialization leads to higher overall productivity, but what they don’t tell you is that it’s hella boring. RIM bought SlipStream for its compression technology, so that makes all of us compression experts only. Any knowledge and experience that we bring to the table in other areas has just about zero value. Of course switching specialties is always an option, but that doesn’t address the underlying issue.
  3. Bureaucracy. I understand, when the company is so big, there needs to be meetings and paperwork to co-ordinate between groups so that everyone is on the same page. I don’t know if it’s like this at other large companies, but I find it’s quite excessive in some cases at RIM. For example, the overriding factor for some technical decisions is whether or not say, the Legal or the IT department need to be engaged in the process. These are two groups that have gotten the reputation at RIM (deserved or not) of extending timelines by weeks to months.

To be fair, it’s not all bad, the things I DO like include:

  1. Benefits and perks. There’s the free BlackBerry of course. Plus the full health/dental, group RRSP, subsidized gym membership, etc.
  2. Compensation. The salary and options packages are very competitive, especially considering the low cost of living in the K-W area.
  3. Better work-life balance. Long work hours are not expected, vacations never have to be cancelled (as did happen once at SlipStream). If you’re not available, they can always find another way.

These are all "nice to have" things, but truthfully they have very little importance to me at this point in my life. I have no dependents, no mortgage to pay, and Bonnie works 12 hours shifts, so long hours aren’t such a big deal. My goal is still that by the time these things do become important (in say 5-8 years), I won’t actually need to work any more. I can dream, right? :)