Kurt Johnson

Steve Jobs, Commencement @ Stanford. It’s one of the best commencement speeches I’ve heard/read - well tailored for the audience, I think - and it touches on things I’m thinking about as I consider what to do after business school.

The first cut is here - probably too much to go through unless you were there and want to reminisce. An abbreviated collection of the highlights will be up in th enext week or so.

Update - the condensed album of my favorites is up.

I think the move to the new host is 99% complete - there may be a few hiccups as the information percolates through the internet but it’s pretty well done. The only significant problem has been breaking my old blog feed when I moved servers (and concurrently switched from using blogger to Wordpress).

Along with getting a new host that offers a lot more features than the old one, I’m stoked about the new blog software - it’s much, much more powerful than blogger. I’ve got some format tweaking to do but in general I’ve been very happy with how quickly setup went (including importing blogger posts). Since Wordpress is free/open source software I’m sending them the $100 I would have spent on Movable Type/Typepad.

I’m going to switch web hosts from Readyhosting to Bluehost.  Hopefully this causes minimal disruption to the site but things may be a little wacky for the next week or so.  I’m primarily moving to increase disk quota (from 500MB to 4000MB) and get access to Perl/PHP/Apache.

Or, what’s an individual’s optimal investment leverage?

I’ve been thinking about this for a while and finally got around to doing it. The results are posted here because they’re too verbose for the blog. Formatting sucks because the only HTML editor I have on my travel computer is Notepad or MS Word and neither is very fun to work with….I’ll re-post a cleaner version when I get back home.

The bottom line is that I validated conventional wisdom; wealthier individuals should take less risk and asset-poor individuals should take more risk. My contribution is adding a quantitative toolset that lets any moderately sophisticated Excel user model how their savings might play out in retirement at a given risk level.

As always I welcome positive or negative feedback.

Update: I forgot to mention the original reason I built this, which was basically to see how likely I was to acheive my investment goals (10% likely, 50% likely, etc.). In the writeup I’m mostly discussing relative outcomes but for a lot of folks the most interesting part of the model will be to plug in where they are today, where they want to be, and what they expect the market parameters to be in order to see how likely they are to meet their goals.

I’m back in Connecticut after a week’s vacation in Banff. There are a bunch of photos to post (as well as photos from Daniel & Tamara’s wedding) but I’m not going to be able to do anything with them until I’m back in Dallas next weeekend or the weekend after - the laptop I have with me is a work machine without any of the applications I need.

I’m down to my last two weeks at the office. July 1-19 I plan to be in Dallas relaxing and packing things up for the move. Somewhere between July 19-27 we’ll move to Philadelphia and have a few days to unpack before school starts August 2. Susanne is going to stick around Dallas for a couple weeks longer to finish up at her old job but we are hoping to be fully relocated by August 15. Because the consensus view seems to be that the first semester at Wharton is insanely overprogrammed, I expect to more or less drop out of contact from August 2 until sometime in December.

Here’s a pile of links I’d bookmarked for myself; realistically I’m not going to be able to write insightful commentary on most of them but thought I’d share anyway.

WSJ Opinion - An American has a stroke while visiting London and contrasts US and UK healthcare.

Cafe Hayek - A six part series on income inequality (this links to part 6).

Brad Setser comments on Bernake’s global savings glut theory (re: savings rates, asset inflation and low interest rates).

Cafe Hayek - The “Beef - it’s what’s for dinner” type ads are actually a congressionally organized mandatory program - beef producers are required by law to contribute to this advertising.

Calculated Risk has many, many excellent posts on the housing market. This is the latest -http://calculatedrisk.blogspot.com/2005/06/when-bubble-will-burst.html

Arnold Kling at Econlog finds some interesting data on economic success of immigrants.

Also fromEconlog, commentary on “[T]he more things improve the louder become the exclamations about their badness.”

Tyler Cowen’s followup to Freakonomics: Why does crack precipitate so much more crime than other drugs? - http://crookedtimber.org/2005/05/23/looking-forward/

Tyler Cowen - Do immigrants depress wages?

Tyler Cowen - The economics of urban decline.

Intelligent commentary on the estate tax (as opposed to mine) -
Tyler Cowen, The Becker-Posner Blog (1 , 2)

Tyler Cowen - Some interesting technical research on effective advertising; how do people remember their actual experience with a product vs. what advertising has told them? “[C]onsumers cannot recall whether a memory orginates from a genuine consumption experience or from exposure to advertising…advertisers will concentrate their efforts on past customers, because experienced consumers will be more likely to trust that their positive feelings toward the brand are genuine.”

Zimran Ahmed - Deterrence, Game Theory, and the Geneva Convention

Zimran Ahmed - A sweet graph of US marginal tax rates. I know I’ve been consulting too long when I admiringly say “sweet graph” after seeing a chart that efficiently communicates a clear message.

Zimran Ahmed - Measured IQ has increased significantly over time. What are the implications?

Always Low Prices - What is the effect of passing ‘living wage’ laws?

Ed Felten - Dissecting how a worm spreads across the internet

Two great Coyoteblog posts on teaching -
The teacher salary myth
Great Moments in Mediocrity:

Energy Outlook gives the most readable explanation of gasification that I’ve seen to date. This will become more important as petroluem and natural gas prices continue to rise (they are structurally very unlikely to go down over the long term) and the US refocuses on using some of it’s enormous domestic coal reserves.

During my test prep procrastination today I talked about investing with a friend who’s still in college and not finance saavy. I started thinking about what individuals should focus on when doing their own investing. For example, my view is that individuals should not try to pick stocks unless they really enjoy the process of stock selection per se (or see the choosing as entertainment, like a horse race). There is a mountain of empirical evidence that stock picking is hard to do well; individuals are statistically unlikely to beat a passive index investment. Thus a new investor should focus their learning on things that have guaranteed values (such as tax and liquidity planning) rather than stock picking. Note that this is probably not as fun to execute, resulting in several cable channels devoted to stock picking and none that I know of devoted to tax planning or asset allocation. Nevertheless I think the dollar return on time invested will be infinitely higher for structural investment planning than stock picking.

Now that 99% of my readers have stopped reading this post*, here’s my point: the biggest decision a novice investor needs to make is how much to save. This is much more important than stock picking and significantly more important than asset allocation or tax planning. It’s obviously possible to save too little; it’s also possible to save too much - deferring too much gratification. For example, delaying graification in college might mean postponing a trip around the world; unfortunately ten years later this trip may not be an option because of more commitments, disability, or other unforseen constraints - the deferral backfired and the savings can not be used.

There’s a basic level of savings that everyone should have; as in Maslow’s hierarchy there is a foundation level of savings necessary for people to feel secure; the cushion to handle car repairs, minor medical expense, or property disaster without resorting to outside assistance. Once this is established, why should you save? Owning Microsoft vs. GE is not as important as understanding whether one is saving for early retirement, preserving a windfall, funding a child’s education, or enabling philanthropy. It’s tough to make the right decision about how much gratification to defer until you understand what you’re saving for.

Obviously this is oversimplified. If an investor is saavy and dedicated enough the problem becomes more nuanced. The degree of gratification to defer becomes a question of probabilities; what is the probability I will get to spend these reserves while I can still enjoy them (i.e., before unexpected death or disability). How long and expensive a life do I need to plan for? Although I probably shouldn’t admit it I’ve actually nerded out to the point of writing a Monte Carlo simulation to vary life expectancy and annual rates of return on a portfolio (annual timesteps for 100 years) to build a distribution of required capital at a certain age. For example, based on a consumption forecast of $X/year (2005 real dollars) starting at age Y, what is level of savings required at age 30 to be 95% confident that I will not run out of money before dying? Assign probability distributions to the portfolio return and chance of death in each timestep and let 10,000 trials run to get the answer…..Note though that I did this as a fun/intellectual exercise; I’m not actually that obsessive about financial planning.

*Rhetorically speaking. 99% isn’t a possible outcome since it’s not a divisor of 2 readers.

Via future classmate Britchick comes this recap from a GMAC meeting where MBA admissions officers discuss their hits and misses in evaluating applicants. Nothing earth shattering, but kind of a nice checklist all in one place….since the things that make good MBA students also make good employees it’s a good list to think about when interviewing regardless of which side of the table you’re on.

One excerpt:

One red flag that is often ignored but should be taken seriously, said some symposium participants, is excessive contact with the admissions office. Termed “Hassler Syndrome” by one participant, extreme dependency on the admissions office may signal a lack of self-confidence that manifests itself as neediness. This trait may show up later in the learning environment, when the student is unable to contribute meaningfully to classes and work groups and becomes known as a “net taker.” The same person may be a drain on career services, unable to take initiative in a job search.

I’ll take the “Hassler” notion one step farther - I question some of the folks that spend hours a day on message boards. At the very positive end of the continuum are board users who are net contributors, sharing valuable experiences. Then there is a sizable body of needy affirmation seekers - on b-school message boards these are the “what are my chances at X school” posts but similar characters exist on Brand X car boards or wherever. These posts add signifcant mass but minimal value to the community. Finally there are the pure trolls and bullies who tear people down without adding intelligent commentary; these folks drive off the good people with short fuses for BS.