On being a contrarian

August 20, 2018

It's well-known wisdom in the investing community that excess return ("beating the market") comes from doing things others can't or won't. Often, this advice takes the form of "buying when everyone is selling" or something similar.

So, sure, you have to do what others won't. But you also have to be right. People sometimes forget that second part.

Coming out of college, I ended up in Seattle because it seemed the contrarian thing to do vs. the consensus choice of moving to San Francisco. I still think that choice wasn't entirely incorrect. California is an absurd place to live with outrageous taxes, overpriced housing, and dysfunctional government.

But it's also where a lot of smart, driven people live, which makes its own gravity.

So any time you think you're outsmarting the herd, ask yourself, what do I know that others don't?

A lot of what I've learned in the past few years is what a gigantic dunce I was about things. It might be that I'm benchmarking myself against much more accomplished and intelligent people. Or maybe I'm just growing up.

Either way, be careful when you decide to go your own way, that your choice is founded on genuine insight, and not pig-headed stubbornness pursued for the sake of "not following the crowd".

Sometimes, the crowd is right.

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Laddering

August 19, 2018

Caroline and I went to see her grandmother today. She retired a few years ago and wanted some help optimizing her financial portfolio.

We got her set up with a bond ladder. One of the key questions when buying bonds is which term you want: 1 year, 2 years, etc. Longer terms mean higher interest rates (good) but more interest rate risk (bad) and your principal is locked up longer (bad). The solution is a "ladder": you define a length, say three years, and then buy equal amounts of bonds maturing in one, two and three years, reinvesting the one-year into a new three-year bond in a year. When done properly, this gives you a continuous flow of income at the long-term (three-year) rate, even though you get income every year, and your interest rate exposure is decently hedged; all in all, a win.

It's surprising how much laddering comes up in non-financial contexts. I used a similar "laddering" strategy when purchasing reserved compute capacity (RIs) for ops at Crittercism: we built a ladder out of expiring reserved instance contracts, which provide reserved compute capacity at discounted rates over a fixed term. The problem is similar to bonds: you want the cheaper prices, but not the lock-in inherent in a multi-year contract. The solution is to buy a set of multi-year RIs each year, so that they're constantly expiring, giving you the option to renew (at lower rates, if your compute needs are the same) or adjust things as needed.

I love cases like this where you can use ideas in one domain (cloud computing) that come from anohter (finance). I suspect there are many other cases where a laddering-type approach can reduce risk with a little bit of planning; feel free to write a comment if you come across another.

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Total cost of ownership

August 18, 2018

The Economist ran a great article on China's "Belt and Road Initiative" two weeks ago. At $1.5 trillion dollars, the project plans to invest almost 10% of US GDP in foreign infrastructure over the next few years. That's a lot of money!

With all the work I've done for my HOA (City Center Plaza), I can't help but wonder, what will the maintenance cost be on all of this? It's one thing to build a bridge; quite another to ensure it's maintained and kept up over its usable life.

I've come to believe there's some sort of inevitable cycle, where municipalities lurch from new stuff to ruin over a span of about 30-40 years. Everything works well when it's first built, especially given the jobs, politics, and aesthetics of "new". But the real test is whether a new bridge, road, or park bench will make it over 30 years. That's long enough that the newness wears off, and the quality of the planning, and whether it's long-term sustainable, really becomes visible.

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Be easy

August 17, 2018

Be easy.

This may as well be the golden rule of business.

Easy means:

  • You show up on time
  • You come prepared
  • You don't waste anyone's time
  • You do things the way the other guy wants to do them. Even if they want paper checks in the mail, forms in triplicate, or documents sent by FAX.
  • Your checks clear
  • You're reliable

When you're easy, people bring things to you first. That's worth something.

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The future of healthcare

August 16, 2018

After I left Microsoft in 2010, I read a bunch about healthcare (Innovator's Prescription, Health Care Turning Point, etc.). It seemed like big change was imminent and that healthcare would be a good place to work. I came back to this topic recently—eight years later—and it feels like things haven't moved an inch.

One thing that did change: about a year ago, I noticed all these new health tech companies had popped up: Clover Health, Jif, Amino, now Oscar. It was pretty clear the VC "money spigot" had turned on a year or two earlier, and research confirmed my hunch: Benchmark (a noted VC firm) publicly declared they wanted to invest in health in 2015, right on schedule for me to notice these companies starting to get publicity around 2017. Digging deeper, I found an interview between Benchmark's Bill Gurley and Ezra Klein. The interview is a great high-level overview of the issues facing healthcare in the US. Klein and Gurley see the world pretty differently, but agree we aren't on a good path.

A few things I've come to believe:

  • Whatever the solution, we can't afford the system we have today. Medical bankruptcy is a big problem, and employers are trying like hell to wiggle out of paying insurance premiums, which are eating wage growth. Per Catastrophic Care, Americans spend almost 20% of their lifetime income on healthcare, but don't realize it because it's paid by employers and through taxes, not by people themselves.
  • Healthcare is a huge laggard in IT investment because the forces that push other industries toward that investment (demand for convenience, supply chain management, CRM) are absent.
  • The economic model of many healthcare offices is fee-for-service. Like other professional services (law, architecture), doctors are pushed to spend as much time possible on things that are "billable"—procedures—and less on charting and followup, which aren't directly reimburseable.
  • If you believe change is coming (I do), I think it will come in one of two flavors, and which depends on politics. The hard-left Sanders/Ocasio-Cortez option would be pure single-payer, which the AMA and other medical unions will fight, because they'd earn a lot less income. I would prefer a market-oriented system with greater emphasis on price transparency and efficiency; we might get this if the gig economy continues to take off, pushing more people to buy their own insurance. Either is better than what we have today.

A parting note: this is the real damage of the Trump presidency; arguing over strippers and hush money instead of reforming Medicare. What a waste.

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