The Coming Wave: Technology, Power, and the Twenty-First Century's Greatest Dilemma Mustafa Suleyman with Michael Bhaskar New: Crown 2023

The author begins his analysis by identifying the two technological opportunities and threats: Artificial Intelligence (AI) and Biotechnology (BT). Regarding AI, the author reiterates the fear that the application can go rogue, operate beyond human control. With BT, the concern is tampering with the fundamental elements of life. With both, Suleyman ponders the ability to contain the consequences of their results. He posed the following question, "What if we could distill the essence of what makes us humans so productive and capable into software, into an algorithm?" (pp. 7-8). The author believes that we are proceeding to an affirmative to his question. The risks include an upheaval and replacement to manual and intellectual labor and, biologically, the ability to purchase DNA synthesizers that will produce and modify strands of DNA. Suleyman wrote this book to warn readers of the potential dangers and propose safeguards. He divided the book into four parts: Part 1, the history of technology, Part 2, the current state with AI and BT, Part 3, the politics of current technology, and Part 4, the interventions that humans should take to have the technologies work toward the common good. Defining containment as "a set of interlinked and mutually reinforcing technical, cultural, legal, and political mechanisms for maintaining societal control of technology during a time of exponential change" (pp. 37-38), the term implies a multi-dimensional approach to human control over technology, extending to various social institutions and political layers, national and international. The failure of nuclear containment shows the difficulty of the task.

How Big Things Get Done. 2023 Bent Flybjerg and Dan Gardner New York: Currency

Meticulous planning, as was done with the construction of the Empire State Building, that resulted in a project that came 17 percent under budget and ahead of schedule, caused the authors of How Big Things Get Done to conclude that the secret to success results in "think slow, act fast" (p. xvi). Think slow implies adequate planning and analyzing the benefits of the project. Planning, according to the authors, "explores, imagines, analyzes, tests, and iterates" (p. 46); planning explores questions and an understanding of the goal and the reason for it. With all important challenges addressed, the project team can "act fast". The authors distill these two concepts into the team dynamics of power and psychology. Power, the politics of the group, controls the decision-making process. Psychology gets at the emotional temper of the group, optimism, pessimism, and something in between. Flybjerg and Gardner consider optimism the human default, we defer to the "best case" scenario. They also acknowledge the human preference for action over thought. Looking at project development linearly, the authors supported this progression, "think from right to left," the title of the third chapter. Multiple thinkers have characterized this form of analysis. John B. Robinson, a professor of urban and environmental planning, coined the term, "backcasting", envisioning a future state and explaining the steps to attain it. Jeff Bezos, at Amazon, took a different approach. To initiate a project, employees would write a Press Release and Frequently Asked Questions that they would present to execs, in multiple iterations, refining with each version. However, even this process failed with the introduction of the Fire Phone, because of the insistence of the chief executive officer. One fundamental ingredient to successful project completion, experience, includes not only explicit knowledge, understanding the processes, structure, and details of the task, but also tacit knowledge, the unwritten, intuitive understanding. Because no two projects are exactly the same, testing, simulating, and experimenting allow for the better methods to manifest and move the project forward. Eliminating or minimizing bias also clarified the end goals. Uniqueness bias prevents applying tested actions from facilitating the process. The authors applied the concept of Daniel Kahneman and Amos Tversky, "reference class" (p. 105) that derives from your perspective, "inside" or "outside" (p. 106-107). To obtain a realistic cost, the authors recommend that project managers calculate all possible cost, time, benefits and compare your project to the mean of all projects, then decide on cost, time, and resources. The robustness of the data determines the accuracy of the estimate, so collect lots of data. With this approach, you have to factor in the "regression to the tail", the unknown risks. The authors advise to skew the estimate to the fat tail. For extra assurance, add a contingency of 10 to 20 percent. Even with all these safeguards, a "black swan" event might occur, such as the pandemic, rare occurrences that completely alter the context in which your project takes place. By amassing the data, discovering the fat tail, identifying potential black swans, and adding contingencies, can a project team remove their uniqueness bias. A portfolio of projects does not reduce the overall losses. With a portfolio, managers factor in opportunity costs, money spent that could have produced greater returns. After undergoing extensive planning, the authors explain "acting fast" with Chapter 8 entitled, "A single, determined organism" (p. 143), a cohesive, committed team, with each member operating according to her or his strengths. They go through the planning stage, for a construction project, they simulate the project and the assembly--the analysis of the site and the parts for construction, and, third, team optimization and devotion to the project. For the team element, identity with the team and understanding the team purpose and standards underpin team success. The book concludes by describing projects that usually do not go terribly wrong--"solar power, wind power, fossil thermal power (power plants that generate electricity by burning fossil fuels), electricity transmission, and roads" (p. 155). Modularity, having blocks from which to build structures reduces risks. Nuclear power plants do not fit this list, as the author explained with the construction of the Monju nuclear plant in Japan. Why, because the structure does not permit simulation and testing. Secondly, so few have been built and each setting is unique. Additionally, the project only starts to generate revenue after complete commissioning. What makes the projects listed above less risky? They are smaller, modular, with few variables, and often duplicated, and scale-free--expandable without a change of plan. The authors define "'scale-free scalability', meaning you can scale up or down following the same principles independently of where you are scalewise, which is exactly what you want in order to build something huge with ease" (pp. 165-166). Real world examples include projects as diverse as Norway's hydroelectric projects, Elon Musk's factories, Planet's satellites, Madrid's subway, and shipping containers. The authors end the book with the "eleven heuristics for better project leadership" (p. 185). They include: "hire a masterbuilder. . . get your team right. . .ask 'why'. . . build with lego. . .think slow, act fast. . .take the outside view. . . watch your downside. . . say no and walk away. . . make friends and keep them friendly. . . build climate mitigation into your project. . . know that your biggest risk is you" (pp. 185-190).

The Cloud Revolution: How the Convergence of New Technologies will Unleash the Next Economic Boom and a Roaring 2020s

Focusing on three "technological domains" (p. xiii), Mark P. Mills reflected the optimism that the title exudes--"information, materials, and machines" (p. xiii) that he prefaced in his book. He cited the "cloud" as the infrastructure that enables the domains. Mills tempered his enthusiasm by admitting to the decline in drug discovery, "50 percent per year per billion dollars spent since 1950" (pp. xx-xxi) with equal declines in productivity and in "manufacturing, services, and education" (p. xxi). You might think of other industries in that category. With those qualifiers, Mills continued to reference the advances in the three domains. The consequence of the cloud backbone facilitating the three domains results in economic growth for entire populations, healthier lives, and greater conveniences, according to the author. Divided into four parts, the book covered, first, the author's technology forecasting methods, second, the cloud infrastructure, third, the cloud's impact on the three domains, and, part four, the business implications of parts two and three.

Data Detective: Ten Easy Rules to Make Sense of Statistics Tim Harford 2021 Riverhead Books

For those intimidated by math and anything mathematical, this book presents guidelines for readers to overcome mental phobias when confronted with statistical data. Filled with examples from literature of all types, Harford instructs the reader on how to approach statistics. Harford begins by attacking head-on the idea of lying with statistics, the antithesis of his book. Next with his first rule, he defined the basic mindset of any reviewer of statistics--one free of personal bias. The attempt to be objective is the first step for anyone who wants to evaluate the validity of statistical or any kind of data. Second, he advised that individuals understand the perspectives from which they view the numbers in front of them, from a close-up and personal vantage point or a distant and wider angle. As we have seen with the Covid-19 data worldwide, different countries record infection rates and death rates differently. Understanding the differences in methodology helps to avoid what Harford calls "premature enumeration" (p. 65). He used the example of the difference between miscarriages and premature deaths. How each gets defined depends on the country's health criteria. In the chapter, Step Back and Enjoy the View, Harford encouraged us to view statistical data in terms of the broader trends rather than accepting information in isolation. He made the comparison of "rolling business coverage of Bloomberg TV, the daily rhythm of the newspaper the Financial Times. . . and the weekly take of The Economist--each operates on unique information cycles. The fifth rule, "Get the Backstory" highlights the bias of what gets published in scientific journals and what gets omitted, the peer-reviewed "publication bias" . . .[i]nteresting findings are published; non-findings, or failures to replicate previous findings, face a higher publication hurdle" (p.113). The reader has the task of discerning the population sample and sample bias, "Ask Who Is Missing" constitutes the sixth rule. With the focus currently on the disaggregation of data, readers can target to which group the study applied to and to which group the data does not apply. Even the aspiration of N=All, an attempt for an all-inclusive population, will contain only those who conform to the criteria of inclusion. Harford concludes with one certainty. If algorithms are shown in a skewed sample of the world, they will reach a skewed conclusion" (p. 151). Continuing with the discussion of algorithms, Harford instructed the reader to ask the following questions when confronted with conclusions from big data: "Are the underlying data accessible? Has the performance of the algorithm been assessed rigorously--for example, by running a randomized trial to see if people make better decisions with or without algorithmic advice? Have independent experts been given a change to evaluate the algorithm? What have they concluded?" (p. 183). Within the chapter, he explained the difference between causation and correlation. "Figuring out what causes what is near-impossible, some say. Figuring out what is correlated with what is much cheaper and easier" (p. 156). Rule Eight, "Don't Take Statistical Bedrock for Granted", Harford warned that the data from such agencies as the Bureau of Economic Analysis, the Bureau of Labor Statistics, the Census Bureau, the Federal Reserve, the Department of Agriculture, and the Energy Information Administration provide the "nation's statistical bedrock" (p. 190). Here Harford defends the products of his profession. The last two chapters admonish us to delve carefully into the data and "Remember that Misinformation Can Be Beautiful Too" (p. 213) and that through all our investigation, we should keep an opened mind.

The Gray Rhino : How to Recognize and Act on the Obvious Dangers We Ignore by Michele Wucker

 After hearing Michele Wucker's TedTalk and long after I read The Black Swan: The Impact of the Highly Improbable, I decided to read her book on gray rhinos. She contends that many social phenomenon that receive the label of black swan actually come under the designation of gray rhinos.  As the title, The Black Swan suggests, events occur unexpectedly and without warning. Gray rhinos, in contrast, result in "highly obvious but ignored threats" (p. x) or respond insufficiently, weakly, and ineffectively. Among past "clear dangers that were recognized but weren't being addressed" (p. x), Wucker listed: climate change, financial crises, digital technologies, infrastructure failures, wildfires, water shortages, and others. 

To distinguish the types of events that individuals, organizations, agencies, governments and others face, Wucker categorized them according to four characteristics: low probability and high probability and low impact and high impact. Of the three types, white swans, black swans, and gray rhinos, she placed each into one of the four slots. White swans have a high probability of occurrence and low impact. In contrast, black swans and gray rhinos have high impact. However, black swans have low probability and gray rhinos have high probability. With any risky situation, the faster the response, the lower the cost.  

Leaders, who procrastinate when confronted with major challenges, ignore the opportunity or the avoidance of danger that the challenges offer. Wucker views this as the counterpart to danger. Assessing risk is inherent in the avoidance of danger or calamity. Each year at the World Economic Forum, assembled leaders in government, business, media, and Non-governmental Organizations prioritize what they consider the greatest risks in the Global Risks report. The United Nations conducts a similar survey. "In 2013, only 32 percent of those CEOs believed the economy was on track to meet the demands of a growing population within environmental and resource constraints, and just 33 percent believed that business was doing enough to meet those challenges" (p. 12). 

Behaviors that prevent action include many reactions: freezing and a lack of any response or denial and ignoring the threat. These reactions describe the first stage of the gray rhino response. The other four responses, according to Wucker, include" muddle along. . .come to an alert. . .play the blame game as we search for solutions. . .and, finally, we do something--occasionally before the trampling, but all too often after the fact" (p.27). These five responses constitute the five phases that most go through. To create a culture vigilant about gray rhinos or any of the other threats, "change perverse incentives in order to encourage leaders to act sooner, and uses out understanding of the weaknesses of human nature to make us more likely to do the right things" (p.27). In short, leaders thwart groupthink and encourage diverse and independent thinking. 

Project directors of the Good Judgment Project identified traits that separated a good forecaster from others: "First were psychological factors: 'inductive reasoning, pattern detection, open-mindedness and the tendency to look for information that goes against one's favored views, especially combined with political knowledge.' Second was the forecasting environment, including training in probabilistic reasoning and team discussion of rationales. Finally, not surprisingly, effort made a difference; the more time forecasters spent deliberating their predictions, the better they did" (p. 50). 

Weapons of Math Destruction: How Big Data Increases Inequality and Threatens Democracy Cathy O'Neil

The head of the computer department at Regis University, where I teach, recommended this book to all faculty. The author, a math nerd, who started her career as an academician teaching at Columbia and the switching to finance, worked as a quant for D. E. Shaw, a hedge fund company. The Great Recession caused her epiphany, when she realized the damage that numbers can inflict. Although numbers present themselves a objective and unbiased, she realized that numbers and the models, the assumptions behind the numbers, "were based on choices made by fallible human beings . . many of these models encoded human prejudice, misunderstanding, and bias into the software systems that increasingly managed your lives." (p. 3)

Through out the book, O'Neil gives examples of how numbers, models, algorithms, and bid data offer false conclusions. Because the numbers and the assumptions behind them usually can be understood only by the individuals who construct them, people who apply them to actual people, do not understand the consequences of the logic. These "weapons of math destruction (WMDs)" have permeated our society.  In education these numbers and assumptions evaluate students and teachers. In the judicial system, they determine convictions and prison sentences. In finance systems, they caused the crash of 2007, stop and frisk searches in large urban centers, U.S. News and World Report college rankings. President Obama unsuccessfully attempted to correct the U.S. News and World Report college rankings by basing rankings on "graduation rates, class size, alumni employment and income, and other metrics" (p. 67). With computerized health and credit data, zip code information, and Facebook friend information, the numbers, algorithms can determine employ ability,  innocence or guilt in the justice system, and by scanning online data, the amount of ideas a person generates, which determines employment desirability. What website a person accesses might affect their FICO or credit score. Call center personnel data found that people who engaged in job-related chatter performed better at their jobs than those who did not.

With all the scores and assessments of individuals, based on data, a dossier of who we are, what we have done, and what we have can contain correct or incorrect information. Will our job, health, credit, education, insurance, safety, news, and social prospects result from who we really are or what incorrect online information attributes to us.

Workplace Poker: Are You Playing the Game or Just Getting Played, by Dan Rust

Workplace Poker : Are You Playing the Game or Just Getting Played, a 2016 book by Dan Rust, suggests practical tips for navigating the corporate maze. The book offers solutions that range from increasing your understanding of office politics, responding to failures, managing work/life balance, handling difficult colleagues, preparing for performance appraisals, maximizing your professional appeal, to using multiple lenses to analyze complex situations. Put this book on your reading list!

The 5 Mistakes every Investor Makers and How to Avoid Them : Getting Investing Right, Peter Mallouk. (2014). John Wiley & Sons: Hoboken, NJ.

Given the recent turbulence in the market, I need something to calm my nerves, so I picked up this book. When stress increases, I don't have the patience to read what I should not do, I concentrate on what I should do, which is the last half of the book. Turning to the section, Getting It Right, I will recap what the author, Peter Mallouk, listed as his "rules" and "steps".
Rule # 1: Have a Clearly Defined Plan. Step 1. Understand where you are financially when beginning the planning process. Step 2, have a goal, which includes your age, the number of years to achieve your goal, and the financial outcome of the goal. Step 3, "Run a projection showing how on track you are for that goal" (p. 136). Step 4, Given the outcome of the projection, determine what changes you need to make to objectively meet the goal.  Step 5, Structure your finances--portfolio and other assets--to meet the goal. Just like any multi-dimensional concern, you might have many portfolios--and educational portfolio, a business portfolio, a real estate portfolio, etc.
Rule # 2. Mallouk recommends that investors "avoid asset classes that diminish results" (p. 137), such as cash and gold.
Rule # 3. Mallouk thinks that stocks and bond establish the foundation of well devised portfolio.
Bonds underperform stocks but stocks are volatile and any gains might not conform to your needs.
Rule # 4. Think Globally
Rule #5. Indexing works.
Rule #6. "Don't Blow out your existing Holdings" (p. 147)
Rule #7. "Asset Allocation Matters" (p. 149).
Rule #8. Align asset allocation to you needs.
Rule #9. The rebalancing imperative.
Rule #10. Periodically, review your plan and avoid the noise around you.

In addition, Mallouk has an ultimate rule, enjoy your money while you can or your beneficiaries will enjoy it for you.

Levitt, T. (1991). Thinking about Management. New York: The Free Press.

Levitt divided his book into three sections: Thinking, changing, and operating, which capsulizes the activities of management. This short book begins with what Levitt considered the basic questions any manager should ask: "why do we do it; why that way; what are the alternatives; how much does it cost; why are costs up; who does it cheaper and better; what's happening out there that's likely to hurt or help us" (p. 3). Levitt explains the purpose of these questions, to understand the future and not dwell on the past.

To understand the future, Levitt advocates for a streamline of stuff, data, and bureaucracy. The streamline of stuff mirrors the thinking of just-in-time inventory. The streamline in data, in the age of big data, requires formatting the data into useable information for decision making. The streamline of bureaucracy results in leadership teams that "think seriously and deeply for themselves about the purposes of the organizations they head or functions they perform, about the strategies, tactics, technologies, systems, and people necessary to attain these purposes, and about the important questions that need always to be asked" (p. 9). Levitt discusses the role of knowledge workers and the need for leaders who have a proclivity for decisiveness, with understanding of the people in the organization and the environment in which the organization functions. He integrates the concept of modern knowledge economy with innovation, marketing, and advertising.

How Google Works: Eric Schmidt and Jonathan Rosenberg

Anyone purchasing tech stocks of social media or search firms should read this book to understand the industry. The strength of the book involves the 360 view of a company, from management, employees, and the board. Such a broad perspective is rare in most management books. As a manager, I gain insight into some of the practices of a company that contains a diverse workforce that demands excellence from those workers, and provides a culture that nourishes achievement. As an employee, I could extract the expectations of a very successful and innovative company and what that company looks for in its employees. Finally, as a member of a board, the book clearly delineates the role of board members and that of management. That the authors both teach at Stanford Business School allow readers to "attend" a course for the price of the book or a library card.

The book divides into eight chapters, Introduction--Lessons learned from the front row, Culture--Believe Your own Slogans, Strategy--Your plan is wrong, Talent--Hiring is the most important thing you do, Decisions--The true meaning of consensus, Communications--Be a damn good router, Innovation--Create the primordial ooze, and Conclusion--Imaging the unimaginable. These titles sound life ones that you would find in any management book, but the secret sauce is the details and the reliance on data and statistics to support the conclusions that the authors draw.

Upper management creates and determines company culture. Fitting the stereotype of a high tech firm, Google promotes a flat, democratic, adaptive, experimental, and open organizational environment. Things the founders and employees care about and value. Operating on a platform of the internet, management faces these realities: "First, the Internet has made information free, copious, and ubiquitous . . . Second, mobile devices and networks have made global reach and continuous connectivity widely available. A third, cloud computing has put practically infinite computing power and storage and a host of sophisticated tools and applications at everyone's disposal, on an inexpensive, pay-as-you-go basis" (p. 11).  Faced with these forces, Google built a firm full of people the authors label as "smart creative", individuals that differ from the now prevalent, one-dimensional "knowledge workers" because "they are multidimensional, usually combining technical depth with business savvy and creative flair" (p. 17). To keep their workforce networked, Google crowds employees together in close working quarters, tolerates messiness, ignores rank and prizes data, turns the Rule of Seven on its head, and organizes groups functionally and not according to business divisions and product lines to avoid silos.

In the management sphere, the authors discuss strategy, talent, decision making, communication, and innovation. Regarding strategy, the authors take an iterative approach to a company plan, "based on a foundational set of principles that are grounded in how things work today and that guide you plan as it shape-shifts its way to success. The plan is fluid, the foundation stable" (p. 69). The plan rests on technical observations and not on marketing research. Who would have thought Google would innovate the car industry? The book contains Eric Schmidt's format for successful strategy meeting that is worth reading. On the topic of talent and hiring, the authors acknowledge that building a great company entails finding excellent people--the responsibility of not only management but the entire organization. The authors present advise on career-building as well as hiring tips. On the topic of decision making, the authors stress management timing as well as the rightness, the data supporting, of a decision.  Management enables communication to flow--not information hoarders, but information routers. Finally, the sum total of the organization and culture creates a medium where innovation happens.

As an employee, the book offers guidance on the expectations in the world of "smart creatives". The sections of the book on "Google's Hiring Dos and Don'ts . . . Career--Choose the F-16, Treat your career like you are surfing, and Always listen for those who get technology, Plan your career, Statistics is the new plastics, Know your elevator pitch, Go abroad, and Combine passion with contribution" are all worth reading.

Finally, as a member of a board that has had its attention diverted from strategy and product to governance and lawsuits, I found Google's caveat interesting--"If this isn't true, get new board members" (p. 195). A lack of focus erodes business momentum and distracts leadership and strategic thinking.

Schmidt, E. & Rosenberg, J. (2014). How Google Works. New York: Grand Central Publishing.

Boards that Lead : When to Take Charge, When to Partner, and When to Stay Out of the Way

Charan, Ram, Carey, Dennis, Useem, Dennis. 2014. Boards That Lead : When to take charge, when to Partner, and when to stay out of the Way.Boston: Harvard Business Review Press.

In the introduction, the authors list the primary duties of a board--"to select, retain, or dismiss the chief executive, to establish a climate of ethics and integrity, to set the goals and incentives for the executive team, and to pinpoint the company's central idea, risk appetite, and capital structure" (p. 1). With these responsibilities, a board bear a critical portion of the success or failure of an enterprise along with the executive team. The board ideally acts in concert with the management team. The ability of the board to contribute to the enterprise's achievement and partner with management stems from three board attributes--"human dynamics, social architecture, and business leadership" (p. 3).

In line with these goals and with the growing assertiveness of boards, the authors noticed in those that they examined an increase in board functions. "They are taking charge of CEO succession, executive compensation, goal choices, merger decisions, risk tolerance, and other functions that have traditionally been the province of management" (p. 5). As a result, the authors noted the following trends: 90 percent of boards have a lead director, 43 percent of boards have separated the functions of chairman of the board of directors and chief executive officers, the poison pill option has declined to 8 percent, and executive compensation has evolved from fixed pay to "contingent compensation that varies with financial results that directly benefit shareholders" (p. 18).

Traditional obligations for board directors are duties of care and loyalty. The authors define these as, duty of care, "requiring directors to exercise reasonable caution in executing board responsibilities that could harm others if not performed well" (p. 17); and duty of loyalty, requiring that directors exercise good fiduciary judgment on behalf of stockholders" (p. 17).To these obligations, the authors add the "duty of leadership", requiring that directors handle "the increasing complexity of company decisions across virtually every facet of doing business, from sales channels and product categories to price points and product markets" (p. 19). Specifically, the complexity encompasses the overwhelming amount of information must consume and the international nature of business, with its various "regulatory regimes, consumer preferences, and cultural traditions" (p. 19).

From this foundation, the authors delve into the four elements of their board leadership model: (1) strategic decision making, (2) the duties of care and loyalty reinforced with "attention on company strategy, capital allocation, executive succession, management compensation, talent development, and enterprise risk" (p. 21), (3) succession planning, obtaining sufficient information to understand clear the current state to collaborate with executive management when necessary. With these elements, the authors identify four board of director engagement types: "Boards that take charge, boards that partner, boards that monitor, boards that stay out of the way" (p. 22). Because each of these forms of engagement fit within certain circumstances, boards must select the appropriate posture when it is warranted.

The authors offer this checklist.

"Director's checklist for leadership decisions" (p. 24)
"When to take charge
        Central idea
        Selection  of chief executive officer
       Board competence, architecture, and modus operandi
       Ethics and integrity
       Compensation architecture
When to Partner
       Strategy, capital allocation
       Financial goals, shareholder value, stakeholder balance
       Risk appetite
       Resource allocation
       Talent development
       Culture of decisiveness
When to Stay Out of the Way
        Execution
        Operations
        Areas of delegated authority
        Nonstrategic decisions
        Excluded by board charter

 The remainder of the book divides into these sections, Boards that Work, Leading the Leaders, Value Creation. Within Part 1, Boards that Work, the authors discuss, "First things First: Define the Central Idea, Recruit Directors who Build Value, Root Out Dysfunction, Wanted: A Leader of the Board".
Part 2, Leading the Leaders covers CEO Succession: The Ultimate Decision, A Question of Fit, Spotting, Catching, or Existing a Falling CEO. The last, Part 3, Value Creation, addresses Turning Risk into Opportunity, Staying Out of the Way, The Leadership Difference, and A Revised Definition of Corporate Governance.

How to evaluate a Stock by reviewing Financial Information

While reading the book, Financial Intelligence, A Manager's Guide to Knowing What the Numbers Really Mean, I had the annual report of Intrepid Potash in front of me. Because I had paid more than what the stock currently sells for, I wanted to assess whether my belief in its long term potential justified keeping it. For a non-financial analyst, this book offers the basic principles in a readable, easily comprehensible way.

 Having worked for a software company that manufactured accounting applications for Fortune 500 and smaller companies, I have an understanding of accounting principles and month-end, and year-end processing, the balance sheet, and income statements.  What I lacked was how to digest efficiently quarterly and annual financial report information and how to spot quickly the ways companies can distort the numbers to improve bottom-line results. The authors of Financial Intelligence claimed as their philosophy, "that everyone in a company does better when they understand how financial success is measured and how they have an impact on the company's performance" (p. xi) and its first chapter is entitled, You can't always trust the numbers.

In that chapter the authors list a couple of ways a company blatantly 'doctors' its numbers:
1. "One time charge" mechanism: when a company accumulates many charges and
lumps them into one quarter, improving the financials of future quarters instead of recording the charges when they in fact occurred.
2. Financial shell game: Moving expenses from one account to another to improve the bottom line.
3. Retiree benefit accruals: Lowering the numbers even though the commitment remains at the higher rate (this generated, according to the authors, a front page article in the Wall Street Journal.)
4. Determining when to recognize revenue: Although FASB has some rules regarding when companies in some industries can recognize revenue, the authors noted: "According to a 2007 study by the Deloitte Forensic Center, 41 percent of fraud cases pursued by the Securities and Exchange Commission between 2001 and 2006 involved revenue recognition" (p. 8). Options that companies have used include "When a contract is signed, When the product or service is delivered, When the invoice is sent out, When the bill is paid" (p. 8).
5. Accrual, allocation, and depreciation estimated and subjective amounts.

 Part 2 of the book, The (Many) Peculiarities of the Income Statement, covers the components of the income statement--revenue, sales, deferred revenue, earning per share, cost of goods sold, operating expenses, depreciation and amortization,  and one-time charges. The last two items I previously mentioned as areas for financial statement manipulation. Given that focus, the authors begin this part of the book with the chapter, Profit is an Estimate. They elaborate on the topic of profit by discussing it in it many variations, gross profit, operating profit (EBIT), and net profit. To this mix, the authors add contribution margin, "sales minus variable costs. It shows the profit you are earning on what you sell before you account for fixed costs" (p. 81). Part 3, The Balance Sheet Reveals the Most, delved into the sections of that financial statement. According to the authors, the balance sheet constitutes "a statement of what a business owns and what it owes at a particular point in time" (p. 90). Assets reflect what a business owns and liabilities, what it owes.

Part 4, Cash is King, demonstrates by the title the importance that the authors put on this one item.
The authors cite Warren Buffet as an investor that examines the cash position of companies most closely. The authors compress his laser vision on cash by isolating his three practices: "First, he evaluates a business on its long-term rather than its short-term prospects.  Second, he always looks for businesses he understands. . . . And third, when he examines financial statements, he places the greatest emphasis on a measure of cash flow that he calls owner earnings" (p. 125). Obviously, any cash flow that results in owners earnings derives from inflows rather than outflows. Of the cash flows, operating activities, investing activities, and financing activities cause movement. The first and most important cash flow, operating activities, clearly displays the financial health of the firm; it makes more than it spends or vise versa. The second, discloses the amount of money the company spends on future investments. The last, documents how much the business depends on outside financing for its survival. Therefore, an investor needs to examine the connection between profit and cash and where the firm obtains cash to generate its profit.

Part 5, Learning what the numbers are really telling you, documents the various types of ratios investors can use to analyze statements--profitability ratios, leverage ratios, liquidity ratios, and efficiency ratios. For an investor, the authors list five measures--revenue growth by year, earnings per share, EBITDA, free cash flow, return on total capital or return on equity. For the business owner, the authors zero in on the percent of sales figure.

No financial management book would be complete without a discussion of return on investment (ROI) to evaluate capital purchases. This book presents the three methods of calculating RIO, the payback method, the net present value method, and the internal rate of return method.

Finally, the authors advocate educating employees, family, and friends on financial literacy to improve company and personal financial management performance.

Ahead of the Curve : A commonsense guide to forecasting business and market cycles

Have you ever listened to the nightly business report and wondered how the newscaster determines the reason for the rise or fall of the stock market indices on a particular day? The newscaster provides cause and effect analysis on a daily basis, which presumes analytical skills beyond the average investor and an understanding of the broader economic context of that specific event. However, the newscaster does not explain either of these factors in the report.  Joseph H. Ellis, the author of Ahead of the Curve, contends that most reports listeners hear have no basis in analysis or no relationship to actual occurrences of economic business cycles or the stock market.

In the Preface of the book, Ellis explains the basic theses of the book: the business cycle and its cause and effect relationships, the repeatability of which allows individuals to extract forecasts. Secondly, Ellis highlights some fallacies in common conceptions of the leads and lags in economic cycles. Unlike many economic commentators, he classifies a recession as a lagging indicator as well as employment and capital spending. He designated declines in consumer spending and hourly earnings  as leading indicators. Finally, Ellis discredited month by month and quarter by quarter analysis as confusing and out of context. He preferred a year-over-year analysis of an economic cycle, which he called the ROCET--rate of change in economic tracking.

Presenting a statistical analysis of business cycles, Ellis clearly identifies independent variables and
related dependent variables. This approach simplifies the understanding of economics and allows
the reader to view economics in its basic elements, at the macro and micro level. Like Ellis, I wish that my Intro to Economics had started with this perspective and built the course from there. The next step, applying the method.

For the reader, Ellis publishes economic data on his website, http://www.AheadoftheCurve-theBook.com

Standard and Poor's Guide to the Perfect Portfolio : Five Steps to Allocate Your Assets and Ensure a Lifetime of Wealth

Michael Kaye, a portfolio officer at Standard and Poor's, cites studies that documented the importance of asset allocation over individual stock selection. He defined asset allocation as "the process of determining the optimal way to divide a broad range of categories of assets (stocks, bonds, cash, and others) in a way that suits your investment time horizon and risk tolerance" (p. 10).  To make this investment decision, he itemized 5 steps: "Step 1: Identify your goals and objectives; Step 2: Choose the specific asset classes in which to invest; Step 3: Determine what percentage of your total assets belongs in each asset class; Step 4: Decide which investment products to use; Step 5: Monitor the performance of your portfolio and adjust your asset mix if warranted" (p. 13).

Of the common types of asset allocation approaches, the buy and hold strategy becomes the default position. Because after the initial purchases the investor takes no action, transaction costs remain low and the asset allocation can veer far from its original makeup. A less familiar approach to the average investor but one that many unconsciously follow, insured asset allocation strategy, entails selling assets that reach the floor in value and buying more assets that appreciate. As Kaye states, "insured asset allocation assumes that your risk tolerance changes with your level of wealth. You have no tolerance for risk below the floor value and an increasing risk appetite above the floor value" (p. 12).

With strategic allocation, the investor decides what percentages he or she designates for each asset class and rebalances periodically to maintain those percentages. Only because of changing goals or events, does the investor change the percentages. This approach accrues greater transaction costs than buy and hold and, like buy and hold, favors a long-term strategy. Tactical allocation, more short-term oriented, opportunistic, and riskier than strategic allocation, results in a change of percentages based on market conditions. Transaction costs grow from the time taken to follow market trends and the increased costs to buy and sell.

Why Tinkering Too Much with Your Portfolio Won't Pay Off

I found the title of this article, circulated on the Australian School of Business newsletter, intriguing. In the age of day traders, I constantly wonder if monthly I should evaluate my portfolio strategy. This article and the research paper that it explains provided an academic view of the issue.

Andrew B. Abel, Janice C. Eberly, and Stavros Panageas, professors at Wharton, Kellogg, and the Booth School of Business at the University of Chicago wrote a highly technical paper entitled, Optimal Inattention to the Stock market with Information Costs and Transaction Costs http://www.nber.org/papers/w15010.pdf?new_window=1 .

The paper makes the assumption that the investor has two accounts, an investment account with equities and a transaction account, a cash account for living expenses.  The paper, additionally, considered two transaction cycles or "observation dates", one that occurred at regular intervals--"time dependent", for example, a monthly withdrawal to cover living expenses; and another that occurred far less frequently--"state dependent", for example, once a decade. To assess transaction costs, the authors included two types, "the value of the investor's time, plus commissions and other charges that apply to any action taken" (p.1).

The authors identified "the period of 'optimal inattention'. "Logic says that the higher the investor's cost of time and money, the longer this period is" (p. 1) They concluded that "it would probably not pay to adjust a portfolio more often than every month or two" given commission and other fees" (p.1).

http://www.nber.org/papers/w15010.pdf?new_window=1

Charles Schwab : You're Fifty--Now What

Sometimes the most basic tasks get overlooked. Fortunately, Schwab has enumerated what one should do, no matter your age. This book offers those guidelines. I will attempt to summarize the ones I found most helpful here. Schwab divided the book into two section, Planning for the Financial Second half of your life and Putting your house in order in the second half.

Expectedly, in the first half of the book, this leader of a brokerage firm suggests that readers invest in stock. He presents the historical evidence that stock has outperformed  other financial instruments in the past. Furthermore, he proposes that you invest for growth as aggressively as you can tolerate and afford. He argues that asset allocation--stocks, fixed income, and cash equivalents-- determines 90% of your long-term investment returns. Knowing your budget for this period allows you to measure actuals with inflation against budget. For starters, Schwab suggests a Core and Explore asset allocation--a combination of index funds and actively managed mutual funds and individual stocks.

After deciding a strategy, Schwab directs readers to list all their current assets--cash, IRAs, 401Ks, etc. What paperwork should you keep:

1. Tax returns with supporting documents, such as 1099s (up to six years back)
2. Settlement sheets on house closings, improvements or remodeling of the house
3. Retirement Plan records, records of contributions to retirement plans distributions, conversions, and rollovers
4. Purchase of securities that you own, purchases or gifts--for up to three years

The next step requires estimating the income you will need in retirement, after major life changes, etc.  factoring in inflation and compounded interest.  From there, he proceeds to go deeper into the asset allocation options--aggressive plans, moderate plans, and conservative plans, with varying degrees of each. Then we get to the point of all this planning, paying yourself from the earnings of your investments in a manner that supports your expenses throughout your lifetime. The trick, not running out of money before you run out of time--making your money outlive you with, hopefully, some to spare for progeny. The remainder of the first section deals with the mechanics of managing your portfolio--monitoring  and rebalancing it--how to, the frequency, and logic.

The second portion of the book concentrates on financial advice--determining if you need it, where to get
it and the questions you should ask to assess the quality of the potential advisor. Having reviewed your assets and determining your preference for an asset allocation, you should be prepared for any questions that the advisor might ask you. Regarding the questions you should ask him or her:
"What is your education and professional background?
What is your management style and philosophy? What is the best investing decision you've make in the last five years? the worst?
How are fees set?
Do you prefer one type of investment over another?
Have you had success with clients similar to me? What has your past performance been for clients with financial objectives similar to mine?
How will you help me define my investment objectives? Will you provide a customized investment plan? How often will you review my portfolio?
Where will my assets be held?

Schwab recommends that you consider only fee-based managers. Check the fine print : Form ADV (Application for Investment Advisor Registration), required for all investment advisors who manage more than $25 million in customer assets, a registration of the SEC. Needless to say, communication with the advisor, reading and understanding all documents, openness and trust are key.

The book ends with a discussion about insurance--life, term, medical, disability, and long-term care--estate planning, and charitable giving.
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Schwab, C.2001. You're Fifty--Now what? Investing for the second half of your life. New York: Crown Business.

Blum, Brian A.Contracts : Examples and Explanations, 4th ed. (2007). New York: Wolters Klywer.

This post limits its focus to Chapter 13. The Judicial Regulation of Improper Bargaining and of Violations of Law and Public Policy. The Introduction of the chapter lists the types of improper bargaining: "misrepresentation, duress, undue influence, and unconscionability. The text described the underlying theme of all these types as the ability to enter into a contractual agreement and the right of a party to uphold to contracts that he or she has assented to voluntarily. Courts determine "if a party's apparent agreement is based on an acceptable degree of volition. They are regulatory in that they allow the court to regulate improper bargaining behavior. They are sometimes call policing doctrines" (p. 385). The second class, violations of law and public policy, differs from the one above by establishing whether "the contract violates a statute, a rule of common law, or an important public policy" (p. 385). Under these circumstances, the court will not enforce the contract.

In the discussion of remedy, the author explained the outcomes of improper bargaining. The first consists of making a contract voidable. He defined a voidable contract as "a valid contract that remains fully effective unless the aggrieved party elects to exercise the right to terminate it" (pp. 387-388). Avoidance indicates that the party subjected to improper bargaining elects to terminate the contract. In this situation, both parties share any restitution.
The aggrieved party has other options, to maintain the contract but have the terms and conditions changed to eliminate the unfairness, to keep the contract but claim damages, for the tort or injury, battery, etc.

Misrepresentation, the first type of improper bargaining, the author characterized as " an assertion not in accord with the acts. It is a factually incorrect representation made by one of the parties at the time of contracting" (p. 390). The subclasses, fraudulent, negligent, and innocent, demonstrate the degrees of severity of misrepresentation. Cases based on misrepresentation rest of "the decision on whether or not to grant relief involves a closer balancing of the relative culpability of the parties, and a stronger focus on the objective importance (materiality) of the misrepresentation and the victim's duty to verify the facts" (p. 391).

The section of the chapter, "the application of the parol evidence rule to misrepresentations made outside the written contract" (p. 391) applies to misrepresentation for numerous reasons--"to prove that a fact represented in the writing is wrong . . . [or] was allegedly made orally before or at the time of execution of the written contract, or was made in a prior written document" (p. 391). Again, consideration would be given to the severity of the misrepresentation--fraudulent, negligent, or innocent.

Fraudulent misrepresentations, either "fraud of inducement" (p. 392) the deception that acts as an enticement to enter the contract or "fraud in the factum" deception in the "nature or effect of a document to be signed" (p. 392) constitute two types of fraud. Concentrating on the first, more prevalent types, Blum explains the "false representation of fact with knowledge of its falsity and with intent to induce the other party to enter the contract" (p. 392). He distinguished fact, opinion, and prediction or a "promise of future performance" (p. 393). The author posits a general rule for the legal ramifications of these: "Only a misrepresentation of fact constitutes fraud. An opinion or a prediction should be understood as nothing m0re than an expression of opinion" (p. 393). Other types of fraud include affirmative false statement ( a lie), concealment, nondisclosure, "knowledge of falsity and intent to induce the contract" (p. 398). On the topic of materiality and its impact on fraud, the author implied that it factors into some cases and not in others.

Regarding justifiable inducement, Blum asserts from his review of cases that "One can also detect that courts apply a different degree of objective assessment depending on whether the misrepresentation was active ( a statement or concealment) or by nondisclosure. Courts are more likely to impose a tougher standard of reasonable inquiry on the victim where the fraud lies in failure to disclose facts" ((p. 400).

Although the author details quite extensively duress, contracts negotiated based on force or threats of bodily harm, this post will not address these circumstances. Another topic, unconscionability, does pertain to a small business, such as mine. As Blum acknowledged, "unconscionability is most commonly associated with consumer transactions in which a relatively large and powerful corporation supplies a standard form contract that is signed by a consumer with little or no opportunity to negotiate its terms" (p. 412). These contracts have the characteristics of being "harsh, unfair, or unduly favorable to one of the parties" ((p. 416). In adjudicating cases involving unconscionability, the courts can decide on a number of remedies--refusing to enforce the contract, nullifying, or revising the objectionable portion of the contract.
The vagueness of the unconscionability doctrine makes it difficult to argue and to predict the outcome from the courts.

What is Six Sigma: Pete Pande and Larry Holpp

Financial analysts have examined companies by comparing their pre-ISO or other process improvements with post-quality performance. In order to perform a similar evaluation of firms that have engaged in Six Sigma transformations, I needed to understand the basic elements of Six Sigma.

This very short book, under 100 pages, explains the fundamental concepts of Six Sigma. After introducing the term Six Sigma to the uninformed reader, it relates the process to various organizational structures and industries and outlines the types of implementations. Characterizing implementations as 'on-ramps', the author distinguished the three types, (1) the business transformation--the complete over-haul, (2) strategic improvement--limited overhaul of a single process or business unit, and (3) problem solving, targeted improvement by investigating significant issues and discovering the problems' root causes. Individuals that engage in the Six Sigma process include Black Belts--the full-time person dedicated to the process, the Master Black Belt-- the process coach, Green Belts--a person trained in Six Sigma skill but one who has functional responsibilities, the Champion and/or Sponsor--the initiator and the executive support, and the Implementation Leader-- the orchestrator of the Six Sigma effort.

Six Sigma contains a number of phases, referred to as DMAIC--define, measure, analyze, improve, and control. The authors elaborated on these steps:

Define the problem
Measuring the problem: Quantifying inputs, processes, and outputs
Focusing on the customer: Documenting the VOC (voice of the customer)
Analyzing root cause
Calculating Sigma
Managing risks
Improve:Measuring results
Control : Sustaining change

To calculate Sigma requires three pieces of information, the unit of work or item delivered to the customer, the "'requirement' that makes the unit good or bad for the customer" and the "number of requirements, or defects opportunities, for each unit" (p. 37). The formula that results from this information follows:

(incidents of defect 1) + (incidents of defect 2) + (incidents of defect 3)
__________________________________________________

500 X 3 (the number of incident types)

The decimal result is call defects per opportunity (DPO).

Six Sigma employs a number of tools to facilitate the process--brainstorming, affinity diagramming, multivoting, structure tree (tree diagram), high-level process map or the SIPOC diagram (Supplier, Input, Process, Output, Customer) , Flowchart (process map), and cause-and-effect (fishbone) diagrams. Teams gather the requisite data through sampling with clear operational definitions, Voice of the Customer methods (market research, requirement analysis concepts, data warehousing, and data mining. To communicate the findings, six sigma participants display data in checksheets and spreadsheets. They verify the data obtained through Measurement Systems Analysis (MSA), which affirms the repeatability and reproducibility (Gage R & R) of the analyzed results. Types of charts and graphs range from Pareto charts, histogram, trend charts, and scatter plot or correlation diagrams. Statistical analysis of the data can test significance, correlation and regression, and controlled experiments (designed of experiments)--"conducting controlled assessments of how a process or product performs, usually testing two or more characteristics under different conditions" (p. 65).

These skills contribute to a successful six sigma process, project management, problem analysis and failure mode and effects analysis, stakeholder analysis, force field diagrams, and process documentation. Six Sigma fits within the Balanced Scorecard framework by supplying the means to ascertain the measures--the performance, trends, and issues, on the dashboard.

The Predictioneer's Game: Using the logic of brazen self-interest to see and shape the future. Bruce Bueno de Mesquita

Not within the traditional category of a financial book, Bueno de Mesquita's the Predictioneer's Game claimed, "that it is possible for us to anticipate actions, to predict the future, and, by looking for ways to change incentives, to engineer the future across a stunning range of considerations that involve human decision making" (p. xiv). Such knowledge should improve financial decision making. Based on game theory and using models, the author processes information on his subjects' self interest and determines what the subjects will do and why. Bueno de Mesquita acknowledged the limitations of this method. Some problems find better solutions with applied game theory or statistical forecasting.

The audit project that the author engaged in for Arthur Andersen in 2000 to assess the risk that some of their clients would engage in fraud pricked my interest. According to Bueno de Mesquita, his models with publicly available data on companies could "predict the likelihood of fraud two years in advance of its commission" (p. 116). Enron landed in the high risk category. The following flags signal fraud--decreases in dividends, management compensation packages below expectations, the size of institutional investor ownership, the number of directors, among others.


The author presented the steps for predictions with credibility. First, structure the question addressed into the choices or options available to the subject. Second, acknowledge the environmental context, the " 'what if' questions . . . background conditions . . . scenarios" (p. 49) that would influence the subject. Finally, gather the facts. The author lists four:

1. Identify every individual or group with a meaningful interest in trying to influence the outcome. Don't just pay attention to the final decision makers.
2. Estimate as accurately as possible with available information what policy each of the players identified in point 1 is advocating when they talk in private to each other--that is, what do they say they want.
3. Approximate how big an issue this is for each of the players--that is, how salient is it to them. Are they so concerned that they would drop whatever they're doing to address this problem when it comes up, or are they likely to want to postpone discussions while they deal with more pressing matters?
4. Relative to all of the other players, how influential can each player be in persuading others to change their position on the issue.

In a simple example of the process, the author suggested interviewing subjects via a survey on a simple question, such as which movie would be their preference movie A or movie B and rate the "salience" (p. 53) of the question on a scale to the subjects. Their responses demonstrate their position, the strength of their conviction to the position, and the power they bear. By making a decision, the subject exhibits the basic premise of game theory, that self interest motivates individuals. Another primary motivator, according to the author, is the desire for glory, "the ego satisfaction that comes from the recognition by others that they played an important part in putting a deal together" (p. 55). Another formula for predicting entails employing the weighted mean: "multiply the influence of each player (calling influence I) by his or her salience (S) and multiply that result by the numerical value of the position each player advocates (p), then add those totals up for all of the players and divide that total by the sum of the influence time salience for each of the players (sum of I x S x P)/(sum of I x S)" (p. 59). These manual methods, with a 75 percent accuracy rate do not replace the more exact computer models. Bruce Bueno de Mesquite applied his methods to various situations, described in the remainder of the book.

Bogle, J. C. The little book of common sense investing. Hoboken, NJ: John Wiley & Sons, inc.

CEO and founder of the Vanguard Mutual Fund Group, John C. Bogle wrote on the first page of chapter 1 his essential thesis: "Successful investing is all about common sense . . . the best way to implement this strategy is simple . . . buying a fund that holds this market portfolio, and holding it forever. Such a fund is called an index fund" (p. xi-xii). By purchasing an index fund, which contains a basket of stocks, the investor distributes the risk of depending on one company's performance to multiple companies. Furthermore, by maintaining the account for the long term, the investor reaps the rewards of compounding returns. He attested that the holders of individual stocks "returns have probably lagged the market by about 2.5 percentage points per year" (p. xiv); owners of mutual funds have fared worse. Bogle argued that this plan conforms to "Occan's Razor: When there are multiple solutions to a problem, choose the simplest one" (p. 25).

If those of us near retirement age had followed Bogle's advice, we would have amassed, according to him, enough income to adhere to the prescription of holding bond positions equal to your age, 20 percent at 20 and 70 percent at seventy. Itching to own individual stocks? Bogle recommended that to satisfy the urge, allot only 5 percent of a portfolio to personal choices.