links for 8/26/07

• A veritable insurance software opportunity: Key Health IT opportunity: Medicare Says It Won’t Cover Hospital Error

• These three articles helped me understand the subprime crisis: Subprime crisis: Greenspan’s Legacy, How Credit Got So Easy, and Hedge fund letter outlines how we got into this mess
• Why in the world are anti-gentrification forces stopping this Mission District mechanic from building an apartment next to his stop and renting to his mechanics? Anti-gentrification forces stymie housing development

Liberating Public Information

Carl Malamud is my new hero. This writeup about his current endeavor is definitely the coolest tech article I read this week. He is in the middle of building a freely available public database of caselaw, caselaw that WestLaw currently makes a profit re-publishing. Somehow, WestLaw is become the for-profit reporter of court proceedings, and that strikes me as
rent-seeking and ludicrous.

In America, public record should mean public record, like EDGAR for financial records. Speaking of which, that amazing and freely available public online database is another one of Malamud’s accomplishments. Actually, I had always taken EDGAR for granted since this is after all something we should be able to take for granted. But I was ignorant of the years of legal wrangling Malamud had to go through to set this up and of the two years he personally operating the database servers before he shamed the SEC into taking it over. While the SEC was complaining that it would cost millions and take years to implement such a service, one man is all it took. Wow! He also did the same with the Smithonian and with Congressional hearings, neither of which I have ever used, but I’m sure they are of equally high quality.

And soon hopefully we will also be able to take a freely available online database of caselaw for granted, one that is easy for anyone to use and has all the hyperlinked citations that lawyers are paid to connect. I wish I had come up something like that because it certainly is a worthy project for an advanced democratic society.

Non-market capitalization weighted ETFs

I have recently been re-allocating my retirement funds and my parents’ retirement funds following these guidelines, buying diversified passively managed funds wherever possible and also diversifying between domestic and international stock funds. But what is disappointing is how most available ETFs are weighted by market capitalization. (What is even more frustrating is that I sometimes find that actively managed funds are the only options available for international investing in certain retirement plans.)

There are a myriad ways to index, and market cap weighting is almost the worst of them. At any given time, it systematically overweights overvalued stocks and underweights undervalued stocks, and since the overweighted stocks usually have more weight on the fund than the underweighted stocks, the fund is often more expensive than it should be. This runr counter to the commonsense of buying cheap and selling expensive; market cap weighted funds systematically hold more of the expensive and less of the cheap.

Statistically, there are better ways to index. I can’t remember exactly, but I have seen a volatility weighted or an inverse-volatility weighted fund plotted against the S&P500, and it outperformed the S&P index by a long shot.

I feel the same way about market cap weighted indices as Churchill felt about democracy as a form of government: it is the worst way to invest very-very-long-term money, except for all the other ways. And I will continue to feel this way until I find some promising non-market cap weighted ETFs. Actually, I think that if somebody founded an ETF company that promotes non-market cap weighted ETFs and successfully wins the trust of investors while charging low service fees, that person will have performed a tremendous service for Americans everywhere.

My Personal Finance Guide

I have thrown together a personal finance guide based on common questions I have heard friends and coworkers wonder about. It was actually a lot of fun to write as it made me think through stock option tax issues, which I had found very confusing, and about portfolio investing strategies.

Note that this guide is very informal advice of the sort that I would give friends, not something to yell at me for if you lose money following anything in these pages. The information is also selective in that, although much more can be written on each topic, what I have written reflects the information that I found important to myself and my peers.

How We Lost Our Broadband Edge

As someone who prides in America’s technological leadership and generally despises rent-seeking, these three articles make my blood boil:
Part One of I, Cringely’s great writeup, Part Two, and Part Three

I have long wondered why internet (and cellular) networks are slower here than in Japan and Korea. Japan has 100-megabit-per-second (mbps) fiber-optic broadband internet for $14 per month while Americans pay $50 per month for 3-mbps. That’s $0.14 per mbps in Japan, in a country where everything else is more expensive, while we get far worse than $1.00 per mbps! And this is not because those Japanese telcos not operate at a loss. This should not be the case in the country that created Google and Cisco and the internet and cellular communications.

As I now understand it, we lost our telecommunications leadership because:

Reason One: Whereas other countries use telco infrastructure to provide internet, we use both telco infrastructure and cable TV infrastructure. That is much less efficient because that means that support “two completely separate and different technical infrastructures, two billing systems, two service departments, two head offices, two corporate jets.” Here is a case in which government enforcement of single standard adoption would have led to a much better economic outcome. And inefficiencies will continue to persist even as we transition to the faster fiber-optic because those newer networks will be exempt by law from sharing, meaning less competition.

Reason Two: We all got conned out of $200B. Between 1994 and 2004, the major telephone companies profited from higher phone rates, accelerated depreciation of their network assets, and direct tax credits that added up to around $200B. As contracted between local telecom utilities and all 50 states and DC, they were supposed to build out fiber and hybrid fiber-coax networks intended to bring bidirectional digital video service to millions of homes by the year 2000. The Telecommunications Act had set the mandate for this build-out, but the details were left to the states.

Instead of 45-mbps bidirectional service or 20-mbps, we got nothing. I still remember the 1.5-mbps download and 128-kbps upload connection we had in those days. The telecoms played a good game of stiff-arming and bait-and-switching the everyone else, such as when customers were charged $1.00 per month per customer to support Bellcore, a research organization. When Bellcore was sold, the profits went to the telcos instead of returning to customers, and the $1.00 charge remained in place even afterwards despite that it no longer supported anything. (I usually don’t pay attention to all the random charges on my utilities bills, but I’m going to start.)

These should be industries in which competition precludes such expensive rent-seeking from persisting, but lack of standards regulation failed to steer industry trends away from systemic inefficiencies (reason #1) while lack of negotiating, regulatory, and legal capacity failed to hold the telcos accountable for delivering the goods (reason #2).

I am considering switching to Sprint next year when they roll out their WiMAX. They still might not have as good a voice network as Verizon, but I would be willing to reward them for having the guts to move technology forward rather than lay on their rent-sought laurels.

My other big telco question still remains unanswered though: How did we lose our cellular leadership?

Terms:
DOCSIS 3 cable modems
fiber-optic versus hybrid fiber-coax – I’m guessing hybrid is slower than all fiber.

Probabilistic Decision Making

I first learned about probability decision making in a basic math class, and it’s a fairly basic idea. When information about a future outcome is imperfect, you weigh the utility of a particular outcome and its probability of occurring against all other outcomes and their probabilities, and then decide which road you want to venture forth on. We all think probabilistically to some extent when we lay out pros and cons before making a big decision. Of course, no divine being is handing down the probabilities to us, so how risk-averse or risk-inclined we are affects our individual decisions.

Robert Rubin wrote in his book, In an Uncertain World, that probabilistic thinking got him through every decision he made from his daily work as a Wall Street risk arbitrageur to policy recommendations he made as a member of President Clinton’s cabinet. Since nothing in life is certain, the best one can do is research all the variables and, using all available information, make informed decisions that one expects will likely produce the best outcome. Even in hindsight, decisions made probabilistically should be judged not on their eventual outcomes but on how wise they were given the information at hand. That seems fair to me, though I know that internalizing this mode of problem solving is harder said than done; there are many math PhDs who throw their training out the window once they land their hedge fund jobs. Probabilistic thinking is a general mindset, and he makes it seem so straightforward too, as if that’s all one needs to become a partner at GS and a cabinet secretary giving advice to the president on world affairs. Rubin seems like a clearheaded, somewhat quiet, and very nice guy, but not a genius and maybe not much smarter than my friends.

Rubin has had a career that frequently called for probabilistic decision making, but in my own life, there are not many decisions I need to make probabilistically since much of what I do is deterministic. In my work, problem solving involves analysis but oftentimes the common sense solutions jump out at me. Life in other respects is likewise predictable. Really, the decisions I make in the absence of certainty come down to things like how to play a hand of poker and which stocks to buy and which startup to join. These are some of the few risks I take in a fairly deterministic existence, which might also explain why I so much enjoyed making each decision.

Travels to the Ends of the Earth

I just finished a fascinating book by Robert Kaplan, The Ends of the Earth, about his travels to places I probably will never go, like West Africa and Central Asia and Cambodia. Some of the more interesting things I learned are:

• that nation-states only exist on paper in much of the world, such as in much of West Africa where governments and national unity are weak and borders inconsequential. It’s sourly amusing that Sierra Leone is currently Hollywood’s favorite codeword for violent African sh*thole with both Blood Diamond and Lord of War set there.
• that Samuel Huntington got it wrong about civilizations clashing on religious lines. In much of the world, it is rather on ethnic and tribal lines that they clash. In the Caucasus, Shiite Azeri Turks see themselves more as Turks than as Muslims and are hostile to Shiite Iranians, who side with Christian Armenians, who themselves see the Azeris as Turks and therefore related to the same Turks who perpetrated the Armenian genocide of 1915.
• that the word Turk comes from the Chinese tu-kiu. What a rich and diverse history these people have, spread as they are from Turkey to Central Asia to Western China to Mongolia and Korea, and as the inheritors of Greco-Roman traditions during the days of the Byzantine Empire.
• that if I were religious, I would probably be a Sufi.

But the most interesting thing I read today was this:

“Culture is renewed when people from the city, with intellectual resources, settle in the villages.” … [That] is the lesson that the shah of Iran and other third world despots never learned: that the village, not the city, is the key to modernity; that a nation cannot be modern while its villages are still medieval.

He is talking about how cultural-religious conservatives were able to hijack Iran’s trajectory of modernization because modernity had spread too unevenly among its people. It is the same challenge that faces India, where water scarcity and religious violence and vestiges of the caste system weigh on the villages even as the cities produces computer programmers aplenty. And that faces China, where the villagers in many parts are as poor as they were 20 years ago and still suffer the corruption of the same local officials even as their country becomes an economic powerhouse.

Ever since I took that class with Abbas Milani, I have believed that how successfully a people embraces modernity is the single most important question they face. With a modern culture, they shed feudal allegiances and grudges, begin to think of themselves as united people, educate themselves and build strong economies, and generally take responsibility for their own national fates. Without it, they slide into fundamentalism, insularity, and factionalism.

Samsonite – Where all the Turnarounds be at?

I wish I could find more turnaround stocks. Turnaround investing is the ultimate form of value investing: finding a company that has a decent brand but has fallen on hard times but is potentially on the verge of becoming successful again. Oftentimes, the stock is deeply undervalued since the market doesn’t expect much at all from these companies.

SAMC has been my best stock so far. This stable luggage maker had been puttering along but in the last year had hired some executives from Louis Vuitton and was releasing a luxury line of luggage. One of these new Samsonite stores had opened in Union Square, so I checked it out, spoke to the managers about how things were selling, thought “hmm… conspicuous consumers would like expensive luggage” and decided that Samsonite’s margins would soon improve at least modestly and maybe dramatically. I accumulated SAMC at $1.00 and again at $1.25 before some private equity firm decided it was worth $1.49. Shame, I think it had an even brighter future than that. The only thing I didn’t like about SAMC at the time I bought was that it had lots of debt on its balance sheet, but given the stable nature of their business (luggage sales don’t fluctuate all that much) the credit risk seemed reasonable.

Now I’m holding MOT, recently one of the most maligned stocks. It’s pretty funny, but when Motorola last reported earnings way below its initial projections, its stock price didn’t even drop, meaning that Wall Street already had abysmally low expectations for this company, so I knew I was holding a cheap stock. Hopefully that discount means it has a greater chance of outperforming the market in the coming few years, unless of course it doesn’t.

SIRF – Betting on Growth is High Risk

I just sold my first stock, SIRF, and it was for a 30% loss. The company makes semiconductor chipsets for GPS devices and is the market leader in this relatively young and booming industry.

The reasons I initially bought this stock were because:

• I saw all the devices that use GPS chips, like personal navigation devices for your car or many new cell phones, and convinced myself that it was a booming market. I selected SIRF to gain exposure to this market trend because it was the “Intel of GPS chipsets.”
• Balance sheet looked fine. Almost zero debt and decent cash balance.
• Earnings were coming out the very next day when I bought, and I was in a rush to profit off positive earnings announcements.

Unfortunately, SIRF [something about earnings tanking] and I lost 10% of my investment right off the bat. I continued to hold because I believed that the stock would eventually bounce, but it continued to slide gradually, then precipitously in the past few weeks’ subprime-related jitters.

Here are the lessons I learned:

• I did not recognize it at the time, but the price I bought at was already super-optimistic about the future performance of the company. While most growth stocks often trade at high multiples versus its peers, I should have viewed this with more caution.
• I ignored negative signs. The SIRF management had recently sold shares at an even higher valuation than when I bought, which should have raised a red flag. Later at the end of July we would find out that Motorola, a major customer, would stall on its contract, thereby delaying revenue to SIRF. If I had been paying any attention to the news in May about how much trouble Motorola was having, I might not had been caught so by surprise in July.
• I don’t know the market. I have little real insight into this semiconductor market, or any semiconductor market, so I must have somehow convinced myself that I was more savvy than I am. In this respect, I would have been better holding GRMN because I could get a feel for how many friends are buying Garmin navigators for their cars, but with SIRF I have no real way of knowing more than Wall Street about SIRF’s business.
• Beware of any company called the “Intel of this market” or the “IBM of that market.” When I heard the buzz about SIRF as “Intel of the GPS chipset market” and confirmed that SIRF was the market share leader, that was sadly the end of my analysis on this respect. The reality is that SIRF faces much stiffer competition from a whole range of smaller companies as well as larger companies like Broadcom that are getting into the game. In fact, this whole semiconductor industry is ridiculously competitive. Other things being equal, I would have been better off investing in a company in a much less competitive industry.

The Last Straw – My Rant on Macs

When I bought my first mac last September, I was drawn to it because of its reputation for speed and stability and moreover because so many engineers I respect are mac addicts. The initial glow wore off quickly after just a couple of weeks. I noticed several things that are just ridiculous to me, including:

• It crashes all the time: Firefox, the one application that I use whenever I’m logged in, crashes on me often. I have almost never successfully closed Firefox on my MacBook – I have to force quit out of it just to shut my computer down. This is absolutely shameful. And Adobe hangs. And OSX freezes when I navigate around the file system. So much for a crash-free Mac.
• The most illogical file system: Speaking of file systems, this is the first time I have used a computer in which the file system I am navigating doesn’t reflect the real underlying file system, with the effect that nothing is where I think it should be. I will install applications and have no clue where they go. I can’t believe they hand out patents for this.
• Don’t mind those 1.3B people: Chinese character processing is absolutely horrid on my Mac. When I email friends in China, I never type in Chinese anymore because it was such a half-baked feature.
• Slow UI: I had heard so much about how the MacOS UI is so wonderful once you get used to it, and it is nothing but inferior to Windows. I’ve worked in investment banking where people are encouraged to operate without a mouse because aiming-and-clicking slows you down. I used to research companies online, build financial models in excel, respond to emails, and navigate between everything using ALT-TAB and Windows hotkeys and well-positioned folder Shortcuts. I can’t do any of that now in MacOS without using a mouse pointer. I couldn’t even ALT-TAB properly in MacOS before installing Witch, which Apple shamefully doesn’t include in its OS.
• Lack of software: I never realized how little software is written for Mac until I owned one. Microsoft Office is slow and unwieldy on a Mac. Google didn’t release a desktop package for Mac until quite a while after they released it for Windows. I was so excited to try the media software my friend’s startup had been working on until I realized it was only released for Windows. Gah, I can’t even play the classic video game I bought (Myth: The Fallen Lords) because OSX is not backwards compatible. Rather, it’s incompatible, like Apple and Chinese… or logic.
• Memory hardware problems: I had bought 2GB of RAM, but my MacBook has only ever registered 1GB. I sincerely don’t think I did anything wrong, and I can’t figure out why this never registered. I’m blaming Apple for this too.

But the last straw came when I tried to set up a Java project for a side programming project. I downloaded the source code, found the build.xml file, ran the build ANT task and failed to compile. There were several compile errors complaining that it couldn’t find Arrays.copyOfRange() and LinkedBlockingDeque, TimeUnit.HOURS and TimeUnit.MINUTES, and this normally is not a problem because these resources are in Java6, meaning that I simply needed to upgrade to Java6. I looked around and found that the latest released version of Java for Mac is Java FIVE. ARGH!!!! This was really the last straw that a computer company that prides itself on developer tools doesn’t even support the most recent version of Java. Thankfully, I was able to find a preview release of Java 6 for Mac, but the beta status of this product doesn’t exactly inspire admiration.

So I installed Java6 and turned my attention to editing the JAVA_HOME environment variable so that the ANT task would know where to find my newfound Java resources. After a few hours of reading helpful blogs like this and this and this and this, I finally found my way. WindowsXP allows you to easily set environment variables on the Control Panel. I would think that MacOX has something similar on its System Preferences panel, right? But NOOOOO!!!! I had to go download something that should have been included in the operating system anyway.

Is it really this ridiculous, or do I just have a knack for trying all the things Steve Jobs doesn’t think is important?

Now I can finally get started, but right now, this hilarious video shows exactly how I feel.

EDIT 12/14/07: Four months later, the saga ends and I am dumping my Mac.