Tag Archives: failure

Review – Totto-chan (#nonfiction, #reading, #Japan, #education)

Totto-chan: The Little Girl at the Window (buy on Amazon.com)

by Tetsuko Kuroyanagi, published 1981

A “valueprax” review always serves two purposes: to inform the reader, and to remind the writer. Find more reviews by visiting the Virtual Library.

What a wonderful book! I’ve never read anything quite like it, although it reminded me quite a bit of various Hayao Miyazaki animated films I’ve seen in the past. “Totto-chan” is a memoir in the guise of a novel. The author’s childhood self is the main character and the events described actually took place while she attended a creative school called Tomoe Gakuen in pre-war Tokyo. This proves to be an interesting narrative device because the story is told from the emotional and experiential point of view of a child, but with the knowingness and articulateness of an adult. The obvious fondness or at least understanding of the author toward her younger self serves to enhance the overall sensation of empathy the story engenders, for that is the primary theme of the school and what the children were learning there.

Led by the visionary headmaster, Sosaku Kobayashi, the Tomoe school’s philosophy is built on trusting children to be themselves, “let nature lead” as Kobayashi put it. The story is filled with anecdotes of Totto-chan and her classmates being entrusted to figure things out for themselves, with adults and authority figures like the headmaster and parents simply listening and providing confidence that the children will succeed in coming up with workable solutions as they learn to navigate the world around them. Mistakes and slipups (such as Totto-chan falling into the school’s cesspool) are treated with dignity and patience. Instruction and structure come in the form of simple guidelines (for lunch, students were asked to bring “something from the hills and something from the sea”) with the belief that the children will be motivated to find their own solution with a limited amount of information.

The effect on the children is a unique sensation of freedom and capability, of openness and consideration of themselves and the needs of others. Seemingly without encouragement, the school spontaneously forms a meaningful, interested sense of community and ownership by the students toward their school grounds, neighborhood and classmates. Left to pursue their studies and interests at their own pace, some students excel through deep study and careful focus of a particular subject while others enjoy sampling disparate bits of knowledge and experience without a plan. All students appear happy and enthusiastic about their lives, even those students who come to the school with severe developmental handicaps. As the author says, this liberty allowed a lot of children who were misfits in the standard schooling regime to find a sense of ease and belonging and to go on to live productive, independent and connected lives as adults.

The story gives the reader a glimpse of an educational philosophy and pedagogical approach that is at once intuitive and mysterious: why shouldn’t every school demonstrate such empathy and concern for its students; and how DOES Mr. Kobayashi manage to have such patience and a sunny disposition toward the antics of small children that are considered so “obnoxious” by nearly everybody else? The epilogue of the story summarizes some of the research travel Kobayashi performed in Europe for several years leading up to the founding of the Tomoe school and it becomes clear that there is a dedicated, principled purposefulness to every single event in the story, which the author as an adult reflects upon in the present with a “Oh, so THAT must have been what Mr. Koboyashi was trying to teach us there…” To a cynical mind it may seem almost exploitative to be so cunning in one’s schemes, but if the ultimate goal of the approach is to develop in the students the maxim “Trust yourself”, how nefarious could this stratagem actually be?

The school seems like a very “social” place and less like an academy– numerous field trips, “sports” days, music and exercise classes and camping overnights pepper the plot and while there is a library and scenes of students doing self-directed physics studies with alcohol burners and beakers, they always take place in Tomoe’s disused railroad cars-cum-classrooms. It’s a challenge only to those readers with a constricted view of what education and learning necessarily mean. For Kobayashi and his students, every experience brings teachable moments and the question begged and answered is why reading about flora and fauna in a textbook is a superior approach when one can go outside for a walk and study the variety of life up close.

From the view of paranoid American parenting, the children disrobing with their teachers and swimming naked together in the school’s small pool will seem like a perfect opportunity for secret child abusers amongst the faculty to get their jollies. But the lesson here seems to be that every choice in life brings with it risks and if bathing suit-less swim time is a useful means for helping the children (especially the physically handicapped) to appreciate and accept their differences and similarities such that they can have confidence about who they are and act with kindness towards everyone else, the risk of something monstrous or mean-spirited in such an environment might be a better risk to take than watching certain individuals grow up feeling alienated from themselves and others for lack of such experiences.

Indeed, those same paranoid parents would be wondering how a child could ever develop a moral sense without correction and punishment from adults. It is enjoyable, then, to witness the many moments when Totto-chan attempts to do something underhanded or less than honest (with herself, her parents or her friends) but recognizes the moral inconsistency of her actions on her own and eventually makes amends and moves on. It makes you think that children are capable of so much more than they are given credit for, typically, and that maybe the moral failings of children reflect not their immaturity, but the perverse incentives of the adults who guide them.

This is a humorous book, as well. There were many moments when I couldn’t help but laugh out loud and recount a passage to someone nearby, they’re just too good not to share. And thankfully, there are moments of profound tragedy and despair. I say thankfully, because it is in these recollections that we are truly reminded of how precious life is and what a wonderful gift a school like Tomoe is.

One of those tragedies is that the Tomoe school burned to the ground near the finale of the Pacific War as Tokyo came under increased firebombing by the US Air Force. It’s a stark reminder of the injudiciousness and unfairness of war, even though it is recounted without particular frustration or anger on the part of the author (a testament to the empathetic spirit of the school itself!) But there is also a lesson in the resilience of the creative spirit, as Kobayashi’s only response is to ask, “What kind of school shall we build next?

The good news is that we don’t have to suffer war or burn our schools down to ask that question ourselves.

I think this book can be enjoyed by children, parents, families, teachers and social theorists and anyone concerned with building a more empathetic society built upon respect for the individual and the instinct of trusting oneself.

5/5

 

Review – Father, Son & Co. (#family, #business, @IBM)

Father, Son & Co.: My Life at IBM and Beyond (buy on Amazon.com)

by Thomas Watson, Jr., published 1990

A “valueprax” review always serves two purposes: to inform the reader, and to remind the writer. Find more reviews by visiting the Virtual Library.

The son of IBM’s founder, Thomas Watson Jr.’s “Father, Son & Co.” is many things: a collection of folksy business wisdom passed down by his father, memories and recollections of his participation as an airman in World War II and later a US diplomatic career in the USSR, a story about the challenges of growing a global business, lessons in leadership and team building, the pitfalls of transforming an business organization from small scale to large scale and, most importantly, a personal reflection on the value of family. It was most interesting and entertaining for me to read when it dealt with business and some of the personal issues of the author in trying to prove himself in the shadow of a legendary father; I found it less enjoyable and less authentic when the author dabbled in politics or retold sappy anecdotes about popular political figures of his era with whom he had had personal relationships.

The Business of IBM

The axis around which the story revolves is not Tom Watson, Jr., and it’s not Tom Watson, Sr. It’s the company which Senior grew and transformed into IBM, and which Junior effected the change over to actual computing technology in the 1960s, that the book is really about. But because Junior’s and Senior’s personalities, families, fortunes and lives were so wrapped up in the affairs of IBM, it becomes about all of those things in turn as well. That is somewhat surprising because the book is ostensibly a memoir by Junior, yet the gravity of IBM is hard to ignore in nearly every chapter of the book.

When Senior joined on with the company as general manager and, shortly thereafter, president, IBM (then Computing-Tabulating-Record Company) was an important concern but not necessarily a large one. Senior had a vision for it and something of an indomitable will, and he had experienced enough success and failure on his own in other ventures that he had an idea of what it would take to create the vision he had for the company. He built a large, organized and polished sales force, instilled high morale and unity of purpose by creating training programs, achievement awards, national sales team conventions and even company songs that everyone had to sing. He also, like many strong-willed founders, created something of a cult of personality around himself, putting his picture up at IBM offices and facilities, writing memos that were distributed widely to all staff and constantly visiting field offices and manufacturing facilities and “pressing the flesh” with company men and their wives and children, creating a kind of endearing aura of patriarchy.

In later years this intuitive, personality-driven approach was deemed problematic by Junior and other successor senior executives who believed that Senior had created a culture and cadre of Yes Men and hadn’t implemented enough standards and professional protocols that could create stability for growth. But for decades of the company’s history (essentially the first half, to date) this approach seemed to work, and fantastically so. Company publications like “Business Machines” and sales achievement distinctions like the “Hundred Percent Club” put the company’s focus on employee well-being and professionalism and incentivized outstanding achievement in the dawn of the era of lifetime commitment to big companies.

Something that shocked me as I read was how much of IBM’s growth could be attributed to solving statistical problems for the US and other national governments:

IBM more than doubled in size during the New Deal… Social Security… made Uncle Sam IBM’s biggest customer.

Wow! I suppose someone else could’ve come up with the technology as well, but it is kind of amazing to think that the evil New Deal and the disastrous Social Security pyramid scheme would have been too burdensome to administer without the existence of IBM tabulating machines which were a major time saver. It reminds me of Palantir Technologies, which helps the NSA, CIA and other foreign governments conduct surveillance work on target populations, another way to profit off of coercive interference in society’s affairs.

This trend didn’t stop with the New Deal but only started there. During WW2 the company converted many of their factories to help produce armaments (a fairly common industrial practice during the time, but still remarkable) and after the war one of the big incentives (and indeed, initial sources of research funding) for switching the company’s focus to electronic computing solutions were the ongoing “national defense” needs of the US military as the Cold War wore on.

Words of wisdom

I enjoyed the many old-timey nuggets of wisdom and rules about manners sprinkled throughout the book which were mostly remembrances of Junior of things Senior had said to him as he raised him or mentored him in the business. For example, Junior talks about the first time he road a cross-country train with his father on a business trip and the way his father taught him to clean up the wash basin in the bathroom of the railroad car to be considerate of others. “The person coming after you will judge you by how the place is left,” he tells him as he uses a towel to wipe down the basin before and after shaving in it. He talks about the importance of leaving the basin in a clean state so that the next person will have “the same chance you had”. There is a deep moral lesson here that goes well beyond the world of men shaving– this is a version of the Golden Rule, not just considering how upsetting it would be to have someone leave a place in a state of disarray for you, but then following that logic through to performing a service voluntarily for other people in trying to leave the world a little bit nicer than you found it.

In another instance, Senior lectures Junior about the practical reasons for treating even the “lowly” members of society in a kindly and generous fashion:

There is a whole class of people in the world who are in a position to poor-mouth you unless you are sensitive to them. They are the headwaiters, Pullman car conductors, porters and chauffeurs. They see you in an intimate fashion and can really knock off your reputation.

Those who enjoy shows like Downton Abbey are familiar with the idea that the “servants” of the world end up having an interesting amount of power and leverage over those they serve because they are so familiar with them they know their weaknesses, secrets and bad habits. There is something noble and self-aware in Senior’s advice here– a cultivated awareness of the reality of power and influence, mixed with a genuine empathy for treating even the relatively less fortunate with respect and concern. It might be read as “These people could really knife you if you don’t pay attention” but I think it is also honestly read as “Don’t forget these are people, too, and they want and need kindness regardless of their station in life.”

Another endearing moment comes when Senior teaches Junior about how he manages his executives:

“Well, I haven’t shaken up So-and-so for a while. So I’ll get him in and ask some questions about his department and in the process part his hair a little. He’ll get a pat on the back if I find something good or a kick in the tail if I find something bad.”

The imagery of “parting someone’s hair” says a lot about the relative authority of the two people in this “process” and while kicking someone in the tail sounds like bullying, it was clear that Senior gave quite a few pats on the back, as well, and when he dished out the ass-kickings, they might have been deserved– these were grown men dealing with a multi-million dollar business, after all, and if they weren’t bringing their problems to Senior’s attention but rather waiting for him to discover them, shame on them.

In teaching Junior about how to be an executive, Senior advised “what a chief executive does outside his business is just as important as what he does at his desk”, which was another idea I found interesting. I’ve been skeptical in the past of chief executives who seem to spend more time glad-handing than running the business. But I’ve come to appreciate that a lot of running a business simply is taking care of relationships– with customers, employees, vendors and even members of the local community. IBM’s business was dependent upon political grace, so there is perhaps a more sinister side to this advice from the standpoint of simply being a businessman but it was an interesting idea to ponder, nonetheless, that the chief executive’s identity and role extend beyond his office hours.

Senior was clearly a hard-driver and a hard-charger himself. So I was interested to hear about his daily routine:

He had his day set up so that he got up at seven, played tennis from seven-thirty to eight-thirty to stay in shape, got to work on time, did his work, went home, read great books for an hour, had dinner, listened to classical music for a while, and went to bed.

Senior ended up dying of starvation; his stomach was so scarred from stress-induced ulcers that it essentially closed up and wouldn’t let enough food in, and he didn’t want to go under the knife and so chose a fairly painful death by starvation (more on health issues in a moment). But despite this, he lived to age 82! I think that’s still considered a long time to live and I am always curious what a person’s habits were when I hear of such longevity, so it was pleasing to see that he put emphasis on daily physical activity as well as daily relaxing, contemplative activity (reading and music listening). Interestingly, breakfast didn’t seem to play a large part in his routine although Junior recounts many times when he had lunch brought in despite it being ignored in this telling.

A few other choice ideas, on restraint:

What you haven’t said, you can say anytime.

And on the value of friendship:

Don’t make friends who are comfortable to be with. Make friends who will force you to lever yourself up.

The son also rises

So, Senior had a knack for keen insight, but what about Junior?

While Senior was the builder, Junior was the administrator and manager. He seemed to take what he learned from Senior and build on it, so many of his notions seemed like continuations of the thoughts of Senior. For example, consider Senior’s advice about how chief executives should behave as Junior extemporizes about the relationships of businessmen:

A good businessman needs a lot of friends. Cultivating them is a laborious process, and how well you succeed is a direct result of how much effort and thoughtfulness you bring to bear.

He isn’t talking about friends in the business. He’s talking about friends outside of the business, which to me sounds like an echo of the idea that the chief executive’s job extends well beyond life in the office.

Similarly, he recounts a tale about the importance of making good introductions,

I stuck out my hand and said to him, “I’m Tom Watson Jr.”

Offering one’s name with a hand shake ensures that the other person is not put in the uncomfortable spot of being expected to remember people he’s only met once before, which engenders a sense of gratitude and respect immediately. Consider that this was the practice of an individual leading one of the largest and most well-known companies in the world and he still made the effort to be forward about his identity like this.

I also made a note of Junior’s characterization of the political structure of business:

The government has checks and balances, but a business is a dictatorship, and that is what makes it really move.

I think there is consensus building in business, too. It’s hard to keep a team cohesive and productive over a long period of time if people don’t feel like they contribute ideas and that those ideas get seriously considered. But I do understand the idea that ultimately decisions have to be made by somebody, that is, one person, and a business with a strong will behind it can make those decisions more effectively because everyone may be listened to but they don’t necessarily all get a vote. In the business world, people tend to vote by exit which is rarely an option in the world of politics.

The wealth of health

As mentioned earlier, Senior ended up choosing death by starvation when his health maladies caught up with him, though he made it to age 82. I noticed that both Junior and his younger brother (who headed up IBM’s non-US business) suffered heart attacks in their middle-age, attributed to the high stress of their positions.

Junior describes a life of almost continual travel and social functions, not just for himself but for his father and his brother. It was clear reading the book that the Watson clan and IBM executive leadership in general were part of the “global elite”, they knew dignitaries and heads of state from around the planet and were deeply connected to American political figures as well, a confusing blending of public and private prerogatives and relationships. There were many chapters where Junior described so many different locales and travels simultaneously that is almost seemed as if he was everywhere at once– at the very least he would spend long stretches of time away from home engaged in high level networking. It was a fascinating glimpse into “how the other half lives.”

But it was also terrifying from a health point of view. It is just hard to imagine this high-paced lifestyle allowing one to live with optimal health and longevity. Along with suffering a heart attack, his brother seemed to be frail enough to die from a “fall” at age 55. Junior ended up quitting his official business responsibilities following his heart attack which he reflects on with positivity in the book, saying it was a relief to have an opportunity to look critically at his life and get out while he still could. It seems to say a lot about the lifestyle he was living that he could so clearly connect his longevity to his work and chose the former over the latter.

Working with family

At the beginning of the book, Junior says that if you have the chance to go into business with your father, know that it will be difficult, but do it. I was fascinated by this strong suggestion given that he spends much of the rest of the book relating all the violent disagreements he had with his father, their latent power struggles, the continual struggles with self-esteem and even depression that he experienced living and working under the shadow of his successful father and so on.

There were many touching moments in the book where the reader is afforded a look at the parenting practices of Senior, who was truly from a pre-modern era. But there were also many that shocked my sensibilities of the proper relationship between parent and child, such as when Junior recalled how Senior handled tax documentation of his personal trust:

Each year his accountant would come around and have me sign income tax forms that were blank. He’d make an excuse that he hadn’t had time yet to fill them out. This kept up not only through college but ten years beyond, until I was a grown man with children of my own.

How would hiding this information from a child do anything but stoke their curiosity, fear and self-criticism? Why did this practice continue on even when he was a man with his own family (at which point he had long been a part of the business in a senior role)?

While the book offered many such puzzles and glimpses into family life for the accomplished Watsons, I couldn’t help but wonder how people who had achieved such greatness in so many areas had completely neglected to resolve interpersonal emotional conflicts and instead struggled with this source of unhappiness for decades. What is family for?

 

For me, reading about the early struggles and the early attempts at growth are always the most interesting parts of a story like Thomas Watson, Jr.’s, and IBM’s in general. I found myself less interested in what it was like being Bobby Kennedy’s friend, or getting tapped for the ambassadorship in Moscow. You can look at the history of the company and of the family and think, “It could’ve been anyone else, it’s not clear what they did that was special or unique beyond being lucky” but you can’t say they didn’t work hard, or purposefully. There’s no simple recipes or formulas for success in this book when it comes to business, family or life, but there are a number of things to think about, struggles that turn out to be common to all of us, great or small in our vision or accomplishments. I think that is where the value in this book lay for me.

 

Review – What Makes Sammy Run? (#fiction)

What Makes Sammy Run? (buy on Amazon.com)

by Budd Schulberg, published 1941

A “valueprax” review always serves two purposes: to inform the reader, and to remind the writer. Find more reviews by visiting the Virtual Library.

What Makes Sammy Run? (WMSR) is a work of fiction and judging by the title, you’d think the book is about Sammy Glick, the eponymous antagonist. Certainly that is what many reviewers, readers and critics seem to focus on. But WMSR isn’t about Sammy– it’s about the people around him, who tolerate and even tacitly support him, who enable his antics in various ways and thereby lower themselves in the process. WMSR isn’t a study in lite social tyranny, as some think, but rather it is a study in the Stockholm Syndrome. The real villain in this novel is the narrator, the despicable Al Manheim.

It’s easy to be fooled. Sammy isn’t a “nice person” and he clearly isn’t a “happy person.” He’s a wildly imbalanced person with a humongous ambition and not much else of note. He isn’t necessarily handsome or well-spoken. He isn’t an intellectual. He certainly doesn’t have any charm, or empathy for others. It’s easy to dislike him and it’s easy to watch him tread over other people on his way up and make the mistake of thinking he’s the bad guy.

But the question we must always ask ourselves in a tale of moral depravity is, “Where’s the hero, and what is he up to?” Who is keeping this guy in check? Who is going to stop him. In WMSR, the answer is “There isn’t one.” So the people who bear the responsibility for Sammy’s reign are all those who could be the hero and stop him, but don’t, or worse, those who claim to find him distasteful but end up worshipping him.

The best example of worshipping the supposed bad guy in the book is the way Al Manheim falls in love with Kit, a woman who admits to a one-time sexual relationship with Sammy Glick because of her burning curiosity to know what it’d be like to have all of his ambition and energy inside of her. She’s supposed to be the strong, principled and competent femme of the novel yet she couldn’t resist her own base sexual craving for a man she knew was no good. And rather than keep her at arm’s distance, Manheim becomes a soppy wet romantic for her. This is what you call “selling out.”

Sammy’s rise to the top in Hollywood despite having no talent, no money, no experience and no real value to anyone for anything is supposed to serve as a condemnation of the industry and maybe tangentially of the voluntary, for-profit capitalist economy itself. We’re supposed to read WMSR and look around us at all the entitled pricks like him who are our bosses, our owners or are actively in the process of clawing their way to such heights and smirk or despise them. “You’re just another Sammy Glick!” But why then do people secretly admire and envy them and their achievement-less achievement?

The answer is that the Al Manheim’s of the world have no self-esteem. They don’t love themselves enough to say “This is wrong!” on the many occasions they have to say such things. They don’t admire themselves enough to ignore the nuisance Sammy’s, to resist their endless persistence, to insist in return that they go ply their filth somewhere, anywhere but here. Instead, they open the city gates, invite them in and grab them a footstool so they can be comfortable as they bark out their orders. Then, like Al, they drink or smoke or ingest their minds into oblivion when the pressure of thinking about what they’ve done gets too great.

In other words, they’re weak.

Sometimes, they’re so weak, like Al Manheim, that they become accomplices to the madness. Like Nick Carraway, they’re happy to stand silently on the sidelines and observe and oogle as long as they can have the feeling that they’re in on the big adventure, as horrible as they think it may be.

And like Jay Gatsby, the Sammy Glick’s all have a pitiable background. They come from a world without love and so they can’t imagine a world with it. They’re not human, choosing, conscious entities. That experience of life was stripped from them at birth when they entered their perceived loveless world. All they can do is march to their idiot tune and destroy a bit of the world along the way to their doom.

Only they wouldn’t get very far, if it weren’t for the Al Manheims and the Nick Carraways.

The answer to the question What Makes Sammy Run? is less interesting than you hope. It’s so simple, it’s almost stupid– he has no love. It’s also somewhat pathetic because it can’t be helped. Sammy is damaged goods and no amount of therapy or intervention can get him back. The great irony of the novel, of any Sammy Glick, is that someone, somewhere served as the Great Enabler by bringing them into the world and nurturing them long enough to develop their skewed sense of possibility. From there, they’re working on auto-pilot.

A far more interesting question is What Makes Al Go Along With It?, especially when He Says He Hates Him.

Or, something I was thinking about last week, What Makes Davey Crawl? “Davey” is a small business owner, responsible for a few dozen people, who has managed to slowly run into the ground over a period of decades what could be a valuable little enterprise. There are the Sammy’s out there, deterministically trying to skitter to the top without adding anything of value, and then there are the Davey’s just trying to hold on and desperately, desperately disinterested in doing any better.

Why? Why is Davey happy without his ambition (is he happy?) when Sammy is miserable (to himself and others) with his? Sammy wants to wrap his whole mouth around the hose so there isn’t any for anyone else, but Davey just doesn’t want to turn it on all the way when there could be plenty more.

The answer is probably similarly simple, stupid and hopeless to fix. We may just have to suffer these Sammys, these Daveys and these Als as best we can.

Review – The Art of Execution (@harriman, #investing)

The Art of Execution: How the world’s best investors get it wrong and still make millions (buy on Amazon.com)

by Lee Freeman-Shor, published 2015

A “valueprax” review always serves two purposes: to inform the reader, and to remind the writer. Find more reviews by visiting the Virtual Library.

Note: I received a promotional copy of this book from the publisher in exchange for sharing my thoughts AFTER reading it.

Professor Failure

What can we learn from failure? Aside from the fact that there’s an entire industry of business literature fetishizing the idea that it has much to teach us (as a kind of doppelgänger to the decades of success literature that took a person or business’s success as given and tried to look backward for an unmistakeable pattern that could’ve predicted it) I’m personally skeptical of what failure might teach. Life is complex and there is often little to separate the failure and the success but timing and luck in certain endeavors.

So, I approached Freeman-Shors book with some trepidation as the subtitle of the book suggests this is a study of failure. Au contraire, what we have here is actually a psychological or behavioral study, somewhat in the vein of Benjamin “you are your own worst enemy in investing” Graham, which studies not failure per se, but rather how investors respond differently to failure and thereby either seal their fate or redeem themselves.

A Behavioral Typology

The book recounts the investment results of several different groups of portfolio managers who were categorized, ex post facto, into various groups based upon how they reacted to adverse market conditions for stocks they invested in. The Rabbits rode most of their failed investments down to near-zero before bailing out and taking the loss. The Assassins had a prescribed set of rules for terminating a losing position (either a % stop-loss, or a maximum time duration spent in the investment such as a year or a quarter). The Hunters kept powder dry and determined ahead of time to buy more shares on a pullback (ie, planned dollar-cost averaging).

While I am suspicious of backward-looking rule fitting, I do think the author’s logic makes sense. What it boils down to is having a plan ahead of time for how you’d react to failure. The Rabbits biggest mistake is they had none whatsoever, while the Assassins managed to protect themselves from total drawdowns but perhaps missed opportunities to profit on volatility rebounds. The author seems most impressed with the Hunters, who habitually started at a less than 100% commitment of funds to a planned position and then added to their investment at lower prices when the market gave them an opportunity to do so.

Freeman-Shor’s point is that when the price falls on your investment you need to decide that something material has changed in the story or facts and you sell, or else you need to be ready to buy more (because if it was a good buy at $10, it’s a great buy at $5, etc.) but you can not just hang tight. That isn’t an investment strategy. This is why I put this book in the Benjamin Graham fold, the message is all about being rational ahead of time about how you’d react to the volatility of the market which is for all intents and purposes a given of the investing landscape.

Learning From Success, Too

The author goes over a couple other behavioral typologies, Raiders and Connoisseurs. I won’t spoil the whole book, it suffices to say that this section is worth studying as well because it can be just as nerve-wracking to try to figure out whether to take some profit or let a winner ride when you have one. Freeman-Shor gives some more thoughts based on his empirical observations of other money managers who have worked for him on when it’s best to do one or the other.

More helpfully, he summarizes the book with a winner’s and loser’s checklist.

The Winner’s Checklist includes:

  1. Best ideas only
  2. Position size matters
  3. Be greedy when winning
  4. Materially adapt when losing
  5. Only invest in liquid stocks

The last bit is probably most vital for a fund manager with redeemable capital.

The Loser’s Checklist includes:

  1. Invest in lots of ideas
  2. Invest a small amount in each idea
  3. Take small profits
  4. Stay in an investment idea and refuse to adapt when wrong
  5. Do not consider liquidity

Free e-Book With Purchase!

It is hard for me to decide in my own mind if this book is a 3.5 or a 4 on a 5-point scale. I think of a 5 as a classic, to be read over and over again, gleaning something new each time. This would be a book like Security Analysis or The Intelligent Investor. A 4 is a good book with a lot of value and a high likelihood of being referenced in the future, but not something I expect to get a new appreciation for each and every time I read it. A 3 is a book that may have been enjoyable overall and provided some new ideas but was overall not as interesting or recommendable.

While I enjoyed this book and did gain some insight from it, and I think the editorial choices in the book were bold, it’s closer to a 3 in my mind than a 4 just in terms of the writing and the ideas. I’ve found a lot of the content in other venues and might’ve rated it higher on my epiphany scale if this was one of the first investment books I ever read.

But something that really blew me away is that the publisher, Harriman House, seems to have figured out that people who buy paper books definitely appreciate having an e-Book copy for various reasons and decided to include a copy for free download (DRM-free!!) in the jacket of the book. This is huge. I read my copy on a recent cross-country flight and was really agonizing about which books from my reading stack wouldn’t make the trip for carry-on space reasons and then realized I could take this one with me on my iPad and preserve the space for something else. That’s a big value so I am going with a 4 as a result.

 

Notes – Original Issue Discount (OID) Tax Implications, Lessons Learned (#taxes, #investing)

In the process of carrying out the KV Pharmaceuticals capital structure arbitrage trade of 2012, I got caught with my pants down a bit as I didn’t think to sell the convertible notes before they stopped trading. As a result, I missed an opportunity to lock in a capital loss for tax purposes at the time, which would’ve helped shield some of the income I made on the puts and thus made the trade as a whole more tax efficient.

Instead, I got a double-whammy of tax inefficiency for my ignorance, a chicken that finally came home to roost in tax FY2013 as the CPA assisting me with my tax preparation informed me that I ended up owing an additional sum beyond amounts withheld in prior periods due to Original Issue Discount (OID) interest income related to my defunct KV Pharmaceuticals play!

At first I was shocked and dismayed– the company went into bankruptcy and the securities were eventually removed from my account entirely earlier this year. How could I owe taxes when I never earned any cash interest and will never get back even a penny from the securities I stupidly held onto?

I talked about it with my CPA (who double-checked with his partner) and then spoke to a rep at TD Ameritrade and the matter is decisively not going to turn out in my favor. I learned that when a bond goes into default it often switches from cash interest basis to accrual interest basis in the eyes of the IRS, and like any good group of thugs they want their blood now, not later. In other words, I owe federal income tax on “accrued interest” I not only never received but never will receive. Because the securities were removed from my account in 2014 and not 2013, it looks like I accrued interest income due to me even though we clearly know right now that I’ll never get it.

Instead, I get a stepped up cost basis on the securities (in the amount equal to the accrued interest not received) so when I finally report the loss for FY2014 taxes, it’ll be a total loss of X + Y instead of just X. I get to shield additional future income with the X + Y amount but I paid real cash up front for the privilege.

If I had known better, I would’ve executed this trade such that the gains and losses all occurred in the same period in 2012. I also probably wouldn’t have gotten into a trade in the first place whose money-making mechanics I generally understood but about whose technical execution and tax implications I was grossly ignorant.

Another expensive lesson learned!