I’m excited to announce that I have moved from Chicago to the San Francisco Bay Area. I am now living in Berekely, California. As always, I love getting to know readers on a personal basis. If you are in the area and interested in meeting up for a coffee/drinks please let me know.
Editor of SimoleonSense
P.S. Moving from Chicago to Berkeley has taken up quite a bit of time and I apologize for the slow posts.
Many investors regard John Malone as having one of the best track records of capital allocation in the 20th century. Below are my curated excerpts from the book, “Cable Cowboy: John Malone And The Rise of The Modern Cable Business” by Mark Robichaux.
“Guess at the answers,” he said. John gave him a perplexed look. “Guess before you figure the problems out,” Dan repeated. Uncertain at first, Malone quickly developed an intuition for engineering questions that called for empirical data. Malone was amazed at how quickly he could derive a number, how he could guess what waveforms would look like at the end of a circuit even before doing the underlying mathematics. This ability to make split-second calculations served him well throughout his school days, and it became the one weapon in his arsenal-to see the answers before others did-that gave him an edge over future rivals.”
Lessons From Consulting:
“Over time, Malone found that if he interviewed 30 people or so and listened intently, themes would emerge. The best ideas were sometimes hidden, or they were lost on senior executives.”
“It was not rocket science, Malone quickly realized. You simply take the best ideas from anyone who has them, polish them, and serve them up to the chairperson.”
“Always ask the question, `If not?’”
Crafting A Cable Strategy:
“Despite the explosion of new content, most operators of cable systems paid little attention to programming; it was merely a commodity that brought in new viewers, not a value chain all its own. But John Malone quickly saw a more important role for all the new channels popping up-they had a dual-revenue stream: from advertising and from payments made by cable systems based on how many subscribers each system had.”
“Turning it over in his mind, he suddenly realized the answer: Rather than just owning the cable that delivered the new programming fare, TCI needed to own a piece of the cable channels themselves, thereby sharing in a whole extra upside. A big operator like TO could give a new network a big head start, and as valuable as its laid wires were, if the cable industry kept growing, the new networks now launching could be even more valuable. By buying into networks, Malone thought, TCI could own both the pipe and the water flowing through it. The cable wire and the cable programming, if owned under one roof, could be leveraged off of each other to create innumerable efficiencies. Vertical integration of companies would become an awesomely powerful and controversial tool for Malone to use in building TCI. Malone arrived at a simple conclusion: He wanted to own as much of the programming as he did of the wire. TCI, which would eventually reach 20 percent of the households, would seek to own 20 percent of every programmer that came calling. “I want to be hedged all the way,” Malone told himself.”
“Malone envisioned owning an entire portfolio of networks to supply his growing cable TV empire. And this was just the beginning.”
“TCI launched Encore, a pay-movie channel, with a marketing gimmick that put a new spin on “The Godfather” and the offer that couldn’t be refused. To attract as wide an audience as possible, TCI gave away the service free to its subscribers for the first month. If subscribers did not want to receive the service, the burden was on them to inform TCI; otherwise, they would be billed for it from then on. The tactic, pioneered by book and record clubs, came to be known as negative-option billing.”
“Telephone companies weren’t the only reason cable operators had for alarm. Another technology that had the danger of growing quickly was satellite-dish TV. Malone took precautions like any good monopolist “
“media titans in the East tried frantically to outbid each other to wire the big urban markets, John Malone avoided the fray and waited for them to tire themselves out. TCI steadily expanded by buying suburban and rural systems at cheap prices, waiting until the mid-1980s to venture into urban areas.”
“Malone was simply reaping the remains of a system someone else had already paid for and could not operate profitably. ”
“Malone’s strategy was simple: Get bigger. After more than a decade at TCI, Malone could tally a cable system’s budget with precision and predict costs and returns with uncanny accuracy. Because of that insight and because of the company’s sheer size, TCI could now buy a cable company and begin to improve the performance dramatically within a few months. TCI could buy programming and equipment on the cheap, and it could get cheaper financing rates. Malone focused on long-term growth, eschewed dividends, and handsomely rewarded management. He enjoyed an extensive network of industry contacts, but when trolling for information with investment bankers and colleagues, he often found that he knew more than they did. ”
“All the while, TCI had consistently failed to report any earnings. As the stock continued to climb, Malone pointed out that it was the accumulation of valuable assets over time, not the flow of reported after-tax earnings, that was making TCI shareholders so wealthy. “Forget about earnings. That’s a priesthood of the accounting profession,” he would preach, unrelentingly. “What you’re really after is appreciating assets. You want to own as much of that asset as you can; then you want to finance it as efficiently as possible.”
“Bigger scale, higher risk. But risk was a function of skill and knowledge. If you know you can exert control on the outcome, Malone reasoned, the risk is far less than those who jump into a deal with no expertise or facts.”
“Malone viewed himself as an investor and shareholder in each of these enterprises. It was not unusual for TCI to make straight financial investments in operators he deemed shrewd. ”
“Despite the company’s healthy stock price, Malone didn’t put much faith in it. He always believed that disaster and ruin hung over his head, dangling by a single hair like the sword of Damocles. ”
“It was classic Malone: Take a tiny, near worthless stock, fill it with small stakes in several companies, watch them grow, then trade them for stakes in even bigger, more secure companies. “
“Malone did not believe in memos. No paper passed from his desk to underlings. No executive sought to curry favor or engage in the sort of Kremlinesque politics that causes ulcers in so many midlevel executives. Communication was direct, effective, and efficient. Every Monday morning, Malone sat with his closest executives at a broad round table, much as Magness had done, to figure a way to squeeze more out of TCI’s growing cable kingdom.”
“It was, of course, much more complicated than that; what drove John Malone, always, was getting the best deal, and part of his motivation in these disputes was power-which side had it, and how it was used. ”
“Malone seemed to relish the fight; he found comfort in a world of efficacy. He would never sacrifice his convictions to the whims of others, no matter what the price.”
“Malone had known something about himself all along, that he was a deal maker, a strategist, a fund manager-anything but an operator. He loathed simply running a company, and now TCI was under what he saw as occupation of the federal government, shackled by an inordinate amount of federal regulation. He could not handle the duress of running a regulated monopoly for years to come.”
“Malone accomplished this consolidation of power largely by doing what he always did: picking up the phone and reaching out to the other side to look for the common ground where he could put together a mutually agreeable deal. ”
“A guy who rises to the top of a big corporation and owns none of it is much more interested in control than he is in economics. It is just the nature of humanity. A guy who owns his business is used to control. He never has to fight for control. What he has to fight for is economics. But a bunch of entrepreneurs find it much easier to collaborate and create economic value.
Bob Magness, Malone’s Partner & Mentor:
“Magness learned to listen instead of talk, and within a short time he could read a customer like a poker player, anticipating what that person wanted from the deal moments into negotiation.”
“a quiet determination, free of the need for praise or encouragement, that seemed to give him the advantage over others.”
This CIA Monograph (re-released in 2010 by Robert Sinclair) presents “the implications of growing knowledge in the cognitive sciences for the way the intelligence business is conducted – in how we perform analysis, how we present our findings, and even its meaning for our hiring and training practices”. In other words, this paper is about, “thinking and writing [and] the complex mental patterns out of which writing comes, their strengths and limitations, and the challenges they create, not just for writers but for managers”. Below are some curated excerpts.
P.S. Don’t confuse this paper with the popular CIA book, “Psychology of Intelligence Analysis” which I have linked to in the past. This paper draws upon similar cognitive research but has a different focus (mainly that of communicating clearly).
Two quotations sum up what this essay is about:
“Our insights into mental functioning are too often fashioned from observations of the sick and the handicapped. It is difficult to catch and record, let alone understand, the swift flight of a mind operating at its best.”
“A writer in the act is a thinker on a full-time cognitive overload.”
“In brief, I hope to describe some of the powerful metaphors about the workings of our minds that have developed over the past couple of decades.”
“…although this essay talks a lot about writing, it is not designed to deal with the how-to-write issue. As the title indicates, its topic is thinking and writing the complex mental patterns out of which writing comes, their strengths and limitations, and the challenges they create, not just for writers but for managers.”
“I would argue that the elements of cognitive science highlighted in the monograph are still the ones of first-order relevance for the DI. I do not think an intelligence analyst will gain much professionally from knowing how neurons fire or which parts of the brain participate in which mental operations. I do consider it essential, however, that we be aware of how our brains ration what they make available to our conscious minds as they cope with the fact that our “ability to deal with knowledge is hugely exceeded by the potential knowledge contained in man’s environment.” Not only do they select among outside stimuli, they also edit what they let us know about their own activities. This is the focus of the monograph.”
“For every analyst and every reviewer in this serial process, the analysis starts from a body of analogies and heuristics that are unique to that individual and grow out of his or her past experience after images of ideas and events that resonate when we examine a current problem, practical rules of thumb that have proven useful over time.The power of this approach is incontestable, but we are all too easily blinded to its weaknesses. The evidence is clear: analysis is likely to improve when we look beyond what is going on in our own heads—when we use any of several techniques designed to make explicit the underlying structure of our argument and when we encourage others to challenge our analogies and heuristics with their own. Little about the current process fosters such activities, it seems to me; they would be almost unavoidable in a collaborative environment.”
“If the very act of writing puts a writer any writer at all—into “full-time cognitive overload,” then perhaps we would benefit from a better understanding of what contributes to the overload.”
“The novelist and poet Walker Percy offers a concept that may be even more fruitful. In a series of essays dealing with human communication, Percy asserts that a radical distinction must be made between what he calls “knowledge” and what he calls “news.” Percy’s notion takes on added significance in light of the findings of cognitive science (of which he seems largely unaware), and I will be discussing it at greater length in due course. For the present “I would simply assert that the nature of our work forces us to swing constantly back and forth be- tween knowledge and news, and I believe cognitive science has something to contribute to our under- standing of the problem. “
Why We Use Heuristics / Mental Shortcuts In Decision Making
“What is it about heuristics that makes them so useful? First, they are quick and they get the job done, assuming the experiential base is sufficient and a certain amount of satisficing is not objectionable. Second, what cognitive scientists call the problem-space remains manageable. Theoretically that space becomes unmanageably large as soon as you start to generalize and explore: any event may be important now, any action on your part is possible, and you could get paralyzed by possibilities as the centipede did. But humans constantly narrow the problem-space on the basis of their own experience. And most of the time the results are acceptable: what more efficient way is there to narrow an indefinitely large problem-space? ”
Limits To Using Heuristics / Mental Shortcuts In Decision Making
- “Heuristics are inherently conservative; they follow the tried-and-true method of building on what has already happened. When the approach is confronted with the oddball situation or when someone asks what is out there in the rest of the problem-space, heuristics begin to flounder. Yet we resist using other approaches, partly because we simply find them much less congenial, partly because the record allows plausible argument about their effectiveness when dealing with an indefinitely large set of possibilities.”
- “As most people use them, heuristics are imprecise and sloppy. Some of the reasons why cognitive activity is imprecise were noted earlier; another reason is the tendency to satisfice, which encourages us to go wherever experience dictates and stop when we have an adequate answer. With perseverance and sufficient information one can achieve considerable precision, but there is nothing in the heuristic approach itself that compels us to do so and little sign that humans have much of an urge to use it in this way. Most of the time, moreover, the information is not terribly good. We then may find ourselves trying to get more precision out of the process than it can provide.”
- “In everyday use, heuristics are not congenial to formal procedures such as logic, probability, and the scientific method. This fact helps explain why we rarely use logic rigorously, why we tend to be more interested in confirming than in disconfirming a hypothesis, and why we are so poor at assessing odds.”
We Can’t Talk About Mental Shortcuts Without Talking About Memory & “Chunking”
“It should be apparent the heuristic approach is critical to the effectiveness of our conscious mental activity, since short-term memory needs procedures like heuristics that narrow its field of view. On the other hand, the drawbacks are equally apparent. The ability to process large quantities of information is always an advantage and sometimes a necessity. How can we operate effectively if we can consider so little at a time? The answer to this question lies in the speed and flexibility with which we can manipulate the information in short-term memory; to use the terminology, in our chunking prowess.”
A chunk, it should be clear, equates to one of the roughly seven entities that short-term memory can deal with at one time. Hunt’s formulation notwithstanding, it need not be tied to words or discrete symbols. Any conceptual entity—from a single letter to the notion of Kant’s categorical imperative- can be a chunk. And not only do we work with chunks that come to us from the outside world, we create and remember chunks of our own. Anything in long-term memory probably has been put there by the chunking process. We build hierarchies of chunks, combining a group of them under a single conceptual heading (a new chunk), “filing” the subordinate ideas in long-term memory, and using the overall heading to gain access to them. We can manipulate any chunk or bring wildly differing chunks together, and we can do these things with great speed and flexibility.
“In some ways “chunk” is a misleading term for the phenomenon. The word calls to mind something discrete and hard-edged, whereas the very essence of the phenomenon is the way we can give it new shapes and new characteristics, and the way conceptual fragments interpenetrate each other in long-term memory. A chunk might better be conceived of, metaphorically, as a pointer to information in long-term memory, and the information it retrieves as a cloud with a dense core and ill-defined edges. The mind can store an enormous number of such clouds, each overlapping many others.This “cloudiness” the way any one concept evokes a series of others is a source of great efficiency in human communication; it is what lets us get the drift of a person’s remarks without having all the implications spelled out. But it can also be a source of confusion.”
Heuristics/ Mental Shortcuts & “Chunking” Work Hand in Hand During Decision Making
- “Heuristics—non-random exploration that uses experience and inference to narrow the field of possibilities—loom large in the development of each individual and are deeply ingrained in all of us (particularly when we are doing some- thing we consider important). Combined with the chunking speed of short-term memory, the heuristic approach is a powerful way to deal with large amounts of information and a poorly defined problem space.“
- “But there is always a tradeoff between range and precision. The more of the problem space you try to explore—and the “space,” being conceptual rather than truly spatial, can have any number of dimensions—the harder it is to achieve a useful degree of specificity. Talent and experience can often reduce the conflict between the need for range and the need for precision, but they cannot eliminate it. We almost always end up satisficing.”
- “We are compulsive, in our need to chunk, to put information into a context. The context we start with heavily conditions the way we receive a new piece of information. We chunk so rapidly that “the problem,” whatever it is, often has been sharply delimited by the time we begin manipulating it in working memory.“
- “Although the conceptual network formed through years of experience may make an individual a more skillful problem-solver, it can also make him or her less open to unusual ideas or information—a phenomenon sometimes termed “hardening of the categories.” The conservative bias of the heuristic approach—the tendency we all share of looking to past experience for guidance—makes it easy for an old hand to argue an anomaly out of the way. In fact the old hand is likely to be right nearly all the time; experience usually does work as a model. But what about the situation when “nearly all the time” isn’t good enough? Morton Hunt recounts an instance of a computer proving better than the staff of a mental hospital at predicting which patients were going to attempt suicide.”
Cognitive Aspects of Speaking & Writing
Here are some of the ways in which writing and speech differ:
- “With speech, much of the communication takes place in ways that do not involve words: in gesture, in tone of voice, in the larger context surrounding the exchange. Speech is a complex audio-visual event, and the implications we draw—the chunks we form—are derived from a whole network of signals.
With writing there is nothing but the words on the paper. The result may be as rich as with speech—nobody would accuse a Shakespeare sonnet of lacking richness—but the resources used are far narrower.”
- “Writing calls for a sharper focus of attention on the part of both producer and receiver. When you and I are conversing, we both can attend to several other things—watching the passing crowd, worrying about some aspect of work, waving away a passing insect—and still keep the thread of our discourse. If I am writing or reading I must concentrate on the text; these other activities are likely to register as distractions.”
- “The pace and pattern of chunking is very different in the two modes. With speech, one word or phrase quickly supersedes the last,and the listener cannot stop to ponder any of them. What he ponders is the chunk he forms from his perception of everything the speaker is saying, and he is not likely to ponder even that very intensively. He does have the opportunity to ask the speaker about what he has heard (an opportunity almost never available to a reader), but he rarely does so; the spoken medium has enormous forward momentum. In compensation, speech uses a much narrower set of verbal formulae than writing. It relies heavily on extralinguistic cues, and by and large it is more closely tied to a larger context that helps keep the participants from straying too far from a common understanding. In the written medium, by contrast, the reader can chunk more or less at his own pace. He can always recheck his conclusion against the text, but he has little recourse beyond that. All the signals a writer can hope to send must be in the written words.”
- “A reader is dealing with a finished product: the production process has been essentially private. A listener is participating in a transaction that is still in progress, a transaction that is quintessentially social.”
- “Partly because of the factors listed so far, writing is capable of more breadth and more precision than speech. Neither complex ideas nor complex organizations would be possible without writing. My own impression is that even in this television-dominated era, people attach more solidity and permanence to something written than to something spoken. Perhaps we have an ingrained sense that the products of speech are more ephemeral than the products of writing. But to achieve this aura of permanence writing sacrifices a sense of immediacy. A writer tends to speak with the voice of an observer, not a participant.”
Communicating Knowledge vs News
“…. I am building toward an assertion that…..there are correlations between news and the cognitive processes involved in speech on the one hand, and between knowledge and the cognitive processes involved in writing on the other.”
Knowledge = “all the scientific and formal statements, all the generalizations, and also all the poetry and art. Producers of such statements are alike in their withdrawal from the ordinary affairs of life to university, laboratory, studio, mountain eyrie, where they write sentences to which other men assent (or refuse to assent), saying, “Yes, this is indeed how things are.””
News = “statements that are significant precisely insofar as the reader is caught up in the affairs and in the life of the island and insofar as he has not withdrawn into laboratory or seminar room.”
- “Nature of the sentence. Knowledge can in theory be arrived at “anywhere by anyone and at any time”; news involves a nonrecurring event or state of affairs which bears on the life of the recipient.”
- “Posture of the reader. The reader of a piece of knowledge stands “outside and over against the world;” the reader of a piece of news is receiving information relevant to his specific situation.”
- “Scale of Evaluation. We judge knowledge ac- cording to the degree it achieves generality; we judge news according to its relevance to our own predicament.”
- “Canons of acceptance. We verify knowledge either experimentally or in light of past experi- ence. News is “neither deducible, repeatable, nor otherwise confirmable at the point of hear- ing.” We react to it on the basis of its relevance to our predicament, the credentials of the newsbearer (according to Percy, “a piece of news requires that there be a newsbearer”), and its plausibility.”
- “Response of the reader. A person receiving a piece of knowledge will assent to it or reject it; a person receiving a piece of news will take action in line with his evaluation of the news. (And, I would add, the receiver of a piece of news is more immediately concerned than the reader of a piece of knowledge with the correctness of the information.)”
I just finished watching Frontline’s documentary, United States of Secrets, which is about Ed. Snowden and the NSA spying on U.S. citizens. This narrative has some parallels with the warnings that were voiced prior to the financial crisis. In both cases a few contrarians learn about wrongdoing, do everything possible to alert the proper authorities (and general public), and no one listens to them until it’s too late.
One of my close friends is looking for an entry level analyst to work with his buy-side firm in Chicago. My friend works at one of Chicago’s most respected investment firms. Unlike other shops, this firm has permanent capital and is only constrained to investing intelligently. They invest in equities, debt, and derivatives around the world and have an amazing track record. He asked me to help him find an analyst and that leads us to this post.
If you are a recent college grad with a passion for investing – have read all of the value investing classics and have a firm grasp on accounting -this would be a dream job for you. Think of this job as a 21st century version of Warren Buffett getting a job with Ben Graham. Meaning, this job would expose you to global equity research as well as other types of research (debt, options, etc) making you a unique and well rounded investor.
You think like a value investor and have common sense.
You already have a firm grasp of accounting and a reasonable understanding of equity valuation.
You prefer long-term career success to a fancy salary and sign-in bonus.
You are not a finance/econ major who believes in efficient markets.
You do not have an MBA.
You are entrepreneurial – meaning you are willing to wear many hats.
Formal Job Description:
A Chicago-based proprietary trading firm is looking to add a junior trader/analyst to the long/short desk. The long/short desk specializes in relative value and event driven trades globally. The role calls for having a fundamental analysis background, being self-motivated and having a passion for the markets. Strong organizational skills and attention to detail are critical. The long/short desk covers many different markets and an eagerness to work off hours is expected.
The ideal candidate has a passion for investing and a Bachelor’s degree with strong record of academic performance.
If you are interested please email the following: Resume175440@gmail.com
I would recommend sending a resume, cover-letter, and an investment writeup.
Disclosure: I did not receive any sort of compensation for this post.