Guidance from Giants

Here are some quotes that I find to be somewhat appropriate in today's global environment:

Moving too fast?:

"What is the use of running if you're not on the right road" - Anonymous

If only people listened to Ben (and I don't mean Bernanke. Anyways, for more of Poor Richard's pearls of wisdom click here):

"An ounce of prevention is worth a pound of cure" - Benjamin Franklin

Come on now, it isn't all bad:

"We are healed of a suffering only by experiencing it in full" - Marcel Proust (this one is too true)

"Good judgment comes from experience and experience usually comes from bad judgment" - Anonymous (I'm more experienced than I thought.)


Here is a Bonus Quote (On first reading I thought it was pretty useless but after further observations this quote was only seemingly useless):

"There is nothing in which people more betray their character than in what they laugh at" - Johann Wolfgang van Goethe

So, if you really want to get to know someone, take them to a comedy show and see what jokes they laugh at. You will be surprised at how right Johann was.

Stock Market - Just a Pile of Sand?

The stock market, with all the recent volatility, reminds me of an imagery described by Per Bak, a Danish theoretical physicist who developed the concept of "self-organized criticality".

Per Bak uses self-organized criticality to describe the actions of a sand pile. When you first sprinkle sand onto a flat surface, the sand behaves predictably and the pile begins to grow. As more sand is added, the sides of the sand hill become steeper and at a certain height and slope, the self-organized critical state is reached where just one more grain of sand will lead to an avalanche. Furthermore, Bak and his researchers observed that it was impossible to pinpoint the exact grain that caused the avalanche and that the magnitude of the avalanche was not proportional to the "absolute impact" of the grain. Other examples of self-organized criticality can be found in earthquake magnitudes (check out Earthquakes - The Cost of Stress Relief) and spreading of forest fires.

The stock market is very much like the Bak's pile of sand. In the financial markets, what is REALLY being traded is NOT a commodity (gold, oil, wheat), a company (Google, General Electric , Disney) or a service (homebuilding, banking, defense) but INFORMATION. Stock prices merely reflect investors' expectations and those with the best (not most) information can more readily recognized and take advantage of opportunities due to the faulty expectations of others. Stock prices are rarely priced to perfection as many proponents of the Efficient Market Hypothesis would have you believe. Rather, most prices are usually overbought or oversold since the "herd effect" have a consistent tendency to overshoot the "correct" price.

Information, the real market price mover, is like the sand in Bak's experiment. During the simple beginnings of the stock market, the only information that moved markets was information concerning the various factors that would affect supply and demand. When information was made public, the magnitude of the price movement would consistently move with the magnitude of the news. As the stock market grew in size and complexity (derivatives, swaps, etc.), the mountain of information grew exponentially. Everything became interconnected and the stock market became a self-organized critical entity. Much like a sand pile avalanche, information that was considered inconsequential began moving markets. This has become evident with the turbulent market movements in all financial stock exchanges. From my personal experience, I have seen the Dow Jones Industrial Average (DJIA) move 400 points (about 3%) on "no apparent news". Just as one grain can cause an avalanche, in a complex system, many grains may have very little effect when added to the pile. In complex systems, the magnitude of the reaction is no longer proportional to the magnitude of the cause.

With the volatile movements of the stock market these days, it feels that there is just no price stability. Just like a person's yelling can cause an avalanche on top of a moutains, small seemingly unrelated news can cause the same avalanche effect in the stock market or any other self-organized critical entity for that matter. Sometimes what is natural may not always seem sensical. One must keep this in mind the next time the stock market leaves one scratching their heads.

Poor Richard's Thirteen Virtues

It's all about the Benjamins. I am currently reading The Autobiography of Benjamin Franklin aka Richard Saunders, the author of Poor Richard's Almanack, and came across his list of thirteen virtues (which I have now dubbed "The Benjamins". These virtues, aside from their obvious moral interests, have many other useful (or seemingly useless) benefits especially when it comes to dealing with people and relationships (which one of my friends insightfully suggests is what life is really all about).

Without further delay, here are The Benjamins - Franklin's Thirteen Virtues:

1. Temperance - Don't eat for the sake of eating or drink until you are drunk.
   
2. Silence - If you have nothing nice to say, don't say anything at all.
   
3. Order - Organize your work AND play time. Make time for both.
   
4. Resolution - "Resolve to perform what you ought. Perform without fail what you resolve."
   
5. Frugality - Don't waste. Don't make expenses unless they are beneficial to others or yourself.
   
6. Industry - Don't waste time. Always be doing something useful and eliminate all unnecessary actions.
   
7. Sincerity - "Use no hurtful deceit. Think innocently and justly;"
   
8. Justice - Don't let harm fall on others by your actions or inactions.
   
9. Moderation - "Avoid extremes." Also, don't hold grudges.
   
10. Cleanliness - "Tolerate no uncleanness in body, clothes and habitation". Have good hygiene.
    
11. Tranquility - Don't get aggravated over uncontrollable circumstances and incidents.
    
12. Chastity - "Rarely use venery but for health or offspring - never to dulness, weakness, or the injury of your own or another's peace or reputation."
    
13. Humility - "Imitate Jesus and Socrates." - If you don't know who they are, wiki them.
    

There is a reason why Benjamin Franklin was such an accomplished man and I believe that adherence or an attempt to adhere to these 13 virtues played a big role in his achievements. Even though this was written in the 18th century, these qualities are timeless and very applicable for all people regardless of religion, race or age.

Recommended Reading: The Autobiography of Benjamin Franklin by Benjamin Franklin and Poor Richard's Almanack by Richard Saunders aka Benjamin Franklin

Great Firewall of China

For those who regularly read my blog, I would like to apologize for not having written any recent articles. I was in China and have just returned to the United States. Censorship is still an issue in China and I have not been making any new posts due to the Great Firewall of China. Although I doubt my material will raise any concerns, I felt it more convenient to leave nothing to chance. I will be returning to China and therefore, future articles will be written intermittently as I hope to slip in articles here or there during my trips outside of China.

Drowning in Information

"We are drowning in information, while starving for wisdom"

- from Consilience by Edward O. Wilson

Pareto's Law - 80/20 - Do Less to Achieve More

Recently I stumbled upon an interesting book by Tim Ferris called The Four Hour Workweek. With such an inviting title, how can I resist? In his book, he touches upon Pareto's Law or what is more popularly known as the "80/20 Principle". This principle was founded when Pareto noticed that 80% of a country's wealth was owned by 20% of the population. The interesting and most important aspect of this principle is its widespread presence over a variety of matters such as: 80% of all sales revenues come from 20% of the customers, most people spend 80% of their time with 20% of our friends, 80% of gains in a stock market portfolio comes from 20% of the stocks in that portfolio and etc. To encompass the infinite other examples (I am sure you can think of a many examples of your own), here is a basic definition of Pareto's Law or the 80/20 Rule: "In ANYTHING, a FEW (20 percent) are VITAL and MANY (80 percent) are TRIVIAL".

Here is a graphical representation of the Pareto Effect:
This Pareto Principle has been used heavily and effectively in business management (online resource based on Richard Koch's The 80/20 Principle) and quality control (Six Sigma) but many people rarely apply this rule to their own personal lives. In the work place, one can use Pareto's Principle to work "smarter" and more effective by focusing on the 20% of the work that is truly important. Another way to use this rule is to use it like Ferris did in his book by evaluating your life. He did so by asking two Pareto questions:

1. Which 20% of sources are causing 80% of my problems and unhappiness?
2. Which 20% of sources are resulting in 80% of my desired outcomes and happiness?

Take some time to answer these questions on your own, you might just surprise yourself and find out that you're a living example of the Pareto effect. Many people tend to associate being "busy" or doing more as being productive, but if many of things (80% to be specific) that you do are trivial, how productive are you? It is important that you BE SELECTIVE with your time and efforts. Find out what things in your life pull the most weight and focus on those things while deemphasizing things that do not have much effect in your life. If you can't differentiate between what is vital and what is trivial, start by making a list of your day to day activities and evaluate each activity and its "real" importance. The hardest part about this is being honest with yourself because contrary to your own belief, you will probably find that you do spend most of your time doing ineffective things. When I mean ineffective, I am not referring to hanging out with friends or doing things you enjoy but rather activities such as checking email every 15 minutes or spending 5 hours preparing for a minor meeting.

Here are some quotes that might inspire you to perform a self-Pareto evaluation:

"There is never enough time to do everything, but there is always enough time to do the most important thing" - Brian Tracy, Self-Help Author

"Short as life is, we make it still shorter by the careless waste of time" - Victor Hugo, Author of Les Miserables

Lastly, the 80/20 Rule is a great way to get rid of the clutter, not only mentally but physically, in your life. Most of us wear 20% of our wardrobe 80% of the time, so why not clear up some closet space by donating your unused clothes to the local church or Salvation Army. Your trivial clothes can become part of someone's vital wardrobe. Cleaning up the clutter in your life will definitely reduce stress in your life and invite clarity into your thoughts. Give it a try! (Check out CutterClarity's 21 tips to removing clutter)

Feel free to leave personal experiences and ideas on the Pareto Principle in the comments section below. Achieve more now by doing less today!

Recommended Reading: The 4-Hour Workweek: Escape 9-5, Live Anywhere, and Join the New Rich by Timothy Ferris and The 80/20 Principle: The Secret to Success by Achieving More with Less by Richard Koch

Monkey See Monkey Do - Tulipomania!

I'm not a proponent of evolution but maybe we have more in common with monkeys than we would care to admit. When imitation occurs as a result of conscious thought it can represent the sincerest form of flattery but more often than not people are actually "victims" of unconscious imitation.

Innately, humans have a strong tendency towards imitation. Just look at children - they were never told to imitate but they just do - it is the way they learn and it's natural. As we progress in brain development and age, we have had enough experiences to generate "unique" behaviors and outwardly cast off "child-like" imitation behaviors (this is especially prevalent in the Western hemisphere where individuality reigns supreme).

Like all natural urges, what may be suppressed in the conscious mind (ego) may not necessarily be restrained in the unconscious mind (id). This is the reason why we have so many fads, fashion and partners that are beyond the comprehension of reasonable thinking. One example of imitation gone wild is the popularity of faded designer jeans. These days, jeans that look like they would have normally been thrown out due to extensive wear (stained and faded with holes) are being sold as new and bought at ridiculous prices. Despite our common sense (jeans do not cost over $100 to make), we can not help but to imitate everyone else and buy these jeans or at least have the desire to buy them.

Another interesting example of unconscious imitation is the "groupie effect" (For more on human attraction, check out Like Dissolves Like). The basic premise for this effect is that men/women are attracted to women/men that other men/women find attractive. This is why musicians and celebrities "seem" attractive and have groupies despite their actual physical appearance. So for anyone that is single, a good way to increase your chances of success in meeting someone is to have an "opposite-sex" wing person. This effect can be explained by what scientists call "mate choice copying". Finding a suitable partner is time consuming so taking cues from other is an effective mating shortcut. This also explains why women view men who are married or have a girlfriend more attractive than men who are single.

The last example that exemplifies unconscious imitation, desiring what others consider desirable, can be found in free capital markets. In the year 1634 in Holland, the price of tulips (yes, the flower) traded higher than the price of gold. This occurred because people wanted tulips for the sole reason that everyone else wanted tulips. They disregarded their common sense, much like we do with "holey" jeans, and prices for tulips sky rocketed. As with all fads, the demand for tulips faded and a panic ensued causing the price to plummet and financial ruin for many. Now tulip mania or tulipomania is used to refer to any large economic bubble. In hindsight, one can almost laugh at the absurdness of the Dutch, but with many brought to financial ruin when the tech bubble burst and many suffering through the bursting of the current housing bubble, are we that much different?

Unconscious imitation can certainly be dangerous but it can also be helpful. One way to take advantage of your natural desire to imitate is to surround yourself with people you want to be like. If you want be a better basketball player, play with people better than you. If you want be more religious, surround yourself with religious people by consistently attending religious services and events. Unconscious imitation requires no "work" on your part but this can be a double edged sword. Since you can't help but be affected by those around you, it is important to evaluate the people and media (visual- television, audio- radio/mp3 and print- books) that you surround yourself with.

"When the character of a man is not clear to you, look at his friends." - Japanese Proverb

Recommended Readings: Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay