Why?

I want to share this poem with you. I wrote it almost two years ago in a burst of anger, funny how some things never change.

FTSE up 7% YTD!

A friend commented to me that since January the UK market is up 7.4% (for the S&P UK and 7.6% for the FTSE100), while I said in my earlier port that it was essentially flat. I would like to apologize for that, I should’ve said it was essentially flat in dollar terms because while it is true that the S&P UK is up more than 7% year-to-date, the British Pound (GBP) is down about 7% during the same period making the total return for a US Dollar investor (which includes Saudis) essentially zero. Just wanted to clear that up.

 

The Growth Trap

From 1990 to 2004 China’s economy grew at a rate of more than 9% annually, while Brazil’s grew at about 1.3%. If you knew that in advance, in which country would you invest. China? Wrong! China’s stock market delivered an annual rate of return of almost -10%, yes, minus¸ while Brazil’s delivered more than 14% annually. How can that happen when China’s economy more than doubled during that period while Brazil's barely grew? Questions like these are addressed in Jeremy Siegel’s new book The Future for Investors : Why the Tried and the True Triumph Over the Bold and the New, which addresses what he calls the “Growth Trap”, a phenomenon that value investors have known and talked about for decades. The Growth Trap is the tendency of investors to overpay for growth stocks/countries to the point where they price in so much growth potential, that the companies can never over-deliver, and those stocks end up underperforming the market. The same applies to IPOs, which underperform the general market by a huge margin. On the other hand, “boring” firms that grow at a slower pace that the “hot” sectors/stocks go on sale many times and this causes their total returns to outstrip both the broader market and growth stocks. Siegel summarises his theory in a simple principle which he calls “The Basic Principle of Investor Returns” that states that returns on investment capital is a function of actual growth relative to expected growth, not of growth alone. The following BusinessWeek article talks about the subject and the book.

On Current Market Conditions

Many have talked to me over the past two years about investing in the Saudi Stock Market. Our company, Yareem, Ltd., has a total of $0 invested in Saudi stocks as of this second, and this has been the case since the inception of Yareem’s predecessor, TwentyEight, Inc., in May 2003. The question I am starting to hear now (either explicitly or implicitly) is whether or not I regret not investing in Saudi two years ago, given the fact that the market has performed so well. Of course the question becomes even more important as the year approaches its end and I have to deliver my annual report to our shareholders. Being a value investor my answer remains no, even if the market doubles from its current levels and even if the US and UK markets (where we’re currently investing) remain flat, as has been the case in 2005. The reason I wouldn’t invest appears so simple for me (and probably so absurd for others)--I don’t like current valuations--although I may have had trouble explaining it in words. I usually look at the history of financial markets around the world for lessons that I can apply to the future. In my studies I came across the following quote and it probably captures most of what I want to say:

I am out of step with present conditions. When the game is no longer played your way, it is only human to say the new approach is all wrong, bound to lead to trouble, and so on. On one point, however, I am clear. I will not abandon a previous approach whose logic I understand (although I find it difficult to apply) even though it may mean foregoing large, and apparently easy, profits to embrace an approach which I don't fully understand, have not practiced successfully, and which possibly could lead to substantial permanent loss of capital.

Warren Buffett, in a letter to his partners in the stock market frenzy of 1969.

Whenever I mention that point, I get a typical response, so here’s another quote, also by Warren Buffett, that addresses that typical response:

The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities - that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future - will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands.

Berkshire Hathaway 2000 Annual Report, Feb 28, 2001

Freakonomics

I finished Freakonomics last night, a very interesting book by Stephen Levitt and Stephen Dubner. The book has no unified theme but rather takes a look at a number of totally unrelated subjects--at least it seems that way until the book examines them. It is a really fun book and it will change your thinking, maybe not dramatically, but if you’re not yet suspicious of “conventional wisdom”, then this book will likely make you so.

Failure

Go to Google and type “failure” then click on “I’m Feeling Lucky”.

The World Is Flat - Cont'd

I finished reading The World Is Flat yesterday. The second half of the book talks about dealing with the new “flattened” world. Competition will be global, as I’ve mentioned in my earlier post and so advancement means being better than that other guy or gal in India or Poland. To compete, a country needs to do many things, but better laws and regulations, meaning less laws and regulations, a.k.a. economic liberalization, is a good starting point. Better education and training is also crucial to both develop the skills of the labor force and ease the inevitable structural shifts in employment between industries through re-training. The book offers a compelling case for the flattening of the world and the continuance of that trend. However, it also talks about the forces that might un-flatten the world, protectionism and paranoia. The first could arise as a political response to job losses than developed countries might face in certain industries as the global playing field is leveled. The second would arise if a second terrorist event on the magnitude of 9/11 or more were to happen in a major US or European country. Both forces would mean more walls and barriers, and thus a less-flat world. I found the book extremely interesting and even fascinating at time, such as when Friedman talks about where every component of his Dell laptop came from. Although I’m sure many people would disagree with some of his points (or many of them for that matter), it still offers a great update on the current state of Globalization and the forces behind it. It also makes a good case for why the trend would benefit the majority of people and offer suggestions to help those who would be left behind. Friedman started and ended the book with a very interesting coincidental fact: the Berlin wall, arguably the beginning of the flattening of the world and Globalization, fell on 11/9/1989 while the World Trade Center fell on 9/11/2001. Throughout the book he refers to the forces behind 11/9 (democracy, liberty, economic opportunity) versus the forces behind 9/11 (a sense of humiliation which cases anger and frustration and which Friedman describes as “the most underappreciated force in international relations) as the two forces in existence that are trying to move the world in one two opposing directions, we must choose to believe in 11/9 and not in 9/11 for the world and us to prosper.

Albert Einstein

Out of clutter, find Simplicity. From discord, find Harmony. In the middle of difficulty lies Opportunity.

-- Albert Einstein

 

God Is in the Rules

This is unbelievable, I’ve read this in Arabic but the fact that it got published in the New York Times is really bad!

SAUDI ARABIA: CARTOONS ONLY IN KINGDOM'S FIRST CINEMA

http://www.adnki.com/index_2Level.php?cat=CultureAndMedia&loid=8.0.219320520&par=

Greenspan: The worst Fed chief ever

My opinion of Alan Greenspan has changed over the past few years, probably as my understanding of what he does improved. To me, the worst thing he did was compromising the neutrality and independence of the Fed when he recommended the huge 2001 & 2003 tax cuts, mostly to satisfy the Bush administration (he’s Republican). And, I do agree with the writer that he is overrated as a Fed Chairman. However, I am not as negative about him as the writer of this column is. Nonetheless, his points are worth considering and I could very possibly be mistaken about the possible impact of a housing slowdown--I don’t expect a huge meltdown as the writer does.

Krispy Kreme tumbles; unit files for bankruptcy protection

NEW YORK (MarketWatch) -- Shares of Krispy Kreme Doughnuts (KKD) dropped nearly 30% to $3.42 in pre-market action on Instinet after the Winston-Salem, N.C., doughnut seller said its Freedom Rings LLC unit has filed for Chapter 11 bankruptcy protection. The company said Freedom Rings is a majority-owned unit and franchisee partner operating in the Philadelphia region. Krispy Kreme has agreed to provide funding for Freedom Rings during the restructuring process.

 

Oh, how the times have changed!

Transcript: Saudi King Abdullah Talks to Barbara Walters

http://abcnews.go.com/2020/International/story?id=1214706&page=1

Voltaire

I may not like what you have to say, but I'll defend to the death your right to say it.

---Voltaire

The Cold Within

Earlier today, I was out with a good friend of mine in my car and prayer time came. I stopped by a mosque and we went inside and waited for prayer to start. When we entered the mosque I walked to the front row while he sat at the back, close to the door and almost hidden behind a pillar. He prayed alone and left the mosque and stood as far from the entrance, eventually hiding behind the mosque’s side wall. Why did he do that? Because he is a Shiite and had suffered several incidents where he was harassed inside a Sunni mosque, such as the time a guy came and removed the tissue paper he had placed on the carpet in front of him while he was praying. So this friend of mine, fearing harassment, had to hide to practice his religion. We talk of tolerance nowadays and how we must tolerate “the other”, such as people from other religions, but how can we even start to seriously consider ourselves tolerant if we cannot tolerate our brothers who pray to the same God and follow the same prophet we do. We will never get anywhere until we become citizens of the world and stop acting like we’re living alone on this planet. But how can we become citizens of the world and interact with others and tolerate their faiths if we cannot tolerate ourselves? I share with you this beautiful poem:

 

The Cold Within

By James Patrick Kinney

Six humans trapped by happenstance
in black and bitter cold
Each possessed a stick of wood,
Or so the story's told.

Their dying fire in need of logs,
the first woman held hers back
For on the faces around the fire
She noticed one was black.

The next man looking 'cross the way
Saw one not of his church
And couldn't bring himself to give
The fire his stick of birch.

The third one sat in tattered clothes
He gave his coat a hitch,
Why should his log be put to use
To warm the idle rich?

The rich man just sat back and thought
Of the wealth he had in store,
And how to keep what he had earned
From the lazy, shiftless poor.

The black man's face bespoke revenge
As the fire passed from his sight,
For all he saw in his stick of wood
Was a chance to spite the white.

And the last man of this forlorn group
Did naught except for gain,
Giving only to those who gave
Was how he played the game.

The logs held tight in death's stilled hands
Was proof of human sin,
They didn't die from the cold without,
They died from the cold within.

 

The World Is Flat

I’m half way through Thomas Friedman’s The World Is Flat: A Brief History of the Twenty-first Century. I will not go into a lot of detail but let me tell you what is the main lesson that you’d learn from reading this book, yes you guessed it, the world isn’t round, it’s flat! Friedman argues that the barriers to global competition are disappearing quickly and that whether you’re an American (or a Saudi), you will soon have to compete with everyone else in the world. It used to be the case in the past century that global competition was in the product market, i.e. my products against yours and we saw how Japanese cars and electronics manufacturers beat their American competitors and how the Koreans (and recently the Chinese) are threatening this Japanese supremacy. In the future, the competition will be on jobs.

 

It used to be the case that Indian programmers had to move to the US and work at American companies, that was how they threatened American programmers but today, they can stay in Bangalore and compete from there. The over-investment made in the 1990s in fiber-optic cables connecting the whole world means that the cost of moving digital information around is almost zero, and the development of collaboration technologies means that more and more tasks can be done remotely, from anywhere in the world. And I’m not talking about mundane jobs like call centers, that is “so 1990s”. Today, if an American goes to his accountant to get his tax returns done, there is a high probability that part of that work will be done by an Indian accountant in Bangalore that specializes in say New York or Massachusetts tax law. The accountant in New York or Boston would take the information, scan it into his computer system and within seconds it will be available in Indian where most of the work will be done and sent back to America. Today, the Indians and increasingly the Chinese and East Europeans are doing Design and Engineering tasks. Qualified doctors in India examine MRIs done in American hospitals during the night and send their diagnosis back to the American hospitals without the patient knowing that the specialist who examined his MRI is on the other side of the globe. If you’re an executive in San Francisco and you have a presentation due tomorrow, you can send an email to your remote Executive Research Analyst/Assistant in India in companies like Brickwork (at a cost of $1,500-2,000 a month) and by the time you arrive tomorrow the presentation will be in your email inbox! Not only that, they’ll do proposals and more complex research and analysis for you.

 

Competition is becoming global, and the Indian and Chinese are not only cheaper, they are highly-motivated, they have a great work ethic, and they are becoming as good as or better than Europeans and Americans. It is no longer enough to be better than everyone in your school or city; you have to compete with the world. Notice that I’m talking about Americans and European who are highly-educated and very skilled, so where do we fall as Saudis? Are we ready to compete with the world? The bureaucrats at our Ministry of Labor (a.k.a ignorant idiots) don’t seem to see this coming. They think that if they can only make stronger laws and apply them stringently and prevent Indian from coming here to take the jobs that Saudis could fill, they’ll solve the Saudis employment problem. Guess what? Today, I can form a company here in Saudi in whatever field I desire and have very few employees here in Saudi. With the exception of jobs that require an interaction with clients or customers, I can outsource to India or China almost any job. I can outsource my back office tasks (such as accounting, accounts receivables and billing). I can outsource design and manufacturing. I can even outsourcing jobs that require monitoring and maintaining systems. Why would I do that? How would I do that? I would do that because I, too, have to compete in the global market place of products and services and I have to maintain my cost, efficiency and productivity and a globally-competitive level. And I would do that by simply digitizing all of those tasks and linking them seamlessly with any of the outsourcing companies in India.

 

We must understand that we are not alone in the world and we cannot protect ourselves with walls and barriers. And, quoting Friedman, the world is flat and getting flatter by the day, are we ready for this new reality?

NEWSREADER DEFIES TRAVEL BAN

Certainly a brave move, but ya wailaha when (if?) she comes back! http://www.adnki.com/index_2Level.php?cat=CultureAndMedia&loid=8.0.215213254&par=0

Collapse

I finished reading Jared Diamond’s new book Collapse a few days ago and I can tell you it wasn’t an easy read! His style isn’t bad but the amount of detail he provides can (many times) be overwhelming. The book looks at the historical causes of the collapse of whole societies, from Easter Island and the early Norwegian settlements in Greenland to the Maya and Rwanda. The causes are many of course, but many take form in environmental collapse that eventually feeds into famine, wars, etc. Diamond also looks at contemporary societies that could face similar fates if they don’t address their environmental problems. To me, the most striking lesson and the one most relevant to me (especially as a Saudi) is about society’s values. Diamond gives many examples about how a society’s strongly-held values and beliefs helped destroy it. It appears that in many instances, certain beliefs and values help maintain and rescue a society during rough times. As a result, the society holds on to those values and beliefs and passes them down the generations thinking that they would continue to help the society. Eventually, society forgets why it holds its values and beliefs so strongly and, when times change and conditions change, they continue to cling on to those value and never adapt to the changing times and conditions. Eventually, the same values and beliefs that helped rescue and maintain a society becomes the reason why it collapses. The lesson we must learn, therefore, is to never forget why we hold our values and beliefs, to continue to examine them and see whether they are helping to maintain or ruin society and change those values and beliefs when the times and conditions change. We must remember that values and beliefs are there to help us; they have no intrinsic value in and of themselves. That is the lesson of past societies.

Every morning in Africa

Here’s a very inspiring quote. I first came across it in Thomas Friedman’s The World Is Flat, a must read for those interested in Globalization and International Economics.

 

Every morning in Africa a gazelle wakes up. It knows it must run faster than the lion or it will not survive. Every morning a lion wakes up and it knows it must run faster than the slowest gazelle or it will starve. It doesn't matter if you are the lion or the gazelle, when the sun comes up, you better be running.

Warning: For Geeks Only

I think I’ve still got some engineering residues because I really enjoyed surfing this website. My favorite gizmo is the Lazer Trip Wire.

Iraqi Battalions

This is hilarious! Jon Stewart is simply the best!

 

How many Iraqi battalions are fully trained and equipped and capable of operating independently of U.S. forces?

 

http://www.informationclearinghouse.info/article10521.htm 

Most Expensive U.S. Restaurants 2005

http://www.forbes.com/2005/10/05/expensive-restaurants-U.S.-cx_sb_1006feat.html

GETTING IN: The social logic of Ivy League admissions.

A very interesting look at admissions at Ivy League schools by the brilliant Malcolm Gladwell, author of The Tipping Point and Blink!

Warren Buffett, Bill Gates talk bridge, business and family to students

Warren Buffett and Bill Gates hosted a forum at the University of Nebraska-Lincoln. In their usual style (at least Buffett’s) advice was mixed with humor and a video depicting Buffett suing Gates on Judge Judy was shown at the event, here’s how the Seattle Post-Intelligencer article described it:

 

A video established the afternoon's lighthearted tone by depicting Buffett suing Gates in "Judge Judy's" small claims court over a $2 bet on an online bridge game.

In the video, Judge Judy tired of Gates' defense and told him, "Mr. Gates, you've got to visit shutup.com."

Buffett bragged that, "I was cleaning his clock as usual" when asked how the bridge game was going and accused Gates of unplugging his computer to avoid losing.

So Judy ruled for Buffett: "Mr. Gates, pay the man two bucks," she said. "Maybe he'll invest it and make something of himself."

Read the full story

IRAQ APOLOGISES FOR BEDOUIN INSULT

I don’t know if it’s just me, but I find the whole episode hilarious, in a sad way! Check this out.

Evolution as Zero-Sum Game

I personally believe it is much more difficult (and thus impressive and great) to design a system that is autonomous than it is to have no system or a simple system that requires constant control. This Op-Ed piece comments on the lawsuit that was brought up in Pennsylvania and that seeks to force schools to add the “theory” of Intelligent Deign to their curriculums.

Buying of News by Bush's Aides Is Ruled Illegal

Every time I find out about something like this I reach the conclusion that the Bush administration has reached an all-time low, but somehow, it never fails to surprise me! Just take a look at this NY Times article about findings that the administration “bought news”!

That Famous Equation and You

Here’s a really nice Op-Ed piece by Brian Greene in the New York Times. It talks about E=mc², Einstein’s famous equation which turns 100 this month. I strongly recommend his book The Fabric of the Cosmos and for those interested in E=mc² specifically, I recommend E=mc² by David Bodanis.

The Holocaust, Rwanda, now Darfur.

While Arab and Muslim countries are acting as if nothing is going on, the American Jewish World Service is calling upon everyone to write to President Bush to stop the genocide in Darfur, Sudan. Their slogan: “The Holocaust, Rwanda, now Darfur.”

Bacteria at Your Fingertips

Out of the 12 surfaces in the office that were studied by professor Gerba of the University of Arizona, the toilet seat was the cleanest!

 

Check out the complete article (available for non-subscribers for 7 days): WSJ.com - Bacteria at Your Fingertips*