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Risk Management is an Oxymoron

One of the faults of the investment industry is that reason and hubris too often trump common sense. Risk management is a good example of what I mean. Every investment firm trumpets its ability to manage risk as one of its greatest selling points to both its present clients and to future clients whom it tries to recruit through its ability to manage risk. Yet the term risk management is really an oxymoron – the words risk and management contradict each other and so, in the end, make no sense. Risk means the chance of a loss in an investment while management infers such things as structures, policies, use of predictive models, personal experience of managers to know or to sense what is happening in the markets that will control the exposure of any investor to a loss in their investments and thereby minimize the potential for that loss.

First of all, the market is not rational. Indeed, no one really knows how the modern market really works. Note all the different predictive tools in use by analysts to try and to figure out what the market will do and all of these tools, in the end, fail. So many factors outside the control of rational thought influence what the market does – wars, greed, fear, environmental catastrophes (natural ones like earthquakes or hurricanes and human created ones like BP’s oil spill in the Gulf of Mexico), terrorism, short term political and economic thinking that has long term harmful consequences (i.e., the ongoing fall out from those toxic sub prime mortgage investment vehicles) and the list goes on and on. The point here is that most of the consequences falling out from the above mentioned risks are outside of any person or group of persons in a financial institution to control or to manage. Indeed, what can best be said is that risks and their consequences are not managed (they can’t be!) they are reacted to after the fact in an effort to salvage what can be salvaged from the destructive consequences of that risk which is no longer a risk but now a catastrophe.

The investment industry couches risk management within an investment strategy known as a balanced investment strategy which is a method of portfolio allocation designed to provide both income and capital appreciation while avoiding excessive risk. Such a strategy has the ability to ‘win’, to make a profit, more often than it ‘loses’. However, the dynamic of the market is such that it only takes one catastrophe to wipe out the gains (and the original principle) of many wins. A better term for risk management, though admittedly not as macho and in-charge sounding, is reactive risk response – how quickly and effectively is the investment professional and investment firm able to minimize the negative consequences of any catastrophe.

What has all of this to do with ethics? It is about honesty to clients. Call a spade a spade and don’t dress up what is essentially unmanageable with terms that imply the unmanageable can be managed. Transparency is called for here. Investing is a crap shoot in which the dice are often loaded and the crap table moves or completely flips over unpredictably.

June 24, 2010 at 2:27 pm Leave a comment

Dehumanizing Language

We live in a business culture. The driving values of business are the underlying values of our culture. Business culture is no longer just confined to business. It is now the underlying ethos behind most aspects of our society. Health care is no longer patient oriented, it is business oriented at its core providing not healing but services. Education is no longer about a more traditional approach to educating our young to think critically; now it is basically concerned with job training skills and thinking critically is definitely not high on list of those skills and so we have a ‘dumb downed’ approach to education. Government is less and less about serving the people and more and more about being run according to “efficient” business principles. Our legal system, once the great equalizer in our society that supported the powerless or less powerful in their interactions with the more powerful (read business elite), if we go by recent Supreme Court decisions, is more pro-business than ever before. Even the artistic expressions of our society are completely at the whim of the business ethos that permeates our society.

A major consequence of our business oriented culture is the degrading of human relationships which are at the heart of ethics. Ethics is how we conduct ourselves in relationships with others to create the trust we need to function effectively as a society. I find one of the key debasing features of our business culture has been the wholesale adoption of business language as the language of human relationships. In the business world people are not referred to as people but as clients or customers. ‘Client’ and ‘customer’ are abstract terms that confer on the object of those terms only a quasi-human status. In the business world of spread sheets, statistics, proposals, and overall ideology, these terms have the great tendency to remove the business person from encountering the humanity of the client/customer. Instead of John Doe or Jane Smith, who by virtue of their names are flesh and blood people demanding the dignity accrued to their persons through their real names, the use of client/customer turns a person into a thing, something on an impersonal ledger that can be moved around and dealt with with minimum attention to the personhood of that person. I think this is why there are so many violations of basic human rights, needs, and fiduciary obligations in the business world. The language of business de-humanizes people; it removes the humanity of people from the consciousness of some business people as it effectively categorizes people as things. It is easier to take advantage of a client/customer when the humanity of that client/customer has been effectively marginalized by the very language used to describe and identify.

This marginalization of personhood through the use of business language also plays itself out in other areas of our society. Just two examples of what I’m writing about. First education. One of the major battles at our universities and colleges (and, unfortunately, in some of our elementary and secondary schools) is the use of the alienating terms of client/customer to refer to what we used to call ‘student’. In education, client/customer as a term has a whole different connotation than does the term student. The former is someone to be dealt with on a far more impersonal level while the latter term demands personal attention from his/her teachers. Client/customer is the preferred terminology used by administrators in academic institutions while student is still the preferred terminology invoked by most teachers/professors and the students themselves (I have yet to hear of a student in a college or university refer to him/herself as a client of the institution). When dealing with the dollars and cents of running an academic institution I think it makes hard decisions a bit easier for administrators when referring to students as clients who are provided services rather than students who learn through their encounters with their teachers. The other example is health care. Again the preferred term for health care administrators to apply to people who require medical attention is client/customer rather than the traditional term of patient. In health care, a client is provided services in the most ‘efficient’ manner while a patient is someone who is looking for a personal relationship with the health care provider (also a business language term, not doctor or nurse) which quite likely makes for an inefficient relationship from a money point of view. Also note that both academic institutions and health care institutions must have business models of operation rather than caring models or patient/student centric models. Another business language (business model) term that distances the user of the term from the humanity of the people who require education and health care.

April 19, 2010 at 2:43 pm Leave a comment

What is a Hero?

This post is a little different from my other ones. But it is something I’d like to share.
What’s a hero? I was reading about a controversy that is brewing in Canada over the awarding of scholarships – the so called “hero scholarships” to the children of soldiers who were, and will be, killed in the war in Afghanistan. As a former soldier myself, this controversy has me questioning just what is a hero in our contemporary society. Hero is a word that has a lot of mileage on it if we go by the number of times it is used in our media. Webster’s defines a hero as someone who is an illustrious soldier, a person admired for his or her achievements and noble qualities and as someone who shows great courage. First of all, let me narrow the field of who, by this definition, is a hero. It’s not our sports ‘heroes’ or our action heroes. While our sports ‘heroes’ may on occasion play in pain, put up incredible statistics, throw, catch or run with a ball when they know they are going to be hit hard by a 200-300 lbs. human missile, or just demonstrate incredible athleticism, none of this makes them heroes in the sense of our definition. A hero is someone who gives of themselves for the betterment of their group or of society. What sports ‘heroes’ are are incredibly good athletes who are rewarded for their athleticism through money or fame or entitlement or all of the preceding. I don’t know of any athlete who does what they do for the betterment of their group; most of them, particularly professional athletes, seem to be in it ultimately for themselves. It is the media who bestow upon these athletes the honorific description of hero rather than the term that should be used which is idol. The media, and most  sport fans, project our own fantasies of athletic greatness onto those athletes we admire for their incredible skill. This idolatry of athletes can border on outright worship. But that doesn’t make them heroes.
Action heroes are strictly a media creation and we can leave it at that. The Jason Bourne character created by Matt Damon is just that, a created character who, if any of us tried to accomplish just a fraction of what Jason Bourne did, we would be dead.
This leaves us with the emotionally charged issue of contemporary soldiers who die in combat in Afghanistan and are then called heroes. I think it goes without saying that the war in Afghanistan is a mess, a quicksand of a situation that is sucking NATO into eventual submission, however they will disguise that submission. Canadian soldiers are in Afghanistan because that is where they were sent by our government. They did not volunteer to go; as professional soldiers they go where they are told to go and perform the tasks they are told to perform. They really have no say in this except that when joining up they gave up the option to say ‘No’ to going to war. For the most part the war in Afghanistan is a guerrilla war that is not winnable by conventional military means. I think a couple of points need to be made here. First, soldiers on the ground are not fighting for grand geo-political goals like a democratic Afghanistan. That may be the ‘official’ reason presented to us in newscasts and briefings by politicians and generals but soldiers who actually look for Taliban fighters to engage, in the heat of the engagement, fight primarily for their own survival and for the safety of their fellow soldiers. Geo-political goals are for politicians and maybe generals. They are not the main reason why the vast majority of soldiers actually fight the Taliban. Second, most of the engagements in Afghanistan are messy and shifting and most of the casualties come not from actual close quarter’s engagement with Taliban fighters but from IEDs that explode and kill and maim before the soldiers are even aware of what is happening. With IEDs the Taliban are nowhere to be seen. Military vehicles are blown up with the occupants barely having time to realize what has happened or troops walking on the ground are killed or wounded before they know what is happening.   An exploding IED will destroy perhaps one vehicle in a column of vehicles or kill or maim a few soldiers in a line of soldiers. Death in these instances is more a case of being in the wrong place at the wrong time than an act of heroism.  These deaths are horrific and tragic. Young lives and all the potential that accrues to those lives are lost forever. This is heartbreaking, painful and distressing. But it is not heroic in the sense of the definition of heroic. It is tragic.
When I think of heroic and hero I think of Romeo Dallaire in Rwanda. Seeing genocide beginning and being orderedby his superiors to leave for his own safety and for political expediency on the part of the UN, Canada and NATO, Gen. Dallaire and his aides freely chose to disobey what they thought was a cowardly, unethical order and stay to try to do something to save people’s lives. He willingly put his own life in danger to save others. He suffered personally from this decision having to deal with psychological demons that tormented him from what he experienced and he literally had to pick himself out of alcoholic despair due to those nightmarish experiences to eventually serve the greater good. That is heroic.
This controversy over the use of the term hero to describe all the dead service people in Afghanistan is caused by the media. I blame the media in Canada for distorting the meaning of the term, applying that term indiscriminately, playing on the raw emotions of those families who have lost sons and daughters in Afghanistan and then fanning the controversy which they themselves created in the first place. I believe this whole misuse of the term is simply a case of poor media ethics. Not every soldier, sailor or air force member killed or wounded in World War 1,WW2, Korea, or on UN Peacekeeping operations was described as a hero. I have to ask the media, why now?

March 29, 2010 at 5:44 pm 2 comments

Some Thoughts on Character

Webster’s dictionary defines character as the complex of mental and ethical traits marking and often individualizing a person, group, or nation. As the definition suggests, character is multifaceted. For one, character is cultivated over long periods of time. It is partly formed through one’s biological inheritances and partly through choice.
Character is the embodiment of a person’s moral orientation. It is dependent upon how a person has interpreted his/her values. It is built up, piece by piece, through the decisions we have made over time. It is not innate, we aren’t born with it, rather we create it. But the rub is most of us create our character more or less unconsciously. Character is based upon our core values and how our interpretations of those values influence our behaviour. What is unconscious for most of us is how we have interpreted our values. It takes a lot of self-reflection to understand what our values are and how we have interpreted them. Unfortunately, we live in a society that largely ignores, indeed in many instances actively discourages, self-reflection.
In the development of character, the cultural and physical environments play an enormous role. You can send individuals to ethics seminars that emphasize trust and fiduciary responsibility as the subject material but if the overall environment those individuals work in day to day is one of a cut throat pursuit of profit often at the expense of the clients the individual and the firm have promised to serve, then the environment will heavily influence many of those individuals to act against the well being of the client. While all of us are limited through circumstances, intelligence, self-awareness and environment, we still do make conscious decisions that define who we are. Morally we come to be what we do and not what we say or think.
With moral values it is one thing to “know about” them and another thing to “know” them through the richness of encounters with other people. When we merely know about values, we can become easily detached from their real existential meaning. Abstract intellectual analysis of values allows for distancing oneself from the spirit of the values. Talking about honesty, fairness, fiduciary responsibility and other critical values is not the same as experiencing those same values in encounters with other people. Some investment firms have magnificent value statements and they may even throw in an ethics seminar to highlight those values, but in their actions one can see that the values statement is merely a mist behind which those firms operate like pirates. One can look at the present state of the investment industry where many of the behaviours that created the massive economic meltdown that we are still suffering through are still the operating behaviours of many of those firms whose selfish and stupid actions created the economic mess in the first place. Here is character on display. These firms can speak abstractly about values but their behaviours indicate the values aren’t worth the paper upon which they are written. They flaunt both the letter and the spirit of the values that they present to the public as demonstrations of their true character.
While most individuals in the investment industry (and, to be fair, the general public) are more or less unaware of the values that influence their decisions that create who they are, many financial firms through their actions are consciously demonstrating an awareness of their values and that awareness, sadly, is still mainly selfish and destructive to the society that both created them and sustains them.

February 16, 2010 at 7:08 pm Leave a comment

Guessonomics

Investing, as it is presently conducted by the investment industry, is a lot like throwing darts at a dart board that is constantly moving in a random manner, not knowing exactly where the board will be but throwing the dart where it is thought the board could be. When you hit the board, you score points; when you miss, you lose. This dart board analogy came to me a short time ago when I had finished reading two related articles. The first was an article that stated RIM’s sales forecast for the current fiscal quarter did not meet analysts’ expectations/forecasts/projections of what they felt RIM should achieve. The second article was an interview in Report on Business magazine with Bill Kanko who is a respected funds manager. Mr. Kanko stated he firmly believed in “the unreliable nature of economic forecasts, especially our own”. Let’s look at this for a moment.
First the big picture in which this forecast is situated, the economy. Now as far as I can make out, no one truly understands how the economy really works. That is why Nobel Prizes are awarded in economics and why we have a plethora of economic theories and investing models which often contradict each other.  Not to mention all those can’t miss economic initiatives or investment opportunities that have been presented to us that, well, missed and missed catastrophically. Not only do we really not understand how the economy functions, the economy also is very susceptible to randomness. That highly insightful saying ‘shit happens’ comes to mind. Wars break out, Mother Nature defies our need for control and unleashes her uncontrollable power to show us where we really stand in the evolutionary pecking order, terrorism, technological glitches like power grid failures or new technologies having negative often unforeseen impact on how we live or do business, pandemics, luck, someone dies unexpectedly, bad timing, unforeseen consequences occurring from poor business decisions, all of these instances, and numerous other instances that a lack of space on this blog preclude me from listing,  have the capacity to disrupt the best planned economic undertakings.
Back to RIM and its forecasts and the forecasts of the analysts who follow RIM. Their projections, then, are based on an economy that can be highly unpredictable or random in its actions. So, projections are made on a firm that operates in an environment, the economy, which is unpredictable. Analysts study a firm’s financial statements, the industry of which the firm is a part, the state of the economy as that relates to the firm, they look at the firm’s management practices and competitive position in the market place, use whatever model they have been trained with to push all this information into and then make a prediction on what they think the firm should do profit-wise primarily in the short term. Firms also go through this same process for themselves to set out their financial expectations in the short term. They make a prediction. In other words, both the analysts and the firm itself come to a best guess at what they think the firm will do. This guess is overlaid upon an economy that is, in the end, unpredictable. Further, these forecasts are taken one more irrational step. These best guesses based on an ultimately unpredictable economy are turned into hard goals by the investment industry against which the firm’s performance is benchmarked. A guess, its dictionary definition being an opinion formed from little or no knowledge (in this case of this unpredictable economy), has now morphed into a hard and fast benchmark that will relate success or failure to the investing world. The guess now has been dressed up as rule approached by the investment industry much like a physicist approaches the law of gravity. In terms of the dart game analogy, the analysts have decided they know where the randomly moving dart board will be in the future. The firm’s share price will depend upon how successful the firm is in achieving this guess-rule – not whether or not it made a profit (the dart hits somewhere on the board) but whether or not it achieved or exceeded the guess (the dart has hit the bulls eye). This random hit or miss in turn has a good possibility of positively or negatively affecting the society you and I live in.
I recently spoke to a financial advisor who told me these predictions tend to be right more often than they are wrong. They hit the dart board more than they miss it. He quoted me a 52/48 right to wrong prediction ratio which is quite scary when you think about it. Even if his ratio is off, lets be really positive here and say it is a 70/30 right to wrong ratio, does this way of managing our economy, let alone our investments, ever take into consideration that just one wrong guess (one miss of the dart board), one “hot” derivative that turns out not to be so hot, such as derivatives based upon sub-prime mortgages, can wipe out the gains of all the right guesses combined? Has anyone ever stopped to think just how crazy our market economy is? Or consider that the less regulated that market is, the more likely it will blow up due to outright greed and fraud of the dart throwers? Further, how crazy are we, that’s you and me, to allow guessonomics to form the basis of our social and economic lives?

February 2, 2010 at 3:21 pm 2 comments

High Frequency Trading

I just read an article that has caused me to stop and reflect. The article was about high frequency traders who, through the considerable power of high speed computers, trade millions of shares in what can be milliseconds. In one of the main forms of high frequency trading, the trader will capitalize on the difference on the price of a particular share that is traded in different markets. For example if a share is trading for $1.00 in New York but for $1.01 in Toronto, the trader will quickly buy large amounts of that share in New York and sell it in Toronto before that gap closes. $0.01 profit on each share of thousands or more shares traded done many times over the course of the day adds up. My concern is what is the point of this form of trading? Most high frequency traders use their own money or their own firm’s money, they don’t have clients in the traditional sense so the only one or ones who profit are the trader and/or the trader’s firm.

Stock markets were originally set up as places where companies could go to sell shares in themselves to investors in order to raise capital so those companies could further grow and develop and through that growth and development create jobs and provide a further base for taxes and, generally, better the economic condition of society as a whole. Today, much of what goes on in the different markets, is not about creating a more robust, stronger society through the improvement of companies looking for investors to help them grow. Now much of the activity in the market place is simply about making a profit for the banks, investment firms, and some investors with little or no regard for building up society through investing in companies to allow them to grow and in so doing make society a better place for us all. For much of our investment industry, it is now about profit for profit’s sake and if society is impoverished through this hunt for profits, well who cares? That’s what investing is all about, eh? The chase for profits with little or no regard for the society that provides the infrastructure for that profit chasing to take place.

The article on high frequency traders high lights this point I’m making. Such trading builds nothing for society as a whole; its sole purpose is profit only for the traders with no care whatsoever that that profit chasing could well have a negative impact in the long run on all of us. One of the problems around high frequency trading is that we don’t know what its long term effect on society (and the market place) will be. Its proponents say it can only do good – high frequency trading, they say, creates more liquidity (anyone can get an order filled quickly at the market price) and lessens the spread between the high price traditional brokers charge clients who want to buy and the low price those same brokers offer clients who want to sell . However, its critics say such trading could have the effect of blowing the markets up much like the more traditional trading in those toxic investments that precipitated the economic meltdown of 2008/2009. It makes me nervous that once again we, the public, are unwittingly riding the tail of an investment dragon that could well have a serious negative impact on our way of life. Where is the due diligence from both the investment industry’s supposed self-regulatory system and our government on how trading in such a risk filled manner is still, even as we are slowly recovering from the last economic disaster created in large part by a failure by all parties in their regulatory responsibilities, allowed to operate when the real consequences of that form of risky trading are not known?

February 2, 2010 at 12:29 am 2 comments

World Economic Forum

Bankers and government leaders are meeting now at the World Economic Forum in Davos, Switzerland to discuss regulatory reforms to banking practices that led to the recent economic meltdown and a subsequent world wide public outrage at how banks, particularly in the US, Britain, Germany and France, almost destroyed the world economic system in their orgy of greed and extremely poor judgements. The bankers are there in force to try to head off proposed government regulations that would govern how they trade, tax their bonuses and have the banks organized such that single banks cannot get so big as to threaten economic disaster if they fail. The bankers are fighting these proposed regulations tooth and nail. “We will all be losers if we don’t have an efficient market in place”, said Joseph Ackerman, the chair of Deutsche Bank, implying present banking structures aren’t that bad. When the banks were allowed to operate basically as they wished, incredibly short sighted (read short term profit driven actions with no thought given to what the consequences would be as a result of their rush for profits through trading in investment vehicles that were toxic to say the least) actions governed only by how much money they could make were the preferred actions of the day. The pendulum will probably now swing in the other direction and regulations, perhaps regulations that are too harsh in reaction to the damage the banks did to the world economy and all the suffering they caused to so many people, will be enacted by governments to protect themselves from the past capricious behaviour of the banks.
Underlying this sorry economic situation is a dearth of ethical awareness and practice by the banks. They violated trust, treated people not as human beings but as mere things on their accounting ledgers to be treated as after thoughts, if at all, to their drive for profit and did not live up to their fiduciary duty to their clients. In short, they betrayed everyone who counted upon them to display even a modicum of responsibility and accountability that society had expected of them. A profound lack of character was demonstrated by many in the banking industry leading up to and immediately after the economic crisis. I think, rather than arrive in Davos to protect themselves and their privileges as best they can against the governments who will curb their freedom of action to protect their citizens from further destructive bank practices, the bankers involved should do a reality check on their own characters and the flawed ethical stances they showed to the world that led them down their destructive path to chase profits and bonuses in such a destructive manner. No constructive change will really take place through regulations unless the bankers themselves show a greater ethical self awareness and an ethical corporate awareness. No ethical change means no real change. Kind of like putting perfume on a pig….you still have a pig only, on the surface, it smells a little better.

January 28, 2010 at 9:29 pm Leave a comment

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