Author: alearningaday

you have to be willing to be disliked.

One doesn’t come without the other.

This week’s book learning is part 11 of a 12 part series on The Ascent of Money by Niall Ferguson. (Parts 1, 2, 3, 4, 5, 6, 7, 8, 9, 10)

Property ownership is a recent phenomenon. Until a 100 years ago, only the aristrocracy owned land. The consistent nature of war in Europe meant the price of food (and thus, the price of land) was consistently high. However, as peace time came in, land’s value began going down while the aristocracy lived way beyond their means leading to a gradual loss of property over time.

The concept of a “property owning democracy” was created in America. Moves by Franklin D Roosevelt lead to governments protecting mortgages leading to the set up of FANNY MAE. Initially, there was segregation in the policy as African Americans paid higher interest. By the 1970s, the set up of FREDDIE MAC made discrimination a crime. Margaret Thatcher followed suit in the UK and the rest of the world followed.

But, the US ran into all sorts of trouble in the 1980s thanks to de-regulating SNLs or “Savings and Loans” corporations that enabled people to buy property. Since they effectively insured SNLs, SNL scams were all over the place and cost the US more than 150 billion dollars. Around the same time, Salomon brothers’ bond traders reinvented mortgages by bundling them all together and converting them into “bonds” by sub-dividing them into strips that mature at different times – giving birth to a “collateralized debt obligation” or CDO.

Sketch by EB

These CDOs marked a shift from a world where there was a link between interest givers and payers. Previously, home owners paid interest to their lenders. Now, the lenders bought securities from the big banks meaning home owners paid their interest to someone who didn’t even know they existed.

Additionally, since these mortgage based securities were actually guaranteed by the US government, their credit ratio was equivalent to US treasury bonds! Thus, more and more “sub-prime mortgages” (risky loans given to folks with dodgy credit history) were given away leading to more people “buying” houses they couldn’t afford. The disconnect between lenders and interest givers meant banks took larger and larger risks… until that fateful day in 2008 when Lehman Brothers declared bankruptcy triggering the global meltdown.

I think Thanksgiving has got to be one of the coolest traditions ever. I like the simplicity of the idea – give thanks. Despite not having anything to do with the holiday culturally (I have never lived in the US or Canada), I love the idea and have been celebrating it over the last few years by giving thanks via written letters.

So, my hope for this year’s thanksgiving is that you will spread the thank you joy as well. Do think of 5-10 people who’ve really had an impact on you this year or over the course of your life and write them a thank you note. Email can work but writing it on a white sheet of paper works even better.

Writing can be a painful process (literally.. we aren’t used to writing any more) but it’s very rewarding. Snail mail/physical mail has a special charm. Think about the look of surprise on the person’s face when they see the letter to help motivate yourself. Do give it a shot and let me know how it goes!

Happy thanksgiving preparation in advance!

I’ve learnt a few things about myself over the years that have greatly helped me learn better.

1. I need a coach. I lean towards the attention deficit side of the spectrum and need coaches to help me focus. I do not have the capability to be self taught. If I taught myself a skill, I’d miss the important aspects. I spent a few months trying to teach myself the guitar in university. But, I invested in a teacher last year and it made all the difference in the world. I’ve since made “finding coaches” a habit.

2. You don’t need a high IQ to get good in most things. Learning most things is hardly dependent on IQ. Sure, a high IQ helps but getting good requires other sorts of traits – tenacity, grit, willpower, openness and a willingness to ask for help. And you know what’s amazing about these skills right? They can all be developed.

3. I need to teach and share. I learn very well when I need to teach and share. I’ve attempted to create systems to be able to do that via this blog, the weekend book learning initiative, and The Bookbytes project.

There are a few other learnings but these are probably the 3 most important ones. Admitting to myself that I am not capable of being self taught when I have a close friend who seems to do it with ease wasn’t easy. Neither was it easy to admit that I was failing on my expectations on willpower. But it helped. Learning isn’t easy. We pay lip service to the idea too often. That doesn’t mean it isn’t doable. It can done and made into a habit.

It just begins with self awareness.

As I get ready to push the publish button on a post every morning, I typically ask myself two questions –

Am I sharing an interesting idea?
Am I articulating it nicely?

I don’t think I do a great job articulating my ideas in these posts. I am not all that good a writer – my grammar and choice of words is average and my sentence construction is weak at best. That means I need to spend a lot more time editing and rewriting posts than better writers and there’s never enough time to do that in the morning. I’m hoping I’ll get better at this as the years pass.

But, I do feel I owe it to everyone to write about something insightful or interesting. And, when I go through a couple of days when I wonder if I have been sharing something of value, the subsequent days become tough till I break out of that cycle.

I have to go back to the “why” behind this blog. Broadly, it involves 3 things –

– Share my failures so I remember they are learnings and don’t take them too seriously
– Help you gain some occasional perspective in your daily life – we can learn from someone else’s experiences
– Live the “a learning a day” philosophy and hopefully spread it as I believe the outcome of doing so is a happy one..

Writing when I feel I’m not on a roll is painful as I feel like I’m not meeting objectives 2 and 3.

But, visiting the “why” helps.. because I realize that my failure to share something insightful is still just that – a failure. They aren’t to be taken too seriously. And perhaps I’m meant to learn that, on some days, just showing up is a small win worth celebrating.

We are always judged on 2 broad dimensions – our ability and our willingness.

We naturally focus on our ability since it takes time to develop it and hone it. In fact, we’re normally in danger of focusing so much on our ability that we get caught up in it. If we’re really skilled, we drink ability kool aid. And if we’re not, we feel we’re worthless.

Willingness involves the “soft stuff.” But, here’s the amazing part – while willingness seems less important ability, it is more important than ever before. In a round world, ability mattered a lot more. If you were the best thinker in your village, you were bound to be sought after even if you were an asshole.

Now, however, the likelihood that your village council will find a thinker who is better than you and cheaper than you from elsewhere is really high. Even if they can’t fly the person in to the job, they can always engage him on Skype. Ability can no longer be your only differentiator.

That’s a huge shift – no matter what skills you posses, what you offer is probably not unique.

But your attitude or willingness? Just being the most enthusiastic, tenacious, and positive version of “you” can make all the difference in the world.

Discount willingness at your peril.

I’ll do better in the game.”

I can’t tell you how many times I’ve made this mistake.

There is no excuse to not performing your best in practice. If you haven’t done consistently well in practice, the chances aren’t high that you will do better in the game.

You plan to win, practice to win, prepare to win, expect to win, and only then win.

And, let’s not forget, if you don’t do well in practice, it’s not very likely you’ll get a game in the first place.

A few months back, I wrote about an initiative to help people pick up skills at their own pace.

We are now ready with Skilldom.org

There are tons of improvements planned but we finally have a starting place. We intend to keep Skilldom.org free and open source and to get us started on the path to improvement, we look forward to your feedback.

Would you find this useful?

This week’s learning is part 10 of a 12 part series on The Ascent of Money by Niall Ferguson. (Parts 1, 2, 3, 4, 5, 6, 7, 8, 9)

The origins of hedging are agricultural. A farmer enters into a “futures” contract with a merchant promising to sell his crop at $5/kg. If the price goes down, the farmer is protected as he still receives $5/kg. However, if the price is $6/kg then the merchant makes $1 for every kg he bought.

This futures market created a home for hedging in Chicago. Partly because of unease at futures being like gambling, the futures market led to the birth of derivatives.

Derivatives are the financial equivalent of “options.” Instead of signing a “futures” contract, the same merchant can sign a “buy option” giving him the right (not obligation) to buy an agreed quantity of the crop at $5/kg (the “strike price“) within a specific time after harvest, at an agreed quantity before a certain time at a certain price known as strike price. The merchant buys options because he expects the price of the crop to rise.

If, instead, the farmer had signed a “put option,” he would now have the right to sell the crop at $5/kg to the merchant at a particular time. He would do this if he felt the crop price is going down. If it’s heading up, he would keep it and sell at a higher price.

Finally, we have a “swap” or an exchange of a bet between parties. Let’s assume the farmer wanted to raise money and issued farm “bonds” that assured 5% interest for 10 years to investors (the farmer assumes he’ll be rich enough in 10 years to pay everyone). Since the investors take a risk on the farmer’s success, they can pay a portion of the interest they receive into a “credit default swap“/CDS to an insurance company who will pay the investors the original amount they paid in case the farmer “defaults.” In essence, a CDS is a bet on whether the farmer will go bankrupt.

In 2007, there were many trillion of credit default swaps betting on households being able to pay for their home loans. When these bets failed altogether, the global economic crisis was triggered..

Source

As much as derivatives are despised by investors like Buffett (who has nevertheless made money from them), they are a key part of the finance system and have divided the world into those who can and can’t be hedged. For example, weather derivatives are sold by insurance companies to hedge funds. This means that hedge funds will pay the insurance amount should bad weather/catastrophes happen. And until then, they get an attractive rate of interest on their principle amount from insurance companies.

While companies and large organizations can hedge to protect their assets, individuals can’t do any hedging and have to rely on insurance. Many go for saving for a rainy day and betting on houses.. More on that in the next 2 editions.