Hedge funds run by Jeffrey Gendell and John Burbank III posted their worst monthly losses in October. Peter Thiel gave back gains made earlier in the year. Nobel-prize winner Myron Scholes froze his biggest fund.
The managers, like many in the $1.7 trillion hedge-fund industry, were caught in a downdraft of market declines, client redemptions, demands from lenders for more collateral and forced asset sales that accelerated after Lehman Brothers Holdings Inc. collapsed in mid-September.
Funds fell by an average 5.4 percent last month, pushing the year-to-date drop to 15.5 percent, according to the HFRI Fund Weighted Composite Index compiled by Chicago-based Hedge Fund Research Inc. Investors have been handed losses for five straight months, the longest streak since HFRI started the index in 1990.
``October was the perfect storm for liquidity drying up, especially in the credit markets,'' said Gary Vaughan-Smith, co- founder of London-based SilverStreet Capital LLP, which has $600 million invested in hedge funds for its clients. ``We are through the worst and the turmoil should be gone by the end of November.''
While hedge funds have held up better than actively managed mutual funds or index-based investments, losses in 2008 are almost certain to be the biggest on record. U.S. global equity mutual funds fell by an average of 39 percent in the first 10 months of the year, according to data compiled by Bloomberg. The Standard & Poor's 500 Index was down 34 percent. The hedge-fund industry's only unprofitable year was 2002, when the HFRI index shed 1.45 percent and the S&P 500 tumbled 23 percent.
Redemptions Rise
Hedge fund investors have reacted by requesting withdrawals that may reach 15 percent of assets in the U.S. and 25 percent in Europe, Huw van Steenis, a Morgan Stanley analyst in London, told clients last month. Combined with investment losses, industry assets may drop by 24 percent to $1.3 trillion in the fourth quarter, van Steenis said.
``I don't think the hedge fund model is broken,'' said Jaeson Dubrovay, head of the $19 billion hedge-fund group at Cambridge, Massachusetts-based consulting firm NEPC LLC. ``We just need to loosen the credit spigots to get the system working again. We don't anticipate that they will be loosened in any way like they were before.''
Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets, bet on falling as well as rising asset prices and participate substantially in profits from money invested. They typically charge fees of 2 percent of assets and 20 percent of investment profits.
Tontine, Passport
Gendell's Tontine Capital Partners LP fund, based in Greenwich, Connecticut, plunged 65.7 percent in October, extending its decline for the year to 76.8 percent, according to investors. Burbank's Global Strategy fund fell 38 percent in the month and 44 percent year-to-date, according to a letter to clients of his San Francisco-based based Passport Capital Management LLC.
Ken Griffin, founder of Citadel Investment Group LLC, lost 22 percent last month in his Kensington and Wellington funds, extending the year-to-date-slide to 39 percent, according to people familiar with the firm.
Chicago-based Citadel, which oversees $16 billion, held a conference call with investors Oct. 24 to dispel speculation that it was liquidating. Griffin, 40, told Citadel bondholders that the firm had $8 billion in untapped bank credit and 30 percent of its assets in cash, and faced ``modest'' client redemptions.
Gains Evaporate
Some managers have seen gains from the first half of the year evaporate. Clarium Capital Management LLC, the hedge-fund firm run by PayPal co-founder Thiel, slumped 18 percent in October, according to estimates given to investors. The San Francisco-based firm's Clarium LP fund reported a year-to-date decline of 2.8 percent, wiping out the 58 percent gain from the first half.
Harbinger Capital Partners Fund, run by Philip Falcone, dropped about 5 percent in October, bringing its loss for the year to about 13 percent, according to investors. The New York- based fund was up 42 percent at the end of June.
Blue Mountain Capital Management LLC of New York and London, Scholes's Platinum Grove Asset Management LP in Rye Brook, New York, and Deephaven Capital Management LLC of Minnetonka, Minnesota, were forced to freeze investor withdrawals after a surge in redemptions.
Some Winners
``We continue to re-evaluate hedge funds,'' Brad Alford, head of Alpha Capital Management LLC in Atlanta, which invests in hedge funds, said in an interview. ``They should do better.''
Managers that made money last month include Christian Levett, whose Clive Capital LLP fund advanced 19.8 percent, bringing its annual return to 43 percent, according to investors. The firm manages more than $2.5 billion from London.
Ionic Capital Management LLC, a $3.5 billion hedge fund run by former Highbridge Capital Management LLC executives Bart Baum, Adam Radosti and Dan Stone, rose 8 percent in October, extending its gain to 16.5 percent for the year, according to a person familiar with the New York-based firm.
John Paulson's New York-based Advantage Plus Fund, which rose 3.8 percent last month, extending its increase for the year to 29.4 percent, according to investors.
Bruce Kovner, who runs Caxton Associates LLC in New York, posted a 2.6 percent return in October for his Caxton Global Investment Ltd. fund, which has climbed 7.25 percent so far this year.
Saturday, November 15, 2008
Bob Farrell’s Ten Market Rules to Remember
1) Markets tend to return to the mean over time. This
is especially noteworthy now, for the housing market is
returning to its mean by plunging, as are equity market,
the dollar, the Yen, et al.
2) Excesses in one direction will lead to an opposite
excess in the other direction. They always do, and the
excesses of the housing bubble and excessive, lenient
bank lending, are giving way to the housing collapse and
inordinately tight lending practices.
3) There are no new eras — excesses are never
permanent. And how strongly does that speak to us
now, for the supposed era of unending housing price
increases and of globalisation has given way to weak
housing and growing protectionism.
4) Exponential rapidly rising or falling markets usually
go further than you think, but they do not correct by
going sideways. Markets correct by going in the
opposite direction, falling sharply after sustained, broad
rallies, and rallying after sustained broad weakness. The
world ebbs and the world flows; it has always been thus,
and shall always be thus.
5) The public buys the most at the top and the least at
the bottom. Of course they do; they always have and
they always shall. The public buys when euphoria reigns,
and it sells when depression does years later.
6) Fear and greed are stronger than long-term
resolve. We are human beings dealing with rational and
irrational markets; to believe that "fear" and "greed" can
ever be lost is naive for they are the most fundamental of
human traits.
7) Markets are strongest when they are broad and
weakest when they narrow to a handful of blue chip
names. Just as volume must follow the trend, so too
must good markets have broad support and weak
markets have broad weakness... and at the moment, the
market is very, very broadly weak.
8) Bear markets have three stages — sharp down —
reflexive rebound —a drawn-out fundamental
downtrend. This really is how this bear market shall end;
not with a hoped for "V" bottom, but with a great
washing-out... a capitulation... and then months, or even
years, of base building.
9) When all the experts and forecasts agree –
something else is going to happen.... or as we like to
say, "When they are yellin', you should be sellin,' and
when they are cryin,' you should be buyin.' "
10) Bull markets are more fun than bear markets.... or
as a friend of ours from Raleigh, N. Carolina used to say
many years ago, "Bears don't eat; bulls party!"
is especially noteworthy now, for the housing market is
returning to its mean by plunging, as are equity market,
the dollar, the Yen, et al.
2) Excesses in one direction will lead to an opposite
excess in the other direction. They always do, and the
excesses of the housing bubble and excessive, lenient
bank lending, are giving way to the housing collapse and
inordinately tight lending practices.
3) There are no new eras — excesses are never
permanent. And how strongly does that speak to us
now, for the supposed era of unending housing price
increases and of globalisation has given way to weak
housing and growing protectionism.
4) Exponential rapidly rising or falling markets usually
go further than you think, but they do not correct by
going sideways. Markets correct by going in the
opposite direction, falling sharply after sustained, broad
rallies, and rallying after sustained broad weakness. The
world ebbs and the world flows; it has always been thus,
and shall always be thus.
5) The public buys the most at the top and the least at
the bottom. Of course they do; they always have and
they always shall. The public buys when euphoria reigns,
and it sells when depression does years later.
6) Fear and greed are stronger than long-term
resolve. We are human beings dealing with rational and
irrational markets; to believe that "fear" and "greed" can
ever be lost is naive for they are the most fundamental of
human traits.
7) Markets are strongest when they are broad and
weakest when they narrow to a handful of blue chip
names. Just as volume must follow the trend, so too
must good markets have broad support and weak
markets have broad weakness... and at the moment, the
market is very, very broadly weak.
8) Bear markets have three stages — sharp down —
reflexive rebound —a drawn-out fundamental
downtrend. This really is how this bear market shall end;
not with a hoped for "V" bottom, but with a great
washing-out... a capitulation... and then months, or even
years, of base building.
9) When all the experts and forecasts agree –
something else is going to happen.... or as we like to
say, "When they are yellin', you should be sellin,' and
when they are cryin,' you should be buyin.' "
10) Bull markets are more fun than bear markets.... or
as a friend of ours from Raleigh, N. Carolina used to say
many years ago, "Bears don't eat; bulls party!"
Friday, November 14, 2008
Interview with Don Coxe - ROBIN GOLDWYN BLUMENTHAL
November 7th, 2008
ONCE A WEEK, LOADS OF INSTITUTIONAL INVESTORS DROP whatever they're
doing to tune in to Donald Coxe's strategy conference calls. Small
wonder. With a keen sense of history and wry sense of humor, Coxe has
helped his followers anticipate some of the biggest shifts in markets,
be they in stocks or commodities. As global portfolio strategist for
BMO Financial Group, a Toronto-based bank that is among Canada's
largest, he now sees real hope for two sectors that have been taking
poundings: banks and commodities. Though he launched the Coxe
Commodity Strategy Fund this past summer, right before commodities
took a nose dive, Coxe remains convinced that we are in the midst of
the greatest commodities bull market of all time. For his reasons,
please read on.
Matthew Furman for Barron's
"The gigantic investment returns are all going to be tied to companies
that meet real human needs and do it better than other companies. What
a great time to be an investor."--Donald Coxe
Barron's: What's your take on the monetary scene?
Coxe: The Fed has doubled the debt on its balance sheet in five weeks.
We don't know how long they are going to be carrying out these
policies, which would send Milton Friedman spinning in his tomb. On
the other hand, they had to do it. I challenged groups this week,
saying, if I had said to you a year ago things will be so bad that the
Fed will double its balance sheet in five weeks, would any of you have
ever invited me back to speak to you? And, of course, the reaction was
the same: Clearly you are stark raving mad.
Are the economic prospects any better in Europe?
The Europeans had thought it was an American problem, but European
banks have lent a vast percentage of their capital to these Slavic
countries, with even worse demography than Europe. Emerging markets
are such a powerful asset class because each generation is bigger than
the next, and there is an increasing middle class and a high savings
rate. That's the stuff of real economic power, and a terrific
investment concept. By contrast, in the OECD countries, each
generation is just 60% of the predecessor generation, there's no
growing middle class and there's a zero savings rate. The formula
across the OECD is for sluggish growth at best.
How should investors approach today's stock market?
If you aren't deeply in the equity market, this is not a time to be
committing large amounts of money. Stocks are cheap but they can get
cheaper; we know that. We got back to the Dow having a multiple of 5.9
in December of '74, which was the foundation of Warren Buffett's
wealth because he started buying at that level. The Dow isn't anywhere
near 5.9 [its multiple last week was 11], but some of my favorite
stocks are trading at lower P/Es than that. I can tell you they are
the fertilizer, oil and agricultural companies.
Tell us some more about those industries.
The core investment concept of our time is that we are living through
the greatest simultaneous effervescence of personal economic liberty
in history. When people go from abject poverty to dwellings with
indoor plumbing, electricity, basic appliances and access to motorized
transportation, they have more economic liberty than 99% of humanity
enjoys and we are adding 50 to 150 million people a year to that list.
The gigantic investment returns are all going to be tied to companies
that meet real human needs and do it better than other companies. What
a great time to be an investor, because it is not just about the
dwellings and the transportation, it is about the high-protein diet.
When I came back from a trip two years ago, I said the biggest
commodity story is going to be food, bigger than the other ones. It is
high-protein food. The way to play that is through the fertilizer
stocks, the genetically modified seed stocks and the farm-equipment
stocks. [Coxe would not recommend specific companies, citing his
firm's compliance restrictions.]
What are the big trends in food consumption?
If you look at areas under cultivation, wheat has only gone up in
hectares a little bit in a decade. Rice is flat in a decade.
Meanwhile, our need for protein has gone up dramatically because
people are consuming more beef and pork. But more important than oil
in this decade is milk. In rural India, the kids are getting animal
protein and they are going to be physically stronger than their
parents. Their brains are going to be better.
But there's still a serious global food shortage.
Until four months ago, when you Googled "global 'blank' crisis" it was
the global food crisis. The global food crisis was our big theme. The
global financial crisis has pushed the food crisis off the front page
at a time when people are actually getting together to say, "How do we
deal with this problem?" We have an enormous challenge, but we also
have the technology to increase farm productivity. Investors who
invest in this are going to make a lot of money, and they don't have
to apologize to anybody for doing it. If it hadn't been for [the
development of genetically modified crops], corn would have gone to
$10 a bushel [instead of a recent high of $7.50] and we would have had
another 100 million people starving. This is a great investment theme.
Which commodity groups do you like best?
Agriculture is first. We will need more fertilizer. There are only
three farm-equipment companies of any size in the world. Terms of
entry are difficult. You have to have dealerships. CNH Global [ticker:
CNH] is one of the top three companies in the world in the field. It's
a subsidiary of Fiat and its stock has collapsed, but earnings haven't
collapsed. In May it sold for $45 a share. It's $17 now. The next
group has to be gold stocks. A period of massive reflation always
leads to a good move in gold.
Next?
The third group is energy. Despite Obama's plan to spend $150 billion
on alternative energy, each year we still lose 4.5 million barrels of
oil a day that we have to replace. Oil is trading now at $61 a barrel,
but oil for delivery in 2015 is trading at over $90 a barrel. Those
with reserves in politically secure areas of the world will do well.
Venezuela could solve a large part of the world's energy needs, but
not under the current management.
How about base metals?
Those stocks are selling for pennies on the dollar. Take BHP Billiton
[BHP]. It was $95 in May, it recently fell to $30, but it's back up to
nearly $40. This is an unrivaled set of assets, a great balance sheet,
top-notch management and no scandals.
Is copper worth a look?
Copper is now at $1.80 per pound, where it was in '05. But as soon as
the economy recovers, copper always doubles in price. It's levered to
growth in China and India. They have an increasing percentage of
well-off people who use energy and metals, and each generation is
bigger than the last. Since 1995, China has had a plan to create 200
cities of more than one million people. The investment strategy should
be tied to areas of the world that are growing the fastest in the next
five years.
As for stocks in general, when will we know that they're ready to
rebound?
In every bear market since 1972, when the banks went through a period
of at least six weeks where they outperformed the S&P, it was over.
But we can't use the rule this time because of the TED spread, which
has a 100% forecasting record in all bear markets.
You have our attention.
The TED spread is the spread between the front-month T-bill contract
and the front-month Eurodollar contract, because the Eurodollar
contract is uninsured deposits in banks around the world in dollars.
Therefore it is the measure of risk in the system. It reached a high
of 500 after Lehman Brothers collapsed. The highest reading we have
ever had up till then was 415 when Continental Illinois bank went bust
in 1984 and got saved in order to save the system. The only reason
they knew they had to save it was because of the spike in the TED
spread. I know that from having interviewed the people involved. I
used it to predict the crash in 1987. Then there was a long period
where my knowledge of the TED spread was useless.
What does TED tell us now?
The spread has fallen to a little under 200 because of the various
bank-rescue programs, and it could easily get to 140-145, which signal
that banks are in a position to start lending again.
Does that favor any particular sector?
As they put this money into the banking system, then the oddity is
that when the bear market ends, the bank stocks will be among the
leaders in the rally that will come. This is based also on the
principle of redemption and religion, which holds that when you have
redeemed your sin you can come into heaven. When the bankers have
stopped sinning and have gone through enough penance, then...
How do we know this will happen?
The TED spread certifies for bankers collectively they are entitled to
go to heaven because it indicates they have gotten their balance
sheets in order and the system is working again and money is flowing
more freely.
Which banks are you buying?
We like those that show that they actually had a pretty good risk
culture beforehand, but a couple of mistakes were made. The system is
shot through with corrupt practices.
Thank you, Don.
ONCE A WEEK, LOADS OF INSTITUTIONAL INVESTORS DROP whatever they're
doing to tune in to Donald Coxe's strategy conference calls. Small
wonder. With a keen sense of history and wry sense of humor, Coxe has
helped his followers anticipate some of the biggest shifts in markets,
be they in stocks or commodities. As global portfolio strategist for
BMO Financial Group, a Toronto-based bank that is among Canada's
largest, he now sees real hope for two sectors that have been taking
poundings: banks and commodities. Though he launched the Coxe
Commodity Strategy Fund this past summer, right before commodities
took a nose dive, Coxe remains convinced that we are in the midst of
the greatest commodities bull market of all time. For his reasons,
please read on.
Matthew Furman for Barron's
"The gigantic investment returns are all going to be tied to companies
that meet real human needs and do it better than other companies. What
a great time to be an investor."--Donald Coxe
Barron's: What's your take on the monetary scene?
Coxe: The Fed has doubled the debt on its balance sheet in five weeks.
We don't know how long they are going to be carrying out these
policies, which would send Milton Friedman spinning in his tomb. On
the other hand, they had to do it. I challenged groups this week,
saying, if I had said to you a year ago things will be so bad that the
Fed will double its balance sheet in five weeks, would any of you have
ever invited me back to speak to you? And, of course, the reaction was
the same: Clearly you are stark raving mad.
Are the economic prospects any better in Europe?
The Europeans had thought it was an American problem, but European
banks have lent a vast percentage of their capital to these Slavic
countries, with even worse demography than Europe. Emerging markets
are such a powerful asset class because each generation is bigger than
the next, and there is an increasing middle class and a high savings
rate. That's the stuff of real economic power, and a terrific
investment concept. By contrast, in the OECD countries, each
generation is just 60% of the predecessor generation, there's no
growing middle class and there's a zero savings rate. The formula
across the OECD is for sluggish growth at best.
How should investors approach today's stock market?
If you aren't deeply in the equity market, this is not a time to be
committing large amounts of money. Stocks are cheap but they can get
cheaper; we know that. We got back to the Dow having a multiple of 5.9
in December of '74, which was the foundation of Warren Buffett's
wealth because he started buying at that level. The Dow isn't anywhere
near 5.9 [its multiple last week was 11], but some of my favorite
stocks are trading at lower P/Es than that. I can tell you they are
the fertilizer, oil and agricultural companies.
Tell us some more about those industries.
The core investment concept of our time is that we are living through
the greatest simultaneous effervescence of personal economic liberty
in history. When people go from abject poverty to dwellings with
indoor plumbing, electricity, basic appliances and access to motorized
transportation, they have more economic liberty than 99% of humanity
enjoys and we are adding 50 to 150 million people a year to that list.
The gigantic investment returns are all going to be tied to companies
that meet real human needs and do it better than other companies. What
a great time to be an investor, because it is not just about the
dwellings and the transportation, it is about the high-protein diet.
When I came back from a trip two years ago, I said the biggest
commodity story is going to be food, bigger than the other ones. It is
high-protein food. The way to play that is through the fertilizer
stocks, the genetically modified seed stocks and the farm-equipment
stocks. [Coxe would not recommend specific companies, citing his
firm's compliance restrictions.]
What are the big trends in food consumption?
If you look at areas under cultivation, wheat has only gone up in
hectares a little bit in a decade. Rice is flat in a decade.
Meanwhile, our need for protein has gone up dramatically because
people are consuming more beef and pork. But more important than oil
in this decade is milk. In rural India, the kids are getting animal
protein and they are going to be physically stronger than their
parents. Their brains are going to be better.
But there's still a serious global food shortage.
Until four months ago, when you Googled "global 'blank' crisis" it was
the global food crisis. The global food crisis was our big theme. The
global financial crisis has pushed the food crisis off the front page
at a time when people are actually getting together to say, "How do we
deal with this problem?" We have an enormous challenge, but we also
have the technology to increase farm productivity. Investors who
invest in this are going to make a lot of money, and they don't have
to apologize to anybody for doing it. If it hadn't been for [the
development of genetically modified crops], corn would have gone to
$10 a bushel [instead of a recent high of $7.50] and we would have had
another 100 million people starving. This is a great investment theme.
Which commodity groups do you like best?
Agriculture is first. We will need more fertilizer. There are only
three farm-equipment companies of any size in the world. Terms of
entry are difficult. You have to have dealerships. CNH Global [ticker:
CNH] is one of the top three companies in the world in the field. It's
a subsidiary of Fiat and its stock has collapsed, but earnings haven't
collapsed. In May it sold for $45 a share. It's $17 now. The next
group has to be gold stocks. A period of massive reflation always
leads to a good move in gold.
Next?
The third group is energy. Despite Obama's plan to spend $150 billion
on alternative energy, each year we still lose 4.5 million barrels of
oil a day that we have to replace. Oil is trading now at $61 a barrel,
but oil for delivery in 2015 is trading at over $90 a barrel. Those
with reserves in politically secure areas of the world will do well.
Venezuela could solve a large part of the world's energy needs, but
not under the current management.
How about base metals?
Those stocks are selling for pennies on the dollar. Take BHP Billiton
[BHP]. It was $95 in May, it recently fell to $30, but it's back up to
nearly $40. This is an unrivaled set of assets, a great balance sheet,
top-notch management and no scandals.
Is copper worth a look?
Copper is now at $1.80 per pound, where it was in '05. But as soon as
the economy recovers, copper always doubles in price. It's levered to
growth in China and India. They have an increasing percentage of
well-off people who use energy and metals, and each generation is
bigger than the last. Since 1995, China has had a plan to create 200
cities of more than one million people. The investment strategy should
be tied to areas of the world that are growing the fastest in the next
five years.
As for stocks in general, when will we know that they're ready to
rebound?
In every bear market since 1972, when the banks went through a period
of at least six weeks where they outperformed the S&P, it was over.
But we can't use the rule this time because of the TED spread, which
has a 100% forecasting record in all bear markets.
You have our attention.
The TED spread is the spread between the front-month T-bill contract
and the front-month Eurodollar contract, because the Eurodollar
contract is uninsured deposits in banks around the world in dollars.
Therefore it is the measure of risk in the system. It reached a high
of 500 after Lehman Brothers collapsed. The highest reading we have
ever had up till then was 415 when Continental Illinois bank went bust
in 1984 and got saved in order to save the system. The only reason
they knew they had to save it was because of the spike in the TED
spread. I know that from having interviewed the people involved. I
used it to predict the crash in 1987. Then there was a long period
where my knowledge of the TED spread was useless.
What does TED tell us now?
The spread has fallen to a little under 200 because of the various
bank-rescue programs, and it could easily get to 140-145, which signal
that banks are in a position to start lending again.
Does that favor any particular sector?
As they put this money into the banking system, then the oddity is
that when the bear market ends, the bank stocks will be among the
leaders in the rally that will come. This is based also on the
principle of redemption and religion, which holds that when you have
redeemed your sin you can come into heaven. When the bankers have
stopped sinning and have gone through enough penance, then...
How do we know this will happen?
The TED spread certifies for bankers collectively they are entitled to
go to heaven because it indicates they have gotten their balance
sheets in order and the system is working again and money is flowing
more freely.
Which banks are you buying?
We like those that show that they actually had a pretty good risk
culture beforehand, but a couple of mistakes were made. The system is
shot through with corrupt practices.
Thank you, Don.
The Best Business Schools of 2008 - by Francesca Di Meglio and Alison Damast
No. 1: University of Chicago
Booth School of Business
2006 BusinessWeek Rank: 1
Total Tuition and Fees: $97,165
Applicants Accepted: 22%
Pre-MBA/Post-MBA Pay in $ Thousands: 78.0/105.0
In Brief: This year's No. 1 has it all: ambitious students, academic rigor, and top-notch faculty.
No. 2: Harvard Business School
Boston
2006 BusinessWeek Rank: 4
Total Tuition and Fees: $101,660
Applicants Accepted: 12%
Pre-MBA/Post-MBA Pay in $ Thousands: 77.0/121.0
In Brief: A century old, Harvard's case-based curriculum continues to set the standard.
No. 3: Northwestern University
Kellogg Graduate School of Management
Evanston, Ill.
2006 BusinessWeek Rank: 3
Total Tuition and Fees: $93,918
Applicants Accepted: 20%
Pre-MBA/Post-MBA Pay in $ Thousands: 75.0/110.0
In Brief: Kellogg's distinct culture of collaboration and competition sets it apart.
No. 4: University of Pennsylvania
The Wharton School
Philadelphia
2006 BusinessWeek Rank: 2
Total Tuition and Fees: $100,860
Applicants Accepted: 18%
Pre-MBA/Post-MBA Pay in $ Thousands: 80.0/120.0
In Brief: Highly competitive program features flexible curriculum, diverse student body.
No. 5: University of Michigan
Ross School of Business
Ann Arbor, Mich.
2006 BusinessWeek Rank: 5
Total Tuition and Fees: $90,879
Applicants Accepted: 20%
Pre-MBA/Post-MBA Pay in $ Thousands: 63.5/105.0
In Brief: School spirit runs high at Ross, where students are highly sought after by recruiters.
No. 6: Stanford University
Graduate School of Business
Palo Alto, Calif.
2006 BusinessWeek Rank: 6
Total Tuition and Fees: $97,842
Applicants Accepted: 8%
Pre-MBA/Post-MBA Pay in $ Thousands: 75.0/125.0
In Brief: Small classes and sense of community in the heart of Silicon Valley are hard to beat.
No. 7: Columbia Business School
New York
2006 BusinessWeek Rank: 10
Total Tuition and Fees: $94,104
Applicants Accepted: 15%
Pre-MBA/Post-MBA Pay in $ Thousands: 75.0/110.0
In Brief: Finance focus and access to Wall Street are pluses—or used to be before the investment banking industry collapsed.
No. 8: Duke University
Fuqua School of Business
Durham, N.C.
2006 BusinessWeek Rank: 9
Total Tuition and Fees: $99,906
Applicants Accepted: 30%
Pre-MBA/Post-MBA Pay in $ Thousands: 65.0/100.0
In Brief: Passionate teachers and competitive, collaborative learning environment all get high marks.
No. 9: MIT
Sloan School of Management
Cambridge, Mass.
2006 BusinessWeek Rank: 7
Total Tuition and Fees: $93,568
Applicants Accepted: 15%
Pre-MBA/Post-MBA Pay in $ Thousands: 70.0/116.0
In Brief: Quantitative skills and entrepreneurship are this program's strong suits.
No. 10: University of California-Berkeley
Haas School of Business
Berkeley, Calif.
2006 BusinessWeek Rank: 8
Total Tuition and Fees: $84,055
Applicants Accepted: 12%
Pre-MBA/Post-MBA Pay in $ Thousands: 78.0/110.0
In Brief: Small size, diverse class, and attentive faculty are pluses. Access to Silicon Valley doesn't hurt either.
Booth School of Business
2006 BusinessWeek Rank: 1
Total Tuition and Fees: $97,165
Applicants Accepted: 22%
Pre-MBA/Post-MBA Pay in $ Thousands: 78.0/105.0
In Brief: This year's No. 1 has it all: ambitious students, academic rigor, and top-notch faculty.
No. 2: Harvard Business School
Boston
2006 BusinessWeek Rank: 4
Total Tuition and Fees: $101,660
Applicants Accepted: 12%
Pre-MBA/Post-MBA Pay in $ Thousands: 77.0/121.0
In Brief: A century old, Harvard's case-based curriculum continues to set the standard.
No. 3: Northwestern University
Kellogg Graduate School of Management
Evanston, Ill.
2006 BusinessWeek Rank: 3
Total Tuition and Fees: $93,918
Applicants Accepted: 20%
Pre-MBA/Post-MBA Pay in $ Thousands: 75.0/110.0
In Brief: Kellogg's distinct culture of collaboration and competition sets it apart.
No. 4: University of Pennsylvania
The Wharton School
Philadelphia
2006 BusinessWeek Rank: 2
Total Tuition and Fees: $100,860
Applicants Accepted: 18%
Pre-MBA/Post-MBA Pay in $ Thousands: 80.0/120.0
In Brief: Highly competitive program features flexible curriculum, diverse student body.
No. 5: University of Michigan
Ross School of Business
Ann Arbor, Mich.
2006 BusinessWeek Rank: 5
Total Tuition and Fees: $90,879
Applicants Accepted: 20%
Pre-MBA/Post-MBA Pay in $ Thousands: 63.5/105.0
In Brief: School spirit runs high at Ross, where students are highly sought after by recruiters.
No. 6: Stanford University
Graduate School of Business
Palo Alto, Calif.
2006 BusinessWeek Rank: 6
Total Tuition and Fees: $97,842
Applicants Accepted: 8%
Pre-MBA/Post-MBA Pay in $ Thousands: 75.0/125.0
In Brief: Small classes and sense of community in the heart of Silicon Valley are hard to beat.
No. 7: Columbia Business School
New York
2006 BusinessWeek Rank: 10
Total Tuition and Fees: $94,104
Applicants Accepted: 15%
Pre-MBA/Post-MBA Pay in $ Thousands: 75.0/110.0
In Brief: Finance focus and access to Wall Street are pluses—or used to be before the investment banking industry collapsed.
No. 8: Duke University
Fuqua School of Business
Durham, N.C.
2006 BusinessWeek Rank: 9
Total Tuition and Fees: $99,906
Applicants Accepted: 30%
Pre-MBA/Post-MBA Pay in $ Thousands: 65.0/100.0
In Brief: Passionate teachers and competitive, collaborative learning environment all get high marks.
No. 9: MIT
Sloan School of Management
Cambridge, Mass.
2006 BusinessWeek Rank: 7
Total Tuition and Fees: $93,568
Applicants Accepted: 15%
Pre-MBA/Post-MBA Pay in $ Thousands: 70.0/116.0
In Brief: Quantitative skills and entrepreneurship are this program's strong suits.
No. 10: University of California-Berkeley
Haas School of Business
Berkeley, Calif.
2006 BusinessWeek Rank: 8
Total Tuition and Fees: $84,055
Applicants Accepted: 12%
Pre-MBA/Post-MBA Pay in $ Thousands: 78.0/110.0
In Brief: Small size, diverse class, and attentive faculty are pluses. Access to Silicon Valley doesn't hurt either.
Friday, October 24, 2008
Goodbye Letter of a Hedge Fund Manager
Now, this is how you close a fund!
Andrew Lahde, manager of a small California hedge fund, Lahde Capital, burst into the spotlight last year after his one-year-old fund returned 866% betting on the subprime collapse. Last month, he took his ball and went home. Tired of the stress, he closed the fund.
Today, Lahde passed along his "goodbye" letter (via FT Alphaville and Portfolio.com), a snarky "Up Yours" to those who do deserve it.
Enjoy:
Dear Investor:
Today I write not to gloat. Given the pain that nearly everyone is experiencing, that would be entirely inappropriate. Nor am I writing to make further predictions, as most of my forecasts in previous letters have unfolded or are in the process of unfolding. Instead, I am writing to say goodbye.
Recently, on the front page of Section C of the Wall Street Journal, a hedge fund manager who was also closing up shop (a $300 million fund), was quoted as saying, “What I have learned about the hedge fund business is that I hate it.” I could not agree more with that statement. I was in this game for the money. The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy, only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.
There are far too many people for me to sincerely thank for my success. However, I do not want to sound like a Hollywood actor accepting an award. The money was reward enough. Furthermore, the endless list those deserving thanks know who they are.
I will no longer manage money for other people or institutions. I have enough of my own wealth to manage. Some people, who think they have arrived at a reasonable estimate of my net worth, might be surprised that I would call it quits with such a small war chest. That is fine; I am content with my rewards. Moreover, I will let others try to amass nine, ten or eleven figure net worths. Meanwhile, their lives suck. Appointments back to back, booked solid for the next three months, they look forward to their two week vacation in January during which they will likely be glued to their Blackberries or other such devices. What is the point? They will all be forgotten in fifty years anyway. Steve Balmer, Steven Cohen, and Larry Ellison will all be forgotten. I do not understand the legacy thing. Nearly everyone will be forgotten. Give up on leaving your mark. Throw the Blackberry away and enjoy life.
So this is it. With all due respect, I am dropping out. Please do not expect any type of reply to emails or voicemails within normal time frames or at all. Andy Springer and his company will be handling the dissolution of the fund. And don’t worry about my employees, they were always employed by Mr. Springer’s company and only one (who has been well-rewarded) will lose his job.
I have no interest in any deals in which anyone would like me to participate. I truly do not have a strong opinion about any market right now, other than to say that things will continue to get worse for some time, probably years. I am content sitting on the sidelines and waiting. After all, sitting and waiting is how we made money from the subprime debacle. I now have time to repair my health, which was destroyed by the stress I layered onto myself over the past two years, as well as my entire life — where I had to compete for spaces in universities and graduate schools, jobs and assets under management — with those who had all the advantages (rich parents) that I did not. May meritocracy be part of a new form of government, which needs to be established.
On the issue of the U.S. Government, I would like to make a modest proposal. First, I point out the obvious flaws, whereby legislation was repeatedly brought forth to Congress over the past eight years, which would have reigned in the predatory lending practices of now mostly defunct institutions. These institutions regularly filled the coffers of both parties in return for voting down all of this legislation designed to protect the common citizen. This is an outrage, yet no one seems to know or care about it. Since Thomas Jefferson and Adam Smith passed, I would argue that there has been a dearth of worthy philosophers in this country, at least ones focused on improving government. Capitalism worked for two hundred years, but times change, and systems become corrupt. George Soros, a man of staggering wealth, has stated that he would like to be remembered as a philosopher. My suggestion is that this great man start and sponsor a forum for great minds to come together to create a new system of government that truly represents the common man’s interest, while at the same time creating rewards great enough to attract the best and brightest minds to serve in government roles without having to rely on corruption to further their interests or lifestyles. This forum could be similar to the one used to create the operating system, Linux, which competes with Microsoft’s near monopoly. I believe there is an answer, but for now the system is clearly broken.
Lastly, while I still have an audience, I would like to bring attention to an alternative food and energy source. You won’t see it included in BP’s, “Feel good. We are working on sustainable solutions,” television commercials, nor is it mentioned in ADM’s similar commercials. But hemp has been used for at least 5,000 years for cloth and food, as well as just about everything that is produced from petroleum products. Hemp is not marijuana and vice versa. Hemp is the male plant and it grows like a weed, hence the slang term. The original American flag was made of hemp fiber and our Constitution was printed on paper made of hemp. It was used as recently as World War II by the U.S. Government, and then promptly made illegal after the war was won. At a time when rhetoric is flying about becoming more self-sufficient in terms of energy, why is it illegal to grow this plant in this country? Ah, the female. The evil female plant — marijuana. It gets you high, it makes you laugh, it does not produce a hangover. Unlike alcohol, it does not result in bar fights or wife beating. So, why is this innocuous plant illegal? Is it a gateway drug? No, that would be alcohol, which is so heavily advertised in this country. My only conclusion as to why it is illegal, is that Corporate America, which owns Congress, would rather sell you Paxil, Zoloft, Xanax and other additive drugs, than allow you to grow a plant in your home without some of the profits going into their coffers. This policy is ludicrous. It has surely contributed to our dependency on foreign energy sources. Our policies have other countries literally laughing at our stupidity, most notably Canada, as well as several European nations (both Eastern and Western). You would not know this by paying attention to U.S. media sources though, as they tend not to elaborate on who is laughing at the United States this week. Please people, let’s stop the rhetoric and start thinking about how we can truly become self-sufficient.
With that I say good-bye and good luck.
All the best,
Andrew Lahde”
Andrew Lahde, manager of a small California hedge fund, Lahde Capital, burst into the spotlight last year after his one-year-old fund returned 866% betting on the subprime collapse. Last month, he took his ball and went home. Tired of the stress, he closed the fund.
Today, Lahde passed along his "goodbye" letter (via FT Alphaville and Portfolio.com), a snarky "Up Yours" to those who do deserve it.
Enjoy:
Dear Investor:
Today I write not to gloat. Given the pain that nearly everyone is experiencing, that would be entirely inappropriate. Nor am I writing to make further predictions, as most of my forecasts in previous letters have unfolded or are in the process of unfolding. Instead, I am writing to say goodbye.
Recently, on the front page of Section C of the Wall Street Journal, a hedge fund manager who was also closing up shop (a $300 million fund), was quoted as saying, “What I have learned about the hedge fund business is that I hate it.” I could not agree more with that statement. I was in this game for the money. The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy, only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.
There are far too many people for me to sincerely thank for my success. However, I do not want to sound like a Hollywood actor accepting an award. The money was reward enough. Furthermore, the endless list those deserving thanks know who they are.
I will no longer manage money for other people or institutions. I have enough of my own wealth to manage. Some people, who think they have arrived at a reasonable estimate of my net worth, might be surprised that I would call it quits with such a small war chest. That is fine; I am content with my rewards. Moreover, I will let others try to amass nine, ten or eleven figure net worths. Meanwhile, their lives suck. Appointments back to back, booked solid for the next three months, they look forward to their two week vacation in January during which they will likely be glued to their Blackberries or other such devices. What is the point? They will all be forgotten in fifty years anyway. Steve Balmer, Steven Cohen, and Larry Ellison will all be forgotten. I do not understand the legacy thing. Nearly everyone will be forgotten. Give up on leaving your mark. Throw the Blackberry away and enjoy life.
So this is it. With all due respect, I am dropping out. Please do not expect any type of reply to emails or voicemails within normal time frames or at all. Andy Springer and his company will be handling the dissolution of the fund. And don’t worry about my employees, they were always employed by Mr. Springer’s company and only one (who has been well-rewarded) will lose his job.
I have no interest in any deals in which anyone would like me to participate. I truly do not have a strong opinion about any market right now, other than to say that things will continue to get worse for some time, probably years. I am content sitting on the sidelines and waiting. After all, sitting and waiting is how we made money from the subprime debacle. I now have time to repair my health, which was destroyed by the stress I layered onto myself over the past two years, as well as my entire life — where I had to compete for spaces in universities and graduate schools, jobs and assets under management — with those who had all the advantages (rich parents) that I did not. May meritocracy be part of a new form of government, which needs to be established.
On the issue of the U.S. Government, I would like to make a modest proposal. First, I point out the obvious flaws, whereby legislation was repeatedly brought forth to Congress over the past eight years, which would have reigned in the predatory lending practices of now mostly defunct institutions. These institutions regularly filled the coffers of both parties in return for voting down all of this legislation designed to protect the common citizen. This is an outrage, yet no one seems to know or care about it. Since Thomas Jefferson and Adam Smith passed, I would argue that there has been a dearth of worthy philosophers in this country, at least ones focused on improving government. Capitalism worked for two hundred years, but times change, and systems become corrupt. George Soros, a man of staggering wealth, has stated that he would like to be remembered as a philosopher. My suggestion is that this great man start and sponsor a forum for great minds to come together to create a new system of government that truly represents the common man’s interest, while at the same time creating rewards great enough to attract the best and brightest minds to serve in government roles without having to rely on corruption to further their interests or lifestyles. This forum could be similar to the one used to create the operating system, Linux, which competes with Microsoft’s near monopoly. I believe there is an answer, but for now the system is clearly broken.
Lastly, while I still have an audience, I would like to bring attention to an alternative food and energy source. You won’t see it included in BP’s, “Feel good. We are working on sustainable solutions,” television commercials, nor is it mentioned in ADM’s similar commercials. But hemp has been used for at least 5,000 years for cloth and food, as well as just about everything that is produced from petroleum products. Hemp is not marijuana and vice versa. Hemp is the male plant and it grows like a weed, hence the slang term. The original American flag was made of hemp fiber and our Constitution was printed on paper made of hemp. It was used as recently as World War II by the U.S. Government, and then promptly made illegal after the war was won. At a time when rhetoric is flying about becoming more self-sufficient in terms of energy, why is it illegal to grow this plant in this country? Ah, the female. The evil female plant — marijuana. It gets you high, it makes you laugh, it does not produce a hangover. Unlike alcohol, it does not result in bar fights or wife beating. So, why is this innocuous plant illegal? Is it a gateway drug? No, that would be alcohol, which is so heavily advertised in this country. My only conclusion as to why it is illegal, is that Corporate America, which owns Congress, would rather sell you Paxil, Zoloft, Xanax and other additive drugs, than allow you to grow a plant in your home without some of the profits going into their coffers. This policy is ludicrous. It has surely contributed to our dependency on foreign energy sources. Our policies have other countries literally laughing at our stupidity, most notably Canada, as well as several European nations (both Eastern and Western). You would not know this by paying attention to U.S. media sources though, as they tend not to elaborate on who is laughing at the United States this week. Please people, let’s stop the rhetoric and start thinking about how we can truly become self-sufficient.
With that I say good-bye and good luck.
All the best,
Andrew Lahde”
Thursday, July 10, 2008
The cult of the dabbawala - From The Economist print edition
AS THE warrior king who defeated the Mughals and founded the Maratha empire of Western India in the 17th century, Shivaji Bhosle is remembered as a tactical genius as well as a benevolent ruler. The direct descendants of his Malva-caste soldiers are also developing a reputation for organisational excellence. Using an elaborate system of colour-coded boxes to convey over 170,000 meals to their destinations each day, the 5,000-strong dabbawala collective has built up an extraordinary reputation for the speed and accuracy of its deliveries. Word of their legendary efficiency and almost flawless logistics is now spreading through the rarefied world of management consulting. Impressed by the dabbawalas’ “six-sigma” certified error rate—reportedly on the order of one mistake per 6m deliveries—management gurus and bosses are queuing up to find out how they do it.
The system the dabbawalas have developed over the years revolves around strong teamwork and strict time-management. At 9am every morning, home-made meals are picked up in special boxes, which are loaded onto trolleys and pushed to a railway station. They then make their way by train to an unloading station. The boxes are rearranged so that those going to similar destinations, indicated by a system of coloured lettering, end up on the same trolley. The meals are then delivered—99.9999% of the time, to the right address.
Harvard Business School has produced a case study of the dabbawalas, urging its students to learn from the organisation, which relies entirely on human endeavour and employs no technology. For Paul Goodman, a professor of organisational psychology at Carnegie Mellon University who has made a documentary on the dabbawalas, this is one of the critical aspects of their appeal to Western management thinkers. “Most of our modern business education is about analytic models, technology and efficient business practices,” he says. The dabbawalas, by contrast, focus more on “human and social ingenuity”, he says.
Firms, both Indian and foreign, are similarly curious. Tata, Coca-Cola and Daimler have all invited dabbawalas to explain their model to managers. Last month it was the turn of delegates at an accountancy conference in Dubai. There are even plans within the organisation to create a consulting business. The dabbawalas, who all receive the same pay, are also seen as paragons of “bottom up” social entrepreneurship. C.K. Prahalad, a professor at the University of Michigan’s Ross School of Business, says they show how a home-grown business can help lift workers at the “bottom of the pyramid” out of poverty. They also contradict the stereotype of developing-world labourers as low-wage economic victims.
In Salman Rushdie’s 1988 novel “The Satanic Verses”, one of the main characters, Gibreel Farishta, worked as a dabbawala before going on to become a film star. The deliverymen no longer need a career change to get noticed.
The system the dabbawalas have developed over the years revolves around strong teamwork and strict time-management. At 9am every morning, home-made meals are picked up in special boxes, which are loaded onto trolleys and pushed to a railway station. They then make their way by train to an unloading station. The boxes are rearranged so that those going to similar destinations, indicated by a system of coloured lettering, end up on the same trolley. The meals are then delivered—99.9999% of the time, to the right address.
Harvard Business School has produced a case study of the dabbawalas, urging its students to learn from the organisation, which relies entirely on human endeavour and employs no technology. For Paul Goodman, a professor of organisational psychology at Carnegie Mellon University who has made a documentary on the dabbawalas, this is one of the critical aspects of their appeal to Western management thinkers. “Most of our modern business education is about analytic models, technology and efficient business practices,” he says. The dabbawalas, by contrast, focus more on “human and social ingenuity”, he says.
Firms, both Indian and foreign, are similarly curious. Tata, Coca-Cola and Daimler have all invited dabbawalas to explain their model to managers. Last month it was the turn of delegates at an accountancy conference in Dubai. There are even plans within the organisation to create a consulting business. The dabbawalas, who all receive the same pay, are also seen as paragons of “bottom up” social entrepreneurship. C.K. Prahalad, a professor at the University of Michigan’s Ross School of Business, says they show how a home-grown business can help lift workers at the “bottom of the pyramid” out of poverty. They also contradict the stereotype of developing-world labourers as low-wage economic victims.
In Salman Rushdie’s 1988 novel “The Satanic Verses”, one of the main characters, Gibreel Farishta, worked as a dabbawala before going on to become a film star. The deliverymen no longer need a career change to get noticed.
Saturday, June 14, 2008
How leaders trip over their own Achilles heel - John Izzo
Many years ago, when I worked as the vice-president of a consulting company, staffers were discussing how a client was so competitive that it got in the way of his success. I casually mentioned how hard it was for me to understand that behaviour, since I was not very competitive myself.
How wrong I was. After the meeting, one colleague had the guts to tell me he hoped I really didn't believe that about myself. I was, he said, "the most competitive person" he knew. Furthermore, everyone considered me a "know-it-all" who would argue a point just to prove how smart I was. "Other than that," he quipped, "everybody loves you."
Amazingly, until he took me aside, I had no clue others saw me that way. Not only did it make me less well liked, but getting ideas from others was being hampered by my need to always be right. It limited my ability to perform at my leadership best.
Call it my Achilles heel: a behavioural weakness so powerful that, despite many other strengths, it could impede career success.
Everyone suffers from at least one such fatal flaw, a quality so annoying that, even as people seem to score success, it can sabotage possibilities of further promotion or stand in the way of forming the networks that help a career grow.
Anyone who wants to be a leader or aspires to that role needs to discover his or her Achilles heel, and take steps to overcome it.
The flaw can take many forms: an inability to listen effectively, a lack of showing appreciation, dismissing other people's opinions, being overly critical, having to be right all the time, tending to micromanage, blaming excessively or resorting to sarcasm.
Ironically, people often remain blissfully unaware of their Achilles heel even while all those around them are painfully aware of it. It may even be a regular topic of conversation among colleagues and subordinates, yet nobody will tell the one person who needs to know it.
How can otherwise smart and successful people be so unaware of such critical flaws?
One major reason is that we rarely see ourselves the way others see us. And the higher up we go, the less likely anyone is to point out our flaws. Employees and peers may feel it's too risky to confront a manager. They may also feel someone would not be open to such feedback, especially when the flaw is perceived to be so much a part of a person's identity.
What's more, many leaders never ask.
So how can you discover your Achilles heel? Simple: Don't delude yourself. Assume you have such a flaw, since most of us do. Then ask, and enlist the help of others in changing it.
To create an environment that will invite such feedback, tell people that you want it. State your awareness there are ways leaders behave that hamper their effectiveness - and say you want to be a more effective leader.
Here's a tip: It has been my experience that people are more likely to offer up constructive feedback if they are asked to provide both positive and negative comment.
So it's best to ask both what is working well, and what one thing you do that you could change to make the biggest difference.
Another tip: Be receptive to the reply. Don't debate or defend it. How you react to hearing about your Achilles heel can either shut down conversation or encourage it.
So rather than get defensive, be open. For example, if an employee tells you that you would be more effective if you were more consistent, don't respond with something like "I may appear inconsistent, but let me explain." Rather, ask for clarity: "Can you give me some examples of what you mean by inconsistent or can you help me with a recent example of when I acted this way?" Then ask for specifics about how you could act differently.
Here's a third tip: Humour helps. If people won't give you the goods directly, they'll often hint at it or give veiled feedback in the guise of jocularity.
One client, the chief executive officer of a health care company, learned about his Achilles heel through a jab at an office party. A peer offered up a toast to "the manager most able to cut you to greatness with his tongue."
The room burst into laughter. But the CEO caught the seriousness of the comment behind the humour and took the time later to ask about it. He learned that, while employees liked his high expectations and the way he coached, they felt his critical comments often left them feeling inadequate and unappreciated. That was his Achilles heel.
So what do you do once you've identified yours? It's time to try to change it.
Changing behaviour, especially habits built up over a lifetime, is never easy. But there are things you can do to help ease such a transition.
The first step is to let those around you know you are aware of your flaw, and want to make change.
Recently, I was working with a senior vice-president of branch banking for a large financial institution. Through formal feedback, he learned his tendency to micromanage was a real impediment. He then let his team know he was aware of the flaw, and wanted to learn how to micromanage less and trust more. He asked for help in better understanding his behaviour and requested they point out instances when he was overmanaging versus being helpful.
You can also reinforce for yourself your efforts to change. For instance, write down the change you want to make on a card and carry it with you. Jot it down on sticky notes that you place on your desk. Your messages might say something simple like: "Let people do their job" or "Don't argue just to prove you are right."
Then be conscientious about your efforts. The micromanager, for instance, decided that, every time he was tempted to ask someone about the status of a project, he would hold off for a few hours; every time, he was tempted to correct someone's work, he would ask himself first if what he was about to say was truly helpful. This made him catch his micromanaging behaviour before he acted on it.
It can also help to track and rate your progress. The micromanager committed himself to 30 days of trying to change. Every day during that month, he gave himself a grade on how well he had performed.
He found that both of these moves made a big difference in his daily behaviour. And the month-long commitment began to create a new habit.
It's also a good idea to make it fun for others. The micromanager invited his team to levy a fine of a dollar every time he slipped up, with the money going toward a team dinner. Even when he didn't agree, he went along.
Six months and $210 later, his team let him know that he was, as one employee said at the fine-funded dinner, "officially kicked out of the micro-man club."
The CEO with the biting tongue also made an effort to change. Over a year, he worked to balance positive feedback with constructive coaching, and was careful about the way he worded his criticisms.
A focus on this one behaviour paid off. Said one employee: "We used to dread hearing his feedback because he could tear you to pieces. Now, we all agree that fixing this one thing about his style turned him from being perceived as an ogre to being seen as a mentor."
One of the interesting things about your Achilles heel is that, once it's pointed out, it becomes painfully obvious. Over the few weeks after I was told about being a know-it-all, I started to notice how often I argued, how many times I would hardly listen to others' ideas because I was so eager to share my own, and how often I was talking just to prove how smart I was. I began to aggravate even myself.
So I went to those I worked with, let them know it was behaviour I wanted to change, and asked for help. I worked hard at not arguing a point just to prove I was right, on listening to the ideas of others, and on commenting on the value of their ideas..
I was able to change. And I realized that while being right might feel good at the moment, it wasn't serving my long-term interests. As a leader, I was much better off removing the poisoned arrow that had struck my heel.
Going toe to toe
Some people don't discover their Achilles heel until someone has the guts to tell them. Afraid to confront a boss or colleague about his or her flaws? Here are some tips:
Ask for permission. Try: "I have a lot of respect for you and have noticed some things I believe would make you more effective. Are you interested in hearing them?"
Balance negative with positive. Offer up at least three things you appreciate about the person before moving on to the flaw.
Frame feedback around future success. Few of us want to know our faults, but many want to know how to be more successful. So instead of telling someone he or she isn't a good listener, say, for example: "I think you would be more successful if you listened more to the ideas of others instead of debating."
Be sincere. Only offer up feedback if you honestly want to help. If that comes across, it's likely to get a better reception.
Be supportive. Say: "I believe you have good intentions and have great potential but I have noticed that your tendency to be critical often discourages others."
Give helpful examples and suggest alternatives. For example, say: "Sometimes people feel you don't trust them because you keep checking up with people. Perhaps you could set up regular meetings for updates and ask people to contact you in between if they need your help."
How wrong I was. After the meeting, one colleague had the guts to tell me he hoped I really didn't believe that about myself. I was, he said, "the most competitive person" he knew. Furthermore, everyone considered me a "know-it-all" who would argue a point just to prove how smart I was. "Other than that," he quipped, "everybody loves you."
Amazingly, until he took me aside, I had no clue others saw me that way. Not only did it make me less well liked, but getting ideas from others was being hampered by my need to always be right. It limited my ability to perform at my leadership best.
Call it my Achilles heel: a behavioural weakness so powerful that, despite many other strengths, it could impede career success.
Everyone suffers from at least one such fatal flaw, a quality so annoying that, even as people seem to score success, it can sabotage possibilities of further promotion or stand in the way of forming the networks that help a career grow.
Anyone who wants to be a leader or aspires to that role needs to discover his or her Achilles heel, and take steps to overcome it.
The flaw can take many forms: an inability to listen effectively, a lack of showing appreciation, dismissing other people's opinions, being overly critical, having to be right all the time, tending to micromanage, blaming excessively or resorting to sarcasm.
Ironically, people often remain blissfully unaware of their Achilles heel even while all those around them are painfully aware of it. It may even be a regular topic of conversation among colleagues and subordinates, yet nobody will tell the one person who needs to know it.
How can otherwise smart and successful people be so unaware of such critical flaws?
One major reason is that we rarely see ourselves the way others see us. And the higher up we go, the less likely anyone is to point out our flaws. Employees and peers may feel it's too risky to confront a manager. They may also feel someone would not be open to such feedback, especially when the flaw is perceived to be so much a part of a person's identity.
What's more, many leaders never ask.
So how can you discover your Achilles heel? Simple: Don't delude yourself. Assume you have such a flaw, since most of us do. Then ask, and enlist the help of others in changing it.
To create an environment that will invite such feedback, tell people that you want it. State your awareness there are ways leaders behave that hamper their effectiveness - and say you want to be a more effective leader.
Here's a tip: It has been my experience that people are more likely to offer up constructive feedback if they are asked to provide both positive and negative comment.
So it's best to ask both what is working well, and what one thing you do that you could change to make the biggest difference.
Another tip: Be receptive to the reply. Don't debate or defend it. How you react to hearing about your Achilles heel can either shut down conversation or encourage it.
So rather than get defensive, be open. For example, if an employee tells you that you would be more effective if you were more consistent, don't respond with something like "I may appear inconsistent, but let me explain." Rather, ask for clarity: "Can you give me some examples of what you mean by inconsistent or can you help me with a recent example of when I acted this way?" Then ask for specifics about how you could act differently.
Here's a third tip: Humour helps. If people won't give you the goods directly, they'll often hint at it or give veiled feedback in the guise of jocularity.
One client, the chief executive officer of a health care company, learned about his Achilles heel through a jab at an office party. A peer offered up a toast to "the manager most able to cut you to greatness with his tongue."
The room burst into laughter. But the CEO caught the seriousness of the comment behind the humour and took the time later to ask about it. He learned that, while employees liked his high expectations and the way he coached, they felt his critical comments often left them feeling inadequate and unappreciated. That was his Achilles heel.
So what do you do once you've identified yours? It's time to try to change it.
Changing behaviour, especially habits built up over a lifetime, is never easy. But there are things you can do to help ease such a transition.
The first step is to let those around you know you are aware of your flaw, and want to make change.
Recently, I was working with a senior vice-president of branch banking for a large financial institution. Through formal feedback, he learned his tendency to micromanage was a real impediment. He then let his team know he was aware of the flaw, and wanted to learn how to micromanage less and trust more. He asked for help in better understanding his behaviour and requested they point out instances when he was overmanaging versus being helpful.
You can also reinforce for yourself your efforts to change. For instance, write down the change you want to make on a card and carry it with you. Jot it down on sticky notes that you place on your desk. Your messages might say something simple like: "Let people do their job" or "Don't argue just to prove you are right."
Then be conscientious about your efforts. The micromanager, for instance, decided that, every time he was tempted to ask someone about the status of a project, he would hold off for a few hours; every time, he was tempted to correct someone's work, he would ask himself first if what he was about to say was truly helpful. This made him catch his micromanaging behaviour before he acted on it.
It can also help to track and rate your progress. The micromanager committed himself to 30 days of trying to change. Every day during that month, he gave himself a grade on how well he had performed.
He found that both of these moves made a big difference in his daily behaviour. And the month-long commitment began to create a new habit.
It's also a good idea to make it fun for others. The micromanager invited his team to levy a fine of a dollar every time he slipped up, with the money going toward a team dinner. Even when he didn't agree, he went along.
Six months and $210 later, his team let him know that he was, as one employee said at the fine-funded dinner, "officially kicked out of the micro-man club."
The CEO with the biting tongue also made an effort to change. Over a year, he worked to balance positive feedback with constructive coaching, and was careful about the way he worded his criticisms.
A focus on this one behaviour paid off. Said one employee: "We used to dread hearing his feedback because he could tear you to pieces. Now, we all agree that fixing this one thing about his style turned him from being perceived as an ogre to being seen as a mentor."
One of the interesting things about your Achilles heel is that, once it's pointed out, it becomes painfully obvious. Over the few weeks after I was told about being a know-it-all, I started to notice how often I argued, how many times I would hardly listen to others' ideas because I was so eager to share my own, and how often I was talking just to prove how smart I was. I began to aggravate even myself.
So I went to those I worked with, let them know it was behaviour I wanted to change, and asked for help. I worked hard at not arguing a point just to prove I was right, on listening to the ideas of others, and on commenting on the value of their ideas..
I was able to change. And I realized that while being right might feel good at the moment, it wasn't serving my long-term interests. As a leader, I was much better off removing the poisoned arrow that had struck my heel.
Going toe to toe
Some people don't discover their Achilles heel until someone has the guts to tell them. Afraid to confront a boss or colleague about his or her flaws? Here are some tips:
Ask for permission. Try: "I have a lot of respect for you and have noticed some things I believe would make you more effective. Are you interested in hearing them?"
Balance negative with positive. Offer up at least three things you appreciate about the person before moving on to the flaw.
Frame feedback around future success. Few of us want to know our faults, but many want to know how to be more successful. So instead of telling someone he or she isn't a good listener, say, for example: "I think you would be more successful if you listened more to the ideas of others instead of debating."
Be sincere. Only offer up feedback if you honestly want to help. If that comes across, it's likely to get a better reception.
Be supportive. Say: "I believe you have good intentions and have great potential but I have noticed that your tendency to be critical often discourages others."
Give helpful examples and suggest alternatives. For example, say: "Sometimes people feel you don't trust them because you keep checking up with people. Perhaps you could set up regular meetings for updates and ask people to contact you in between if they need your help."
Wednesday, June 11, 2008
With online trading, it pays to shop around
It's nice to know as you gas up your car or buy groceries that some things in life are still a bargain.
Online stock-trading commissions, for example. At a discount broker, also called an online or direct brokerage, you can trade stocks for as little as $1 to $29 over the Internet, depending on which firm you use, how large your account is and how often you trade. And whereas brokers used to use commission schedules that charged you a lot more for larger orders, many of them now use a flat rate.
With all sorts of daily living costs on the rise, now's a good time to make sure you're paying as little as possible to invest in stocks. Let's start with a reminder of how you benefit when you cut your trading costs.
First, and most obviously, paying less in commissions can help boost your returns. On a dozen trades per year, the difference between paying $10 and $29 per trade amounts to an extra $228 in your account. Low commissions can also help you put cost considerations aside so you can make buy and sell decisions for your portfolio based strictly on investing merit.
Several years ago, the standard online discount brokerage commission schedule was based on a $29 minimum for trades of up to 1,000 shares placed online. Lower costs were available to active traders - who make 30-plus trades per quarter - but this group represented only a small minority of customers.
E*Trade Canada intensified the level of price competition when it introduced a flat rate of $9.99 for clients who traded actively or had $50,000 in assets with the firm (with less, you pay $19.99). Very quickly, heavyweights like BMO InvestorLine, RBC Direct Investing and industry leader TD Waterhouse began to offer sub-$10 trades for clients with a total of $100,000 in assets. Note: The gap between online commissions and those for trades placed by telephone with a live agent are growing ever larger.
As far as the big firms have come in lowering commissions, they don't offer the cheapest trades around. For that, you have to try small brokers like Questrade and Interactive Brokers.
Both Questrade and IB have been around for years, primarily serving very active or professional traders who require high levels of data and flexibility in placing their trades. Questrade in particular has been trying to appeal to cost-conscious mainstream investors with a plan that offers commissions of 1 cent a share with a minimum of $4.95 and a maximum of $9.95.
IB describes itself on its website as "the professional's gateway to the world's markets," which tells you what type of clientele is being served. But the firm also has a detuned version of its trading platform, called WebTrader, which should be manageable for reasonably experienced investors who are comfortable with online investing.
The reason to consider IB is that it charges 1 cent per share to trade Canadian stocks and half a cent for U.S. stocks, with a minimum commission of $1. You read that correctly - you could, for example, buy 100 shares of a $50 TSX-listed stock and pay $1 in commissions.
Remember, though, that IB is a firm for serious traders (it doesn't even have registered accounts). You need a $10,000 (U.S.) deposit to open an account and you're subject to account fees if you don't meet requirements for a minimum level of activity. Stock market data feeds cost extra, although you can skip them.
The cheapest broker for your account depends in large part on how much money you have. With a small account, you'll pay a minimum of just under $20 at Credential Direct, E*Trade and Qtrade, or less at Questrade and IB. Most other brokers charge in the $25 to $29 range.
Many brokers now cut their cost to the sub-$10 range if you have $100,000 in assets with them, and this usually encompasses multiple accounts. If you have your registered retirement savings plan account at one broker and your registered education savings plan and cash accounts elsewhere, consider a consolidation to get up to the $100,000 mark (or, in the case of E*Trade, $50,000).
Despite the trend for falling commissions, trading costs remain on the high side at some brokers. Scotia McLeod Direct Investing charges $28.95 for up to 1,000 shares and up to 3 cents per share for trades of more than 1,000 shares. If you placed an order for 5,000 shares of a stock trading at $7, you'd pay $150. Compare that to the flat $10 commissions available elsewhere. For active traders, SMDI offers flat-rate commissions of $8.95 to $14.95.
CIBC Investor's Edge charges a minimum of $25 for market orders, where you accept or agree to pay the going market cost of a stock, or $28.95 for orders where you put limits on what you'll accept or pay. If you're an active trader, CIBC offers a deal of $395 paid upfront for 50 trades.
When choosing a discount broker, low commissions have to be balanced against the quality of service, tools and resources available. Consult The Globe and Mail's annual online brokerage survey, available on Globeinvestor.com (look for the Noteworthy headline close to the bottom of the homepage, on the right side), and check individual brokerage websites for demos and other information. Also try the ratings issued by a company called Surviscor on its website at surviscor.com.
When assessing the importance of commission costs on your portfolio, remember that the number of times you buy and sell stocks is just part of the equation. With low commissions, you can be aggressive and yet cost effective in managing your portfolio.
For example, you can cheaply use stop-loss orders, where your stocks are sold at preset prices to either lock in gains or limit losses. It's also more economical to rebalance your portfolio, which means selling down your winners and putting more into asset classes that are under-represented. One last benefit of cheap commissions: It's more cost effective to average your way into a stock, which means making multiple periodic purchases to limit the risk of making a big commitment to a stock or exchange-traded fund just before it tanks.
Discount brokers have become a lot more price competitive in the past year or so, providing a welcome price to the rising cost of so much else. Make sure you're getting your fair share.
Discount brokerage cost comparison
You're an occassional stock trader who is looking for the lowest possible costs for trading online. Here's a comparison of minimum commissions at a variety of brokers.
Minimum
Broker commission Web address
BMO InvestorLine $25 market bmoinvestorline.com
less than $100,000 in assets $29 limit
$100,000+ $9.95
CIBC Investor's Edge $25 market investorsedge.cibc.com
$28.95 limit
Credential Direct $19 credentialdirect.com
Disnat
disnat.com
less than $100,000 in assets $29
$100,000+ $9.95
eNorthern $24 enorthern.com
E*Trade Canada
canada.etrade.com
less than $50,000 in assets $19.99
$50,000+ $9.99
HSBC InvesDirect $29 investdirect.hsbc.ca
Interactive Brokers $1 interactivebrokers.ca
National Bank Direct Brokerage $28.95 nbdb.ca
Qtrade $19 market qtrade.ca
less than $100,000 in assets $23 limit
$100,000+ $9.95
Questrade $4.95 questrade.com
RBC Direct Investing
rbcdirectinvesting.com
less than $100,000 in assets $28.95
$100,000+ $9.95
ScotiaMcLeod Direct Investing $28.95 scotiamcleoddirect.com
TD Waterhouse
tdwaterhouse.ca
less than $100,000 in assets $29
$100,000+ $9.99
Trade Freedom $9.95 tradefreedom.com
Five ways for keep brokerage commissions low
1. Consolidate assets at one firm to benefit from low rates for large accounts.
2. Ask if there are any data or market access fess in addition to posted commissions.
3. If you typically trade more than 1,000 shares at a time, flat-rate commissions will save you a lot of money.
4. Hyper-active traders may qualify for lower rates than are posted here.
5. Avoid trading by phone through a live agent - it costs substantially more.
Online stock-trading commissions, for example. At a discount broker, also called an online or direct brokerage, you can trade stocks for as little as $1 to $29 over the Internet, depending on which firm you use, how large your account is and how often you trade. And whereas brokers used to use commission schedules that charged you a lot more for larger orders, many of them now use a flat rate.
With all sorts of daily living costs on the rise, now's a good time to make sure you're paying as little as possible to invest in stocks. Let's start with a reminder of how you benefit when you cut your trading costs.
First, and most obviously, paying less in commissions can help boost your returns. On a dozen trades per year, the difference between paying $10 and $29 per trade amounts to an extra $228 in your account. Low commissions can also help you put cost considerations aside so you can make buy and sell decisions for your portfolio based strictly on investing merit.
Several years ago, the standard online discount brokerage commission schedule was based on a $29 minimum for trades of up to 1,000 shares placed online. Lower costs were available to active traders - who make 30-plus trades per quarter - but this group represented only a small minority of customers.
E*Trade Canada intensified the level of price competition when it introduced a flat rate of $9.99 for clients who traded actively or had $50,000 in assets with the firm (with less, you pay $19.99). Very quickly, heavyweights like BMO InvestorLine, RBC Direct Investing and industry leader TD Waterhouse began to offer sub-$10 trades for clients with a total of $100,000 in assets. Note: The gap between online commissions and those for trades placed by telephone with a live agent are growing ever larger.
As far as the big firms have come in lowering commissions, they don't offer the cheapest trades around. For that, you have to try small brokers like Questrade and Interactive Brokers.
Both Questrade and IB have been around for years, primarily serving very active or professional traders who require high levels of data and flexibility in placing their trades. Questrade in particular has been trying to appeal to cost-conscious mainstream investors with a plan that offers commissions of 1 cent a share with a minimum of $4.95 and a maximum of $9.95.
IB describes itself on its website as "the professional's gateway to the world's markets," which tells you what type of clientele is being served. But the firm also has a detuned version of its trading platform, called WebTrader, which should be manageable for reasonably experienced investors who are comfortable with online investing.
The reason to consider IB is that it charges 1 cent per share to trade Canadian stocks and half a cent for U.S. stocks, with a minimum commission of $1. You read that correctly - you could, for example, buy 100 shares of a $50 TSX-listed stock and pay $1 in commissions.
Remember, though, that IB is a firm for serious traders (it doesn't even have registered accounts). You need a $10,000 (U.S.) deposit to open an account and you're subject to account fees if you don't meet requirements for a minimum level of activity. Stock market data feeds cost extra, although you can skip them.
The cheapest broker for your account depends in large part on how much money you have. With a small account, you'll pay a minimum of just under $20 at Credential Direct, E*Trade and Qtrade, or less at Questrade and IB. Most other brokers charge in the $25 to $29 range.
Many brokers now cut their cost to the sub-$10 range if you have $100,000 in assets with them, and this usually encompasses multiple accounts. If you have your registered retirement savings plan account at one broker and your registered education savings plan and cash accounts elsewhere, consider a consolidation to get up to the $100,000 mark (or, in the case of E*Trade, $50,000).
Despite the trend for falling commissions, trading costs remain on the high side at some brokers. Scotia McLeod Direct Investing charges $28.95 for up to 1,000 shares and up to 3 cents per share for trades of more than 1,000 shares. If you placed an order for 5,000 shares of a stock trading at $7, you'd pay $150. Compare that to the flat $10 commissions available elsewhere. For active traders, SMDI offers flat-rate commissions of $8.95 to $14.95.
CIBC Investor's Edge charges a minimum of $25 for market orders, where you accept or agree to pay the going market cost of a stock, or $28.95 for orders where you put limits on what you'll accept or pay. If you're an active trader, CIBC offers a deal of $395 paid upfront for 50 trades.
When choosing a discount broker, low commissions have to be balanced against the quality of service, tools and resources available. Consult The Globe and Mail's annual online brokerage survey, available on Globeinvestor.com (look for the Noteworthy headline close to the bottom of the homepage, on the right side), and check individual brokerage websites for demos and other information. Also try the ratings issued by a company called Surviscor on its website at surviscor.com.
When assessing the importance of commission costs on your portfolio, remember that the number of times you buy and sell stocks is just part of the equation. With low commissions, you can be aggressive and yet cost effective in managing your portfolio.
For example, you can cheaply use stop-loss orders, where your stocks are sold at preset prices to either lock in gains or limit losses. It's also more economical to rebalance your portfolio, which means selling down your winners and putting more into asset classes that are under-represented. One last benefit of cheap commissions: It's more cost effective to average your way into a stock, which means making multiple periodic purchases to limit the risk of making a big commitment to a stock or exchange-traded fund just before it tanks.
Discount brokers have become a lot more price competitive in the past year or so, providing a welcome price to the rising cost of so much else. Make sure you're getting your fair share.
Discount brokerage cost comparison
You're an occassional stock trader who is looking for the lowest possible costs for trading online. Here's a comparison of minimum commissions at a variety of brokers.
Minimum
Broker commission Web address
BMO InvestorLine $25 market bmoinvestorline.com
less than $100,000 in assets $29 limit
$100,000+ $9.95
CIBC Investor's Edge $25 market investorsedge.cibc.com
$28.95 limit
Credential Direct $19 credentialdirect.com
Disnat
disnat.com
less than $100,000 in assets $29
$100,000+ $9.95
eNorthern $24 enorthern.com
E*Trade Canada
canada.etrade.com
less than $50,000 in assets $19.99
$50,000+ $9.99
HSBC InvesDirect $29 investdirect.hsbc.ca
Interactive Brokers $1 interactivebrokers.ca
National Bank Direct Brokerage $28.95 nbdb.ca
Qtrade $19 market qtrade.ca
less than $100,000 in assets $23 limit
$100,000+ $9.95
Questrade $4.95 questrade.com
RBC Direct Investing
rbcdirectinvesting.com
less than $100,000 in assets $28.95
$100,000+ $9.95
ScotiaMcLeod Direct Investing $28.95 scotiamcleoddirect.com
TD Waterhouse
tdwaterhouse.ca
less than $100,000 in assets $29
$100,000+ $9.99
Trade Freedom $9.95 tradefreedom.com
Five ways for keep brokerage commissions low
1. Consolidate assets at one firm to benefit from low rates for large accounts.
2. Ask if there are any data or market access fess in addition to posted commissions.
3. If you typically trade more than 1,000 shares at a time, flat-rate commissions will save you a lot of money.
4. Hyper-active traders may qualify for lower rates than are posted here.
5. Avoid trading by phone through a live agent - it costs substantially more.
Sunday, June 1, 2008
Through a glass rosily - John Daly
Meredith Whitney's "15 minutes" appear to be far from over. The CIBC World Markets banking analyst ascended to Wall Street's equivalent of Brad-and-Angelina megastardom last October when she downgraded her rating on beleaguered Citigroup Inc.'s shares and warned of a possible dividend cut. That triggered a $369-billion (all currency in U.S. dollars), one-day drop on U.S. stock markets already shaken by the subprime lending crisis.
And what's not to love? A smart, tough-talking blonde, married to former WWE wrestler John Charles Layfield (a.k.a. "Death Mask"), who--oh so rare among analysts--actually says what she thinks. "No one had the moxie to put in print what I put in print," she said.
Indeed, Whitney's pronouncements stand out because analysts rarely issue negative recommendations, and be-cause--so far, at least--she's been right. Although it shouldn't come as a surprise to any serious investor, analysts' buy recommendations still outnumber sells--or whatever euphemisms they use--by about 9 to 1.
Back in 2002, it looked like the profession might change, when then-New York attorney general Eliot Spitzer went after analysts hard. His whipping boy: Henry Blodget, star tech analyst at Merrill Lynch during the dot-com bubble (see "Look who's back," page 9). In 2003, 10 leading firms agreed to pay $1.4 billion to settle conflict-of-interest charges, and Blodget accepted a lifetime ban from the securities industry without admitting or denying civil fraud charges.
Yet, today, the scandal is water long under the bridge. Sure, Chinese walls are higher now than at the turn of the decade, but most analysts still wear soft gloves when it comes to the companies they cover. But the intriguing question isn't why analysts don't tell the literal truth; it's why retail investors continue to believe analysts' recommendations.
In a study published last August ("Are small investors naive about incentives?"), University of California assistant professor of economics Ulrike Malmendier and Harvard Business School assistant professor Devin Shanthikumar looked at analysts' recommendations from 1993 to 2002. What they discovered proves what we already guessed: Small traders tend to follow recommendations literally, exerting upward pressure on prices after "strong buy" and "buy" recommendations, and no pressure following "hold" recommendations.
But large traders are savvier. They tend to buy after strong buy recommendations, hold after buy, and sell after hold. Why is the split so clear? Malmendier and Shanthikumar couldn't find a definite explanation in the data, although they say the reason could be gullibility, er, "investor naivete."
It's doubtful such a study would produce different results if 2008 trading activity was used, especially in light of the upsurge in websites such as newratings.com that are dedicated to tracking analysts' upgrades and downgrades.
But reading analysts' reports isn't rocket science, or at least it shouldn't be. Just ask Blodget, who has risen from the ashes and now publishes the Silicon Alley Insider, a popular online newsletter that concentrates on tech investments.
So how should individual investors read these reports? "Almost all analysts are going to be flat-out wrong at least 40% of the time," says Blodget. "As long as you understand that, the reports are very reliable. I think the quality of Wall Street research has gone up in the past 10 years, but that doesn't mean analysts are right about stocks more often."
Nor should you take their recommendations literally. "The media generally equates buy ratings with 'urging investors to buy,' which is often unfair to analysts, because the ratings themselves aren't actually action recommendations," says Blodget. "I know that sounds ridiculous, but it's true. Most firms use the words as nouns instead of verbs, as in: 'It's a buy,' and not ' Quick, mortgage your house and buy!' "
Within constraints, analysts appear to choose their words very consistently. In a study entitled "Do security analysts speak in two tongues?" published last October, Malmendier and Shanthikumar found that analysts' buy and sell recommendations tend to be more optimistic than their detailed earnings forecasts. Why? The analysts know that retail in--vestors pay close attention to the recommendations, but bigger players concentrate on earnings.
Even so, analysts employed by underwriting brokerage firms tend to be more positive than independent analysts. Yet they often revise earnings forecasts down just before companies issue results--making it easier for the companies to meet, or even better, the Street's consensus earnings targets.
Again, Blodget isn't surprised. Picking stocks is just a small part of an analyst's job. That job also includes client visits, detailed financial analysis, primary customer research, historical research, meetings with management and investment conferences. "For most professional investors, stock ratings are the least valuable service that analysts provide, because opinions are a dime a dozen," he says.
Putting it in even more startling terms, Blodget isn't optimistic that retail investors have a hope when it comes to playing against Wall Street. "A Little League team is always going to get destroyed by the Yankees," he once told Bloomberg. "It doesn't matter what field they play on, and that is exactly what happens when individuals try to compete with hedge funds."
As long as the retail investor believes the analysts, then there's no reason to believe he isn't right.
WHEN BUY MEANS HOLD
Ever read the back of your analyst's report? While there's lots of dull fine print to help you fall asleep, one reason to read it is to see how your analyst arrives at making a recommendation. Not all "buy" and "sell" recommendations are created equal.
Canaccord Adams, for instance, rates stocks as "buy," "speculative buy," "hold" or "sell." The buy stocks are supposed to generate a return of more than 10% over the next 12 months, while the speculative buy stocks have a significantly higher risk. The hold stocks are meant to generate a return of 0% to 10%, while the sell stocks are expected to lose money.
Okay, that seems fairly straightforward, but what if two stocks that are both rated buy are forecast to generate returns of 11% and 50%, respectively? If what you want are bullish stocks, you'll have to pay more attention to the analyst's target prices.
The stock-picking system over at RBC Capital Markets is different than at Canaccord. RBC designates stocks as "top pick," "outperform," "sector perform" or "underperform" based on sector comparisons. Top picks represent an analyst's best bets, and can only comprise about 10% of his recommendations. Outperforms are expected to materially outperform the sector average over 12 months, while sector performs will be in line with the sector and, you guessed it, underperforms will underperform the sector.
If the sector is expected to underperform the market, then that outperform-rated stock in a lousy sector may suddenly look a lot less enticing.--Scott Adams
LOOK WHO'S BACK
In 1998, Henry Blodgetwas the boy-wonder analyst at Merrill Lynch who set a target price of $400 (all currency in U.S. dollars) for Amazon.com when it was trading at $242. After splitting, Amazon soared to the equivalent of $500. But four years later, he was the fall guy in Eliot Spitzer's offensive against tainted Wall Street analysts who had hyped stocks to help secure fat investment banking fees for their firms. No one received more scorn than Blodget, who was on record publicly recommending a stock like Excite@Home, while describing it in an e-mail to a colleague as "such a piece of crap!" By 2003, he had quit Merrill Lynch under a cloud and agreed to a lifetime ban from direct involvement in the securities business. Though only in his mid-30s, he appeared to be washed up. Notoriety often isn't fatal in America, however. Since his downfall, he's written an online column for Slate, and contributed to Fortune, Newsweek and The New York Times. Last July, he co-founded the Silicon Alley Insider, a New York City-based online news service that's garnered a big audience among do-it-yourself investors. In March, the website Wall Street 24/7 valued the Insider at $5.4 million, and ranked it No. 12 in its list of the "25 most valuable blogs," not far behind such Internet veterans as The Drudge Report (No. 8). Blodget is also a regular contributor to Yahoo! Finance's tech ticker, a news and video site.--J.D.
And what's not to love? A smart, tough-talking blonde, married to former WWE wrestler John Charles Layfield (a.k.a. "Death Mask"), who--oh so rare among analysts--actually says what she thinks. "No one had the moxie to put in print what I put in print," she said.
Indeed, Whitney's pronouncements stand out because analysts rarely issue negative recommendations, and be-cause--so far, at least--she's been right. Although it shouldn't come as a surprise to any serious investor, analysts' buy recommendations still outnumber sells--or whatever euphemisms they use--by about 9 to 1.
Back in 2002, it looked like the profession might change, when then-New York attorney general Eliot Spitzer went after analysts hard. His whipping boy: Henry Blodget, star tech analyst at Merrill Lynch during the dot-com bubble (see "Look who's back," page 9). In 2003, 10 leading firms agreed to pay $1.4 billion to settle conflict-of-interest charges, and Blodget accepted a lifetime ban from the securities industry without admitting or denying civil fraud charges.
Yet, today, the scandal is water long under the bridge. Sure, Chinese walls are higher now than at the turn of the decade, but most analysts still wear soft gloves when it comes to the companies they cover. But the intriguing question isn't why analysts don't tell the literal truth; it's why retail investors continue to believe analysts' recommendations.
In a study published last August ("Are small investors naive about incentives?"), University of California assistant professor of economics Ulrike Malmendier and Harvard Business School assistant professor Devin Shanthikumar looked at analysts' recommendations from 1993 to 2002. What they discovered proves what we already guessed: Small traders tend to follow recommendations literally, exerting upward pressure on prices after "strong buy" and "buy" recommendations, and no pressure following "hold" recommendations.
But large traders are savvier. They tend to buy after strong buy recommendations, hold after buy, and sell after hold. Why is the split so clear? Malmendier and Shanthikumar couldn't find a definite explanation in the data, although they say the reason could be gullibility, er, "investor naivete."
It's doubtful such a study would produce different results if 2008 trading activity was used, especially in light of the upsurge in websites such as newratings.com that are dedicated to tracking analysts' upgrades and downgrades.
But reading analysts' reports isn't rocket science, or at least it shouldn't be. Just ask Blodget, who has risen from the ashes and now publishes the Silicon Alley Insider, a popular online newsletter that concentrates on tech investments.
So how should individual investors read these reports? "Almost all analysts are going to be flat-out wrong at least 40% of the time," says Blodget. "As long as you understand that, the reports are very reliable. I think the quality of Wall Street research has gone up in the past 10 years, but that doesn't mean analysts are right about stocks more often."
Nor should you take their recommendations literally. "The media generally equates buy ratings with 'urging investors to buy,' which is often unfair to analysts, because the ratings themselves aren't actually action recommendations," says Blodget. "I know that sounds ridiculous, but it's true. Most firms use the words as nouns instead of verbs, as in: 'It's a buy,' and not ' Quick, mortgage your house and buy!' "
Within constraints, analysts appear to choose their words very consistently. In a study entitled "Do security analysts speak in two tongues?" published last October, Malmendier and Shanthikumar found that analysts' buy and sell recommendations tend to be more optimistic than their detailed earnings forecasts. Why? The analysts know that retail in--vestors pay close attention to the recommendations, but bigger players concentrate on earnings.
Even so, analysts employed by underwriting brokerage firms tend to be more positive than independent analysts. Yet they often revise earnings forecasts down just before companies issue results--making it easier for the companies to meet, or even better, the Street's consensus earnings targets.
Again, Blodget isn't surprised. Picking stocks is just a small part of an analyst's job. That job also includes client visits, detailed financial analysis, primary customer research, historical research, meetings with management and investment conferences. "For most professional investors, stock ratings are the least valuable service that analysts provide, because opinions are a dime a dozen," he says.
Putting it in even more startling terms, Blodget isn't optimistic that retail investors have a hope when it comes to playing against Wall Street. "A Little League team is always going to get destroyed by the Yankees," he once told Bloomberg. "It doesn't matter what field they play on, and that is exactly what happens when individuals try to compete with hedge funds."
As long as the retail investor believes the analysts, then there's no reason to believe he isn't right.
WHEN BUY MEANS HOLD
Ever read the back of your analyst's report? While there's lots of dull fine print to help you fall asleep, one reason to read it is to see how your analyst arrives at making a recommendation. Not all "buy" and "sell" recommendations are created equal.
Canaccord Adams, for instance, rates stocks as "buy," "speculative buy," "hold" or "sell." The buy stocks are supposed to generate a return of more than 10% over the next 12 months, while the speculative buy stocks have a significantly higher risk. The hold stocks are meant to generate a return of 0% to 10%, while the sell stocks are expected to lose money.
Okay, that seems fairly straightforward, but what if two stocks that are both rated buy are forecast to generate returns of 11% and 50%, respectively? If what you want are bullish stocks, you'll have to pay more attention to the analyst's target prices.
The stock-picking system over at RBC Capital Markets is different than at Canaccord. RBC designates stocks as "top pick," "outperform," "sector perform" or "underperform" based on sector comparisons. Top picks represent an analyst's best bets, and can only comprise about 10% of his recommendations. Outperforms are expected to materially outperform the sector average over 12 months, while sector performs will be in line with the sector and, you guessed it, underperforms will underperform the sector.
If the sector is expected to underperform the market, then that outperform-rated stock in a lousy sector may suddenly look a lot less enticing.--Scott Adams
LOOK WHO'S BACK
In 1998, Henry Blodgetwas the boy-wonder analyst at Merrill Lynch who set a target price of $400 (all currency in U.S. dollars) for Amazon.com when it was trading at $242. After splitting, Amazon soared to the equivalent of $500. But four years later, he was the fall guy in Eliot Spitzer's offensive against tainted Wall Street analysts who had hyped stocks to help secure fat investment banking fees for their firms. No one received more scorn than Blodget, who was on record publicly recommending a stock like Excite@Home, while describing it in an e-mail to a colleague as "such a piece of crap!" By 2003, he had quit Merrill Lynch under a cloud and agreed to a lifetime ban from direct involvement in the securities business. Though only in his mid-30s, he appeared to be washed up. Notoriety often isn't fatal in America, however. Since his downfall, he's written an online column for Slate, and contributed to Fortune, Newsweek and The New York Times. Last July, he co-founded the Silicon Alley Insider, a New York City-based online news service that's garnered a big audience among do-it-yourself investors. In March, the website Wall Street 24/7 valued the Insider at $5.4 million, and ranked it No. 12 in its list of the "25 most valuable blogs," not far behind such Internet veterans as The Drudge Report (No. 8). Blodget is also a regular contributor to Yahoo! Finance's tech ticker, a news and video site.--J.D.
Saturday, May 31, 2008
The art of investing dangerously - DOUG STEINER
The security briefing in Toronto for our trip to Haiti was run by a burly ex-Mountie—big moustache and all—who now protects businesspeople from what he described succinctly as "bad situations."
"Do you plan on going out at night in Port-au-Prince?" he asked matter-of-factly. I can't imagine visiting any city without sampling its nightlife. "Sure," I said. He looked at me sternly. "That changes everything."
"What about Carnival?" I asked. Carnival is Haiti's massive, three-day Mardi Gras festival in February—hundreds of thousands of people dancing in the streets day and night. Of course I wanted to go.
"That will require twice the security," he said, looking at his notes. "I would suggest using locals," he added. "You'll stick out enough as it is."
ings—the manufacturer of official Major League baseballs—and a Club Med resort.
At first, Jean-Bertrand Aristide, a popular Catholic priest who had bravely spoken out against Baby Doc, appeared to offer some hope. Aristide was elected president in 1990, but was then ousted in a coup the following year. In 1994, he was reinstalled by the Clinton administration, which deployed thousands of U.S. troops to Haiti. Constitutionally barred from serving consecutive terms, Aristide was succeeded by René Préval, his prime minister, in 1996. But the two split, and, in 2000, Aristide won a presidential election that was boycotted by opposition candidates.
Which of the two is a hero and which is a villain is still the subject of violent political divisions in Haiti. Suffice it to say that by 2004, Aristide's critics were denouncing him as an autocrat who had to rely on thugs to maintain his authority. The U.S. and other developed countries wanted him out, and he was overthrown and eventually relocated to South Africa.
The United Nations moved in and set up its Stabilization Mission in Haiti (MINUSTAH—the French acronym). Basically, it's trying to rebuild the government and police force from scratch. The mission deployed a few thousand peacekeepers at first, including Canadians. Two years later, however, gangs still controlled the streets, so the UN boosted its troop contingent to more than 7,000, many from Brazil and other Latin American countries. They restored order in Port-au-Prince the way that armies do—they shot people. The fiercest fighting was in the city's poorest slum, the Cité Soleil, still loyal to Aristide.
In 2006, amid allegations of vote rigging, Préval was again elected president, with 51% of the vote in the first round, thereby avoiding a runoff. MINUSTAH, the World Bank and the International Monetary Fund (IMF) would like the next transition of power in 2011 to be a peaceful, democratic one—only the second time ever in Haiti. Their concern is strategic as well as humanitarian. The UN presence is widely regarded as a test case for what might happen in Cuba after the Castro regime falls.
All that said, during our week-long visit, Port-au-Prince was relatively calm. There were just 10 kidnappings for ransom, including the former minister of the interior and his wife. "It's not a serious crime here, like murder or rape," one businessman later assured me. "No one that I know of has ever paid more than $20,000 to be returned." A shootout at a grocery store was deadlier—one armed guard and one of nine assailants were killed. Offshore, near Great Exuma in the Bahamas, the U.S. Coast Guard plucked 131 Haitians off a leaky boat bound for Florida.
While the streets of Port-au-Prince didn't look all that dangerous, they were certainly surreal in many ways. Everyone looked about 15 years old to me—and half of Haiti's population is, indeed, under the age of 19. There also appears to be no middle class. Late-model cars clogged the streets, but the vast majority of people get around by walking, or by riding in the back of covered, colourfully painted small pickup trucks that function as taxis. They'd be a tight fit with eight passengers, yet many carry more than 20.
In Pétionville, the wealthy enclave of mansions in the hills where Haiti's remaining elite live, we passed the odd small stretch of stores as luxurious as ones you'll find on Bloor Street in Toronto or Robson in Vancouver. But prudent locals have an armed guard watch their Escalade or Porsche Cayenne if they shop during the day or dine at an elegant, yet well-hidden restaurant at night. Many also have guards posted 24/7 outside the gates to their homes. Centuries-old racial distinctions persist as well—between light-skinned French speakers at the top of the social scale and dark-skinned Creole speakers at the bottom.
All of this fit in with the grim economic assessments I'd read before I arrived. According to the IMF, Haiti's annual gross domestic product per person in 2007 was about $630 (all currency in U.S. dollars), or 151st out of 179 countries ranked. That's less than one-sixth the per capita GDP of neighbouring Dominican Republic, which many Canadian tourists find impoverished. Adjusting for inflation, per capita income in Haiti has actually declined steadily since the 1960s. The country no longer grows rice—a crop the locals were once proud of—in any quantity, nor does it have a commercial dairy of any size. One business that is booming, although it doesn't show up in official economic statistics, is the transshipment of cocaine and other illegal drugs to the U.S.
In early April, two months after we visited, riots erupted in the south, this time because of soaring international food prices, and spread quickly to Port-au-Prince. The cost of a small bowl of rice has more than doubled since last year to over 60 cents. When you earn less than $3 a day—as most working Haitians do—that hurts your stomach. Some locals have fallen back on terre, a biscuit of vegetable shortening, salt and mud, traditionally served to pregnant women and children to settle their stomachs.
Yet, against the steepest of odds, some Haitian and foreign businesses are still making money here—good, legal money.
You have to be very dogged and clever to maintain a business in Haiti, and our hotel in Pétionville was an excellent example. The first 12 rooms of the Hotel Montana were built in 1946 by Frank Cardozo and his wife, Edna. It has expanded to 120 rooms over the years, surrounded by wonderfully lush gardens. The hotel is still owned by Cardozo's daughters, Nadine Cardozo Riedl and Garthe Cardozo Stephanson, regarded as two of the hardest-working and toughest entrepreneurs in the country.
There aren't many tourists these days, but UN dignitaries, foreign leaders, the occasional celebrity, and rich Haitian expatriates visiting from Miami, Montreal or Paris want four-star accommodation. Photos of recent guests on display at the hotel include Kofi Annan, Paul Martin, and Brad and Angelina, who stayed in January, 2006. Cardozo Riedl maintains high standards, but it's an almost daily ordeal. When the city's electrical power is interrupted, the hotel's diesel-powered generators—with enough fuel to run for three weeks straight—kick in. All water is delivered from a private spring—20 truckloads a day.
Cardozo Riedl didn't discuss a more harrowing ordeal. In November, 2004, she was dragged from her car after an armed gang hijacked her motorcade. Security guards and police had apparently been paid to look the other way. She was held for eight days, and shackled and abused by her captors, until a large ransom was paid.
Her husband, Reinhard Riedl, a German dentist, is more chatty and upbeat. He's a bon vivant who could have walked out of the pages of Graham Greene or Somerset Maugham. The couple met at the 1972 Olympics in Munich. One afternoon at the Hotel Montana's cozy News Bar, he treated us to "the best rum sours in the Caribbean," mixed with Barbancourt Haitian rum by his favourite bartender.
His wife's kidnapping was "regrettable," Riedl acknowledged. And, yes, hundreds of Préval supporters stormed the hotel in January, 2006, and frolicked in the pool. South African Archbishop Desmond Tutu, who was visiting at the time, came out of his room and appealed for calm—in English, which the crowd didn't understand. But the country is now safer than it was two years ago, said Riedl. "Things are looking up for us here in Haiti."
Two Canadian companies that already have solid roots in Haiti are Montreal-based T-shirt manufacturer Gildan Activewear (more about it later) and Scotiabank. The bank has operated in Haiti since 1972, through all the upheavals.
Maxime Charles, 53, is the bank's country head. Dapper and polished, he's a proud and articulate spokesman for his employer and for Haiti. His father was ambassador to Washington in the 1940s. Charles earned business and law degrees in Haiti, and joined the bank in 1976. In 1981, he went to graduate school in France, earned a master's in international relations and law, then returned home.
As he and other Scotiabank executives repeatedly point out, the bank wouldn't have stayed unless it was earning a profit. The key has been to pick the right niches. Charles quickly reviewed the history: The bank started mainly as a corporate lender to manufacturers of baseballs, electronic switches and, more recently, clothing. But even poor individuals can benefit from banking services, and in recent years, Scotiabank has also expanded into retail deposit taking and lending.
Auto loans—$5,000 at about 20% interest being typical—have been a particularly encouraging success. "We had to convince car dealers that it would increase business," said Charles.
The bank now operates four branches in Port-au-Prince and two bank mach-ines. The branches were closed during Carnival, which is basically a week of national holidays, but just walking around the exterior of one of them was intriguing. It looked the same as suburban Scotiabank branches in Canada: red signs outside, grey countertops inside, and a drive-through.
But a small building out back housed diesel-powered emergency generators and dozens of batteries. Stuck to the window of the main door, in addition to a sign with hours of business, was another with an outline of a handgun with an X through it. Back in Toronto, Scotiabank CEO Rick Waugh later told me that checking guns at the door is indeed a service provided by the bank in many countries.
The branch was also by far the tidiest building in the neighbourhood, and we only had to drive down the street for a few minutes to see how impoverished the retail customer base can be in Port-au-Prince. We arrived at a dusty open-air market with dozens of stalls that were no more than bits of cloth or plastic held up with tall sticks. A dozen ragged-looking cows were tethered near a refuse pile. As traffic roared past, a dog drank out of an open sewer across the road.
Any talk of cash in Haiti also brings up the question of drugs, corruption and money laundering. Charles is firm and polite, but short on details. "There are a lot of clichés about this country," he said. He and other bank executives also note that the operations in Haiti have to conform to Scotiabank's corporate rules on cash transactions, as well as Canadian law and international standards. Charles is also chair of a Haitian commission on money laundering.
The more familiar and immediate risk for Charles is personal safety—his own and that of his 79 employees. Two of them have been kidnapped. Both were returned safely after their families paid ransoms, and they are still working for the bank. Charles has two armed guards around the clock at his family's own elegant three-storey house in the hills. However, the only robbery of a Scotiabank branch in Haiti that anyone recalls was 30 years ago. In Canada, on average, one Big Six bank is robbed every day.
Are the risks in Haiti worth it? And would the bank ever leave? These are questions for Waugh and Rob Pitfield, Scotiabank's executive vice-president of international banking back in Toronto. They point out that Scotiabank has been active in the Caribbean for more than 120 years, and now operates in 25 countries in Central and South America. "We're an international bank that happens to have its head office in Canada," said Waugh.
Sure, Haiti and other developing countries look daunting, said Pitfield, but "people manage these issues." A global bank needs a broad mindset. "Canadians are somewhat insular and not aware of the countries out there with wonderful people trying to get what we have," he added. "It's taught the bank to be open to ideas and to be tolerant."
The flip side of that, however, is that Waugh and Pitfield have to be very guarded about talking about political risk, especially any suggestion that the bank might leave a country. The only time that's happened was in Argentina in 2002, when the country was in a financial crisis. Waugh, then head of Scotiabank's international operations, told a reporter the bank was looking for a way to stay. Argentine newspapers turned the remark around, forcing the bank to sell a subsidiary. So Waugh now sticks to a script. "Each foreign country for Scotiabank has its own operational risk," he said.
By our third day in Port-au-Prince, I wished some people would let down their guard more. Fortunately, that evening, they did.
A stroke of luck: A handful of local business leaders agreed to sit down for a dinner in a French restaurant in Pétionville. Apart from a small sign outside, it would be easy to miss when driving past, but the traditional, richly-coloured Haitian interior was elegant. Though our conversations were off the record, I can tell you that our guests represented old-family money and a variety of businesses—manufacturing, shipping, publishing and several others.
Over steaks, seafood and much more, they gave us an earful. Right off the bat, just about all of them were vitriolic about a short article in a January issue of Forbes magazine that placed Haiti fourth on its list of the "World's Most Dangerous Destinations." Haiti? Only slightly behind Somalia, Iraq and Afghanistan? Worse than Pakistan (No. 5), Zimbabwe (No. 9), and nearby trouble spots like Jamaica and Mexico? Preposterous!
The magazine used data compiled by two international consulting firms, Annapolis, Maryland-based iJet Intelligent Risk Systems and London-based Control Risks. Forbes cited Haiti's poverty, civil unrest and police corruption. Haiti scored 5 out of 5 on a scale of danger, the only country in the western hemisphere to do so. In a telephone interview after we got home, Tobias Friedl, iJet's regional manager for Latin America, defended the rating, pointing out that kidnapping is a particularly serious threat to foreign businesspeople. Also, while there are stretches of calm in Haiti, the situation can change very quickly.
Indeed, when prodded, our guests at dinner, like just about everyone we spoke to in Haiti, agreed that the economy and government are "fragile" at best. To diversify their personal risk, pretty well all of them have a "place to go"—children abroad, a condo in Miami, a house in Montreal, an apartment in Paris and so on. Sure, they'd like Préval and the UN to succeed, but the government still can't provide basic infrastructure, social services or protection.
And their role? Like paying their workers just $2.50 a day? It's the market rate, they said, and no one is offering Haitians anything better. Corruption and drug smuggling? Business owners can control their own premises, but not what goes on beyond. As one of them put it, "there isn't even a fucking rowboat" to patrol Haiti's 1,800 kilometres of coastline.
Bracing stuff, but I also wanted to get a closer look at what a large operating Haitian business looked like. The next day, we wheedled our way into one of those, too.
There's a large industrial park just a few kilometres west of Port-au-Prince's airport. It consists of about 50 low-rise buildings that employ more than 20,000 workers, mostly sewing T-shirts and other garments. To call them factories is a bit of a misnomer. Erected in the 1970s, they would really be more suitable as warehouses. The ceilings are high, which reduces the heat, but air-conditioning them would be prohibitively expensive. They could also run 24 hours, but no one wants to risk being attacked when travelling home after dark—even workers paid $2.50 a day are targets.
In late 2006, the U.S. gave the manufacturers a huge break by lifting import duties. In the 1990s, a trade embargo nearly brought Haiti to its knees. Now, the country exports 54 million T-shirts a year, and is the fourth-largest supplier to the U.S. after Honduras, Mexico and El Salvador. It's also the cheapest, delivering shirts at an average cost of $14.66 per dozen.
All the Haitian T-shirt makers' operations are broadly similar, and the plant we toured was typical. We saw dozens of rows of workers at individual sewing machines. By and large, the factories only assemble the garments from cloth manufactured and cut out in the Dominican Republic by bigger and more sophisticated machines. Haiti provides the lowest-value-added step in the process, in part because the sewing machines would be easy to pack up and ship out of the country, if necessary.
Years ago, cocaine traffickers succeeded in concealing transshipments from Haiti in industrial containers filled with finished garments. So brand-name U.S. clothing companies now require their Haitian manufacturers to certify shipments as drug-free. The factories buy highly specialized sniffer dogs, some costing as much as $10,000. Workers are also searched as they enter and leave work. Many of them drift from factory to factory, but plant managers are used to the turnover, and don't see any need to increase wages. Ultimately, said one manager, the plants will keep operating "as long as the assembly work force remains cheap and docile."
Montreal-based Gildan also has a factory in Port-au-Prince, but it's not located in the industrial park. It bought a property of its own in 2006 and built a new factory, investing a total of $10 million in Haiti. We didn't tour the plant, but Geneviève Gosselin, Gildan's director of corporate communications, talked about it with me after I returned from Haiti.
Protecting the company's 1,100 workers and the building are major objectives. Gosselin said the plant is "highly secure." Workers are paid $50 for a 5 1/2-day work week—almost triple what some Haitian factories pay—and the company provides subsidized meals and transport. No employees have been kidnapped, and production has rarely been interrupted.
Gildan's resolve should help Haiti, said Gosselin. "Being in the country, plus staying, brings visibility to attract other companies." For the moment, however, Gildan has no plans to increase (or re-duce) its investment in Haiti.
Are subsistence-level wages alone the basis for an influx of new investment? Even the Haitian factory owners would say no. Just about everyone we talked to agreed that it's a chicken-and-egg problem: Investors and tourists will only flock to Haiti if the political and social turmoil subside, and that turmoil will only subside when there are real economic improvements.
The UN mission leaders aren't all that confident, either. MINUSTAH is headquartered in a 1970s highrise hotel that was basically stripped of furnishings and fixtures before the UN arrived, and that has been converted to offices. Mission head Hédi Annabi is Tunisian, but sitting in his office in a grey suit, he's almost a movie version of a taciturn French diplomat.
He said MINUSTAH has made huge progress. In August, 2006, then-secretary-general of the UN Kofi Annan had to ride into Cité Soleil in an armoured personnel carrier, wearing a flak vest, and could only peer at the locals through a periscope. Last August, Annan's successor, Ban Ki-moon, strolled through the slum in a suit and tie. "The trip was without incident," Annabi said proudly.
Drumming up business and investment is a much taller order, and that's part of the job of Joël Boutroue, the lively and argumentative deputy special representative for the secretary-seneral and coordinator of humanitarian aid. He rattled off some recent aid infusions—$100 million from Canada, $50 million from the World Bank, $30 million from Spain, and more. He's also trying to codify business laws that stretch back to the 1820s. "You need to know the laws before you can enforce them," he said.
Among Boutroue's biggest disappointments, however, are the Haitian expatriates in Miami, Montreal and beyond. They're known as the "diaspora," and he thinks they should be doing much more. "I'm doubtful they will ever return," he said with a sigh. "We have to find new investors—ones that don't run from danger."
Who is stepping up to the plate? We found signs of hope in some unexpected places. On a visit to the Fame Pereo Institute clinic in Port-au-Prince, which specializes in HIV/AIDS and leprosy, we watched Dr. Claude Péan deliver a compelling PowerPoint presentation to Maxime Charles, hoping that Scotiabank would increase its contributions. On an annual budget of just over $100,000—60% from corporate donors—the clinic sees thousands of patients a year and maintains a staff of 39, including five doctors.
With Péan was the clinic's administrator, Réal Charlebois, an 82-year-old Catholic priest who was sent to Haiti by Paul-Émile Cardinal Léger of Montreal in 1953 to found a leprosy clinic. In the 1980s, the clinic started to treat other skin diseases as well, and in 2004, HIV/AIDS. Charlebois was also Maxime Charles's high-school Latin teacher. When we asked Charlebois later how the situation in Haiti today compares with the early '50s, he said, wistfully, in French, "It was a paradise."
Given the checkered track record of Haiti's politicians, we weren't expecting much when we entered the century-old military barracks on the Place du Champ de Mars, near the presidential palace, to meet with Préval's Minister of Finance, Daniel Dorsainvil. But the tall, robust, U.S.-educated economist was a shot of adrenalin. He dismissed the Forbes article as "Georgian," and quipped that someone had "got their teaching assistant to do it."
Dorsainvil then ticked off a long and impressive series of statistics from memory: Trade balance and government budget balance both improving, inflation down to single digits, and so on. Still, he acknowledged weaknesses—the biggest being the diaspora. About three million Haitians live outside the country, from virtual slave labourers in the Dominican Republic to multimillionaires in Miami and Europe. They sent back $1.65 billion in foreign remittances to Haiti in 2006, about 35% of the country's GDP. A U.S. economic downturn could choke off much of that flow.
True, the government is having some small successes collecting income taxes at home. But most of its revenues still come from customs and excise—the easiest kind of taxes for even a shaky regime to collect.
For the moment, however, many Haitians complain that the government is actually hoarding cash. Dorsainvil says the country doesn't have enough experts to get many much-needed capital projects going. "There simply aren't enough educated people left in the country to do case studies of investment proposals forwarded to the government," he said.
On the last day of our visit, our escorts took me to a dark downtown indoor market—with only open louvres on the side of the building for lighting—so I could buy a couple of plastic voodoo dolls for $5. The dolls still sit on a trading desk at my company's offices in Toronto. No one has dared to touch them yet.
Our return flight to Miami from Port-au-Prince was cancelled, but we weren't surprised. Scotiabank's staff got us seats on a later plane. On the flight back to Toronto, I thought about the more than 30 UN personnel who've been killed in Haiti since 2004, trying to make the place better. In early April, I watched news footage of the food riots and UN forces using tear gas in Port-au-Prince—on a tree-lined street where we had stood just two months before, waiting to interview Dorsainvil.
"Do you plan on going out at night in Port-au-Prince?" he asked matter-of-factly. I can't imagine visiting any city without sampling its nightlife. "Sure," I said. He looked at me sternly. "That changes everything."
"What about Carnival?" I asked. Carnival is Haiti's massive, three-day Mardi Gras festival in February—hundreds of thousands of people dancing in the streets day and night. Of course I wanted to go.
"That will require twice the security," he said, looking at his notes. "I would suggest using locals," he added. "You'll stick out enough as it is."
ings—the manufacturer of official Major League baseballs—and a Club Med resort.
At first, Jean-Bertrand Aristide, a popular Catholic priest who had bravely spoken out against Baby Doc, appeared to offer some hope. Aristide was elected president in 1990, but was then ousted in a coup the following year. In 1994, he was reinstalled by the Clinton administration, which deployed thousands of U.S. troops to Haiti. Constitutionally barred from serving consecutive terms, Aristide was succeeded by René Préval, his prime minister, in 1996. But the two split, and, in 2000, Aristide won a presidential election that was boycotted by opposition candidates.
Which of the two is a hero and which is a villain is still the subject of violent political divisions in Haiti. Suffice it to say that by 2004, Aristide's critics were denouncing him as an autocrat who had to rely on thugs to maintain his authority. The U.S. and other developed countries wanted him out, and he was overthrown and eventually relocated to South Africa.
The United Nations moved in and set up its Stabilization Mission in Haiti (MINUSTAH—the French acronym). Basically, it's trying to rebuild the government and police force from scratch. The mission deployed a few thousand peacekeepers at first, including Canadians. Two years later, however, gangs still controlled the streets, so the UN boosted its troop contingent to more than 7,000, many from Brazil and other Latin American countries. They restored order in Port-au-Prince the way that armies do—they shot people. The fiercest fighting was in the city's poorest slum, the Cité Soleil, still loyal to Aristide.
In 2006, amid allegations of vote rigging, Préval was again elected president, with 51% of the vote in the first round, thereby avoiding a runoff. MINUSTAH, the World Bank and the International Monetary Fund (IMF) would like the next transition of power in 2011 to be a peaceful, democratic one—only the second time ever in Haiti. Their concern is strategic as well as humanitarian. The UN presence is widely regarded as a test case for what might happen in Cuba after the Castro regime falls.
All that said, during our week-long visit, Port-au-Prince was relatively calm. There were just 10 kidnappings for ransom, including the former minister of the interior and his wife. "It's not a serious crime here, like murder or rape," one businessman later assured me. "No one that I know of has ever paid more than $20,000 to be returned." A shootout at a grocery store was deadlier—one armed guard and one of nine assailants were killed. Offshore, near Great Exuma in the Bahamas, the U.S. Coast Guard plucked 131 Haitians off a leaky boat bound for Florida.
While the streets of Port-au-Prince didn't look all that dangerous, they were certainly surreal in many ways. Everyone looked about 15 years old to me—and half of Haiti's population is, indeed, under the age of 19. There also appears to be no middle class. Late-model cars clogged the streets, but the vast majority of people get around by walking, or by riding in the back of covered, colourfully painted small pickup trucks that function as taxis. They'd be a tight fit with eight passengers, yet many carry more than 20.
In Pétionville, the wealthy enclave of mansions in the hills where Haiti's remaining elite live, we passed the odd small stretch of stores as luxurious as ones you'll find on Bloor Street in Toronto or Robson in Vancouver. But prudent locals have an armed guard watch their Escalade or Porsche Cayenne if they shop during the day or dine at an elegant, yet well-hidden restaurant at night. Many also have guards posted 24/7 outside the gates to their homes. Centuries-old racial distinctions persist as well—between light-skinned French speakers at the top of the social scale and dark-skinned Creole speakers at the bottom.
All of this fit in with the grim economic assessments I'd read before I arrived. According to the IMF, Haiti's annual gross domestic product per person in 2007 was about $630 (all currency in U.S. dollars), or 151st out of 179 countries ranked. That's less than one-sixth the per capita GDP of neighbouring Dominican Republic, which many Canadian tourists find impoverished. Adjusting for inflation, per capita income in Haiti has actually declined steadily since the 1960s. The country no longer grows rice—a crop the locals were once proud of—in any quantity, nor does it have a commercial dairy of any size. One business that is booming, although it doesn't show up in official economic statistics, is the transshipment of cocaine and other illegal drugs to the U.S.
In early April, two months after we visited, riots erupted in the south, this time because of soaring international food prices, and spread quickly to Port-au-Prince. The cost of a small bowl of rice has more than doubled since last year to over 60 cents. When you earn less than $3 a day—as most working Haitians do—that hurts your stomach. Some locals have fallen back on terre, a biscuit of vegetable shortening, salt and mud, traditionally served to pregnant women and children to settle their stomachs.
Yet, against the steepest of odds, some Haitian and foreign businesses are still making money here—good, legal money.
You have to be very dogged and clever to maintain a business in Haiti, and our hotel in Pétionville was an excellent example. The first 12 rooms of the Hotel Montana were built in 1946 by Frank Cardozo and his wife, Edna. It has expanded to 120 rooms over the years, surrounded by wonderfully lush gardens. The hotel is still owned by Cardozo's daughters, Nadine Cardozo Riedl and Garthe Cardozo Stephanson, regarded as two of the hardest-working and toughest entrepreneurs in the country.
There aren't many tourists these days, but UN dignitaries, foreign leaders, the occasional celebrity, and rich Haitian expatriates visiting from Miami, Montreal or Paris want four-star accommodation. Photos of recent guests on display at the hotel include Kofi Annan, Paul Martin, and Brad and Angelina, who stayed in January, 2006. Cardozo Riedl maintains high standards, but it's an almost daily ordeal. When the city's electrical power is interrupted, the hotel's diesel-powered generators—with enough fuel to run for three weeks straight—kick in. All water is delivered from a private spring—20 truckloads a day.
Cardozo Riedl didn't discuss a more harrowing ordeal. In November, 2004, she was dragged from her car after an armed gang hijacked her motorcade. Security guards and police had apparently been paid to look the other way. She was held for eight days, and shackled and abused by her captors, until a large ransom was paid.
Her husband, Reinhard Riedl, a German dentist, is more chatty and upbeat. He's a bon vivant who could have walked out of the pages of Graham Greene or Somerset Maugham. The couple met at the 1972 Olympics in Munich. One afternoon at the Hotel Montana's cozy News Bar, he treated us to "the best rum sours in the Caribbean," mixed with Barbancourt Haitian rum by his favourite bartender.
His wife's kidnapping was "regrettable," Riedl acknowledged. And, yes, hundreds of Préval supporters stormed the hotel in January, 2006, and frolicked in the pool. South African Archbishop Desmond Tutu, who was visiting at the time, came out of his room and appealed for calm—in English, which the crowd didn't understand. But the country is now safer than it was two years ago, said Riedl. "Things are looking up for us here in Haiti."
Two Canadian companies that already have solid roots in Haiti are Montreal-based T-shirt manufacturer Gildan Activewear (more about it later) and Scotiabank. The bank has operated in Haiti since 1972, through all the upheavals.
Maxime Charles, 53, is the bank's country head. Dapper and polished, he's a proud and articulate spokesman for his employer and for Haiti. His father was ambassador to Washington in the 1940s. Charles earned business and law degrees in Haiti, and joined the bank in 1976. In 1981, he went to graduate school in France, earned a master's in international relations and law, then returned home.
As he and other Scotiabank executives repeatedly point out, the bank wouldn't have stayed unless it was earning a profit. The key has been to pick the right niches. Charles quickly reviewed the history: The bank started mainly as a corporate lender to manufacturers of baseballs, electronic switches and, more recently, clothing. But even poor individuals can benefit from banking services, and in recent years, Scotiabank has also expanded into retail deposit taking and lending.
Auto loans—$5,000 at about 20% interest being typical—have been a particularly encouraging success. "We had to convince car dealers that it would increase business," said Charles.
The bank now operates four branches in Port-au-Prince and two bank mach-ines. The branches were closed during Carnival, which is basically a week of national holidays, but just walking around the exterior of one of them was intriguing. It looked the same as suburban Scotiabank branches in Canada: red signs outside, grey countertops inside, and a drive-through.
But a small building out back housed diesel-powered emergency generators and dozens of batteries. Stuck to the window of the main door, in addition to a sign with hours of business, was another with an outline of a handgun with an X through it. Back in Toronto, Scotiabank CEO Rick Waugh later told me that checking guns at the door is indeed a service provided by the bank in many countries.
The branch was also by far the tidiest building in the neighbourhood, and we only had to drive down the street for a few minutes to see how impoverished the retail customer base can be in Port-au-Prince. We arrived at a dusty open-air market with dozens of stalls that were no more than bits of cloth or plastic held up with tall sticks. A dozen ragged-looking cows were tethered near a refuse pile. As traffic roared past, a dog drank out of an open sewer across the road.
Any talk of cash in Haiti also brings up the question of drugs, corruption and money laundering. Charles is firm and polite, but short on details. "There are a lot of clichés about this country," he said. He and other bank executives also note that the operations in Haiti have to conform to Scotiabank's corporate rules on cash transactions, as well as Canadian law and international standards. Charles is also chair of a Haitian commission on money laundering.
The more familiar and immediate risk for Charles is personal safety—his own and that of his 79 employees. Two of them have been kidnapped. Both were returned safely after their families paid ransoms, and they are still working for the bank. Charles has two armed guards around the clock at his family's own elegant three-storey house in the hills. However, the only robbery of a Scotiabank branch in Haiti that anyone recalls was 30 years ago. In Canada, on average, one Big Six bank is robbed every day.
Are the risks in Haiti worth it? And would the bank ever leave? These are questions for Waugh and Rob Pitfield, Scotiabank's executive vice-president of international banking back in Toronto. They point out that Scotiabank has been active in the Caribbean for more than 120 years, and now operates in 25 countries in Central and South America. "We're an international bank that happens to have its head office in Canada," said Waugh.
Sure, Haiti and other developing countries look daunting, said Pitfield, but "people manage these issues." A global bank needs a broad mindset. "Canadians are somewhat insular and not aware of the countries out there with wonderful people trying to get what we have," he added. "It's taught the bank to be open to ideas and to be tolerant."
The flip side of that, however, is that Waugh and Pitfield have to be very guarded about talking about political risk, especially any suggestion that the bank might leave a country. The only time that's happened was in Argentina in 2002, when the country was in a financial crisis. Waugh, then head of Scotiabank's international operations, told a reporter the bank was looking for a way to stay. Argentine newspapers turned the remark around, forcing the bank to sell a subsidiary. So Waugh now sticks to a script. "Each foreign country for Scotiabank has its own operational risk," he said.
By our third day in Port-au-Prince, I wished some people would let down their guard more. Fortunately, that evening, they did.
A stroke of luck: A handful of local business leaders agreed to sit down for a dinner in a French restaurant in Pétionville. Apart from a small sign outside, it would be easy to miss when driving past, but the traditional, richly-coloured Haitian interior was elegant. Though our conversations were off the record, I can tell you that our guests represented old-family money and a variety of businesses—manufacturing, shipping, publishing and several others.
Over steaks, seafood and much more, they gave us an earful. Right off the bat, just about all of them were vitriolic about a short article in a January issue of Forbes magazine that placed Haiti fourth on its list of the "World's Most Dangerous Destinations." Haiti? Only slightly behind Somalia, Iraq and Afghanistan? Worse than Pakistan (No. 5), Zimbabwe (No. 9), and nearby trouble spots like Jamaica and Mexico? Preposterous!
The magazine used data compiled by two international consulting firms, Annapolis, Maryland-based iJet Intelligent Risk Systems and London-based Control Risks. Forbes cited Haiti's poverty, civil unrest and police corruption. Haiti scored 5 out of 5 on a scale of danger, the only country in the western hemisphere to do so. In a telephone interview after we got home, Tobias Friedl, iJet's regional manager for Latin America, defended the rating, pointing out that kidnapping is a particularly serious threat to foreign businesspeople. Also, while there are stretches of calm in Haiti, the situation can change very quickly.
Indeed, when prodded, our guests at dinner, like just about everyone we spoke to in Haiti, agreed that the economy and government are "fragile" at best. To diversify their personal risk, pretty well all of them have a "place to go"—children abroad, a condo in Miami, a house in Montreal, an apartment in Paris and so on. Sure, they'd like Préval and the UN to succeed, but the government still can't provide basic infrastructure, social services or protection.
And their role? Like paying their workers just $2.50 a day? It's the market rate, they said, and no one is offering Haitians anything better. Corruption and drug smuggling? Business owners can control their own premises, but not what goes on beyond. As one of them put it, "there isn't even a fucking rowboat" to patrol Haiti's 1,800 kilometres of coastline.
Bracing stuff, but I also wanted to get a closer look at what a large operating Haitian business looked like. The next day, we wheedled our way into one of those, too.
There's a large industrial park just a few kilometres west of Port-au-Prince's airport. It consists of about 50 low-rise buildings that employ more than 20,000 workers, mostly sewing T-shirts and other garments. To call them factories is a bit of a misnomer. Erected in the 1970s, they would really be more suitable as warehouses. The ceilings are high, which reduces the heat, but air-conditioning them would be prohibitively expensive. They could also run 24 hours, but no one wants to risk being attacked when travelling home after dark—even workers paid $2.50 a day are targets.
In late 2006, the U.S. gave the manufacturers a huge break by lifting import duties. In the 1990s, a trade embargo nearly brought Haiti to its knees. Now, the country exports 54 million T-shirts a year, and is the fourth-largest supplier to the U.S. after Honduras, Mexico and El Salvador. It's also the cheapest, delivering shirts at an average cost of $14.66 per dozen.
All the Haitian T-shirt makers' operations are broadly similar, and the plant we toured was typical. We saw dozens of rows of workers at individual sewing machines. By and large, the factories only assemble the garments from cloth manufactured and cut out in the Dominican Republic by bigger and more sophisticated machines. Haiti provides the lowest-value-added step in the process, in part because the sewing machines would be easy to pack up and ship out of the country, if necessary.
Years ago, cocaine traffickers succeeded in concealing transshipments from Haiti in industrial containers filled with finished garments. So brand-name U.S. clothing companies now require their Haitian manufacturers to certify shipments as drug-free. The factories buy highly specialized sniffer dogs, some costing as much as $10,000. Workers are also searched as they enter and leave work. Many of them drift from factory to factory, but plant managers are used to the turnover, and don't see any need to increase wages. Ultimately, said one manager, the plants will keep operating "as long as the assembly work force remains cheap and docile."
Montreal-based Gildan also has a factory in Port-au-Prince, but it's not located in the industrial park. It bought a property of its own in 2006 and built a new factory, investing a total of $10 million in Haiti. We didn't tour the plant, but Geneviève Gosselin, Gildan's director of corporate communications, talked about it with me after I returned from Haiti.
Protecting the company's 1,100 workers and the building are major objectives. Gosselin said the plant is "highly secure." Workers are paid $50 for a 5 1/2-day work week—almost triple what some Haitian factories pay—and the company provides subsidized meals and transport. No employees have been kidnapped, and production has rarely been interrupted.
Gildan's resolve should help Haiti, said Gosselin. "Being in the country, plus staying, brings visibility to attract other companies." For the moment, however, Gildan has no plans to increase (or re-duce) its investment in Haiti.
Are subsistence-level wages alone the basis for an influx of new investment? Even the Haitian factory owners would say no. Just about everyone we talked to agreed that it's a chicken-and-egg problem: Investors and tourists will only flock to Haiti if the political and social turmoil subside, and that turmoil will only subside when there are real economic improvements.
The UN mission leaders aren't all that confident, either. MINUSTAH is headquartered in a 1970s highrise hotel that was basically stripped of furnishings and fixtures before the UN arrived, and that has been converted to offices. Mission head Hédi Annabi is Tunisian, but sitting in his office in a grey suit, he's almost a movie version of a taciturn French diplomat.
He said MINUSTAH has made huge progress. In August, 2006, then-secretary-general of the UN Kofi Annan had to ride into Cité Soleil in an armoured personnel carrier, wearing a flak vest, and could only peer at the locals through a periscope. Last August, Annan's successor, Ban Ki-moon, strolled through the slum in a suit and tie. "The trip was without incident," Annabi said proudly.
Drumming up business and investment is a much taller order, and that's part of the job of Joël Boutroue, the lively and argumentative deputy special representative for the secretary-seneral and coordinator of humanitarian aid. He rattled off some recent aid infusions—$100 million from Canada, $50 million from the World Bank, $30 million from Spain, and more. He's also trying to codify business laws that stretch back to the 1820s. "You need to know the laws before you can enforce them," he said.
Among Boutroue's biggest disappointments, however, are the Haitian expatriates in Miami, Montreal and beyond. They're known as the "diaspora," and he thinks they should be doing much more. "I'm doubtful they will ever return," he said with a sigh. "We have to find new investors—ones that don't run from danger."
Who is stepping up to the plate? We found signs of hope in some unexpected places. On a visit to the Fame Pereo Institute clinic in Port-au-Prince, which specializes in HIV/AIDS and leprosy, we watched Dr. Claude Péan deliver a compelling PowerPoint presentation to Maxime Charles, hoping that Scotiabank would increase its contributions. On an annual budget of just over $100,000—60% from corporate donors—the clinic sees thousands of patients a year and maintains a staff of 39, including five doctors.
With Péan was the clinic's administrator, Réal Charlebois, an 82-year-old Catholic priest who was sent to Haiti by Paul-Émile Cardinal Léger of Montreal in 1953 to found a leprosy clinic. In the 1980s, the clinic started to treat other skin diseases as well, and in 2004, HIV/AIDS. Charlebois was also Maxime Charles's high-school Latin teacher. When we asked Charlebois later how the situation in Haiti today compares with the early '50s, he said, wistfully, in French, "It was a paradise."
Given the checkered track record of Haiti's politicians, we weren't expecting much when we entered the century-old military barracks on the Place du Champ de Mars, near the presidential palace, to meet with Préval's Minister of Finance, Daniel Dorsainvil. But the tall, robust, U.S.-educated economist was a shot of adrenalin. He dismissed the Forbes article as "Georgian," and quipped that someone had "got their teaching assistant to do it."
Dorsainvil then ticked off a long and impressive series of statistics from memory: Trade balance and government budget balance both improving, inflation down to single digits, and so on. Still, he acknowledged weaknesses—the biggest being the diaspora. About three million Haitians live outside the country, from virtual slave labourers in the Dominican Republic to multimillionaires in Miami and Europe. They sent back $1.65 billion in foreign remittances to Haiti in 2006, about 35% of the country's GDP. A U.S. economic downturn could choke off much of that flow.
True, the government is having some small successes collecting income taxes at home. But most of its revenues still come from customs and excise—the easiest kind of taxes for even a shaky regime to collect.
For the moment, however, many Haitians complain that the government is actually hoarding cash. Dorsainvil says the country doesn't have enough experts to get many much-needed capital projects going. "There simply aren't enough educated people left in the country to do case studies of investment proposals forwarded to the government," he said.
On the last day of our visit, our escorts took me to a dark downtown indoor market—with only open louvres on the side of the building for lighting—so I could buy a couple of plastic voodoo dolls for $5. The dolls still sit on a trading desk at my company's offices in Toronto. No one has dared to touch them yet.
Our return flight to Miami from Port-au-Prince was cancelled, but we weren't surprised. Scotiabank's staff got us seats on a later plane. On the flight back to Toronto, I thought about the more than 30 UN personnel who've been killed in Haiti since 2004, trying to make the place better. In early April, I watched news footage of the food riots and UN forces using tear gas in Port-au-Prince—on a tree-lined street where we had stood just two months before, waiting to interview Dorsainvil.
ROGUES' GALLERY
Six traders who bet big and lost
2006
BRIAN HUNTER -$7.3 billion
The 32-year-old, Calgary-based energy trader, who earned about $100 million in 2005, brought down $9-billion (U.S.) hedge fund Amaranth Advisors by trading in natural gas futures. He's now an adviser with Boston-based money manager Peak Ridge Capital Group.
2008
JÉRÔME KERVIEL -$7.2 billion
Kerviel staked $80 billion--more than Société Générale's entire market cap--on European futures markets and forged documents to cover up his activity. He claims the bank was complicit in his actions, and he is being hailed as a hero in France.
1996
YASUO HAMANAKA -$3.5 billionThe Japanese copper trader at 300-year-old Sumitomo Corp. forged documents to cover up his losses in illicit trades that rocked world metal markets. He was sentenced to eight years in prison.
1995
NICK LEESON -$2 billionThe Singapore-based trader wiped out the entire cash reserve of Barings Bank while trying to cover bad bets on the Japanese stock exchange. He served three years for fraud and forgery. His book, Rogue Trader, was turned into a film starring Ewan McGregor.
1995
TOSHIHIDE IGUCHI -$1.5 billion
An executive at Japanese bank Daiwa's New York office, he falsified records for 11 years to cover his losses and claimed his managers lied to the Fed to cover his tracks. Iguchi got four years in jail; Daiwa paid a $340-million (U.S.) fine and was expelled from the U.S.
1996
PETER YOUNG -$855 millionYoung, a mathematician and fund manager at Deutsche Morgan Grenfell in London, set up holding companies to purchase oversized stakes in speculative stocks. He showed up for sentencing in a skirt and makeup, and was declared unfit to stand trial.
2006
BRIAN HUNTER -$7.3 billion
The 32-year-old, Calgary-based energy trader, who earned about $100 million in 2005, brought down $9-billion (U.S.) hedge fund Amaranth Advisors by trading in natural gas futures. He's now an adviser with Boston-based money manager Peak Ridge Capital Group.
2008
JÉRÔME KERVIEL -$7.2 billion
Kerviel staked $80 billion--more than Société Générale's entire market cap--on European futures markets and forged documents to cover up his activity. He claims the bank was complicit in his actions, and he is being hailed as a hero in France.
1996
YASUO HAMANAKA -$3.5 billionThe Japanese copper trader at 300-year-old Sumitomo Corp. forged documents to cover up his losses in illicit trades that rocked world metal markets. He was sentenced to eight years in prison.
1995
NICK LEESON -$2 billionThe Singapore-based trader wiped out the entire cash reserve of Barings Bank while trying to cover bad bets on the Japanese stock exchange. He served three years for fraud and forgery. His book, Rogue Trader, was turned into a film starring Ewan McGregor.
1995
TOSHIHIDE IGUCHI -$1.5 billion
An executive at Japanese bank Daiwa's New York office, he falsified records for 11 years to cover his losses and claimed his managers lied to the Fed to cover his tracks. Iguchi got four years in jail; Daiwa paid a $340-million (U.S.) fine and was expelled from the U.S.
1996
PETER YOUNG -$855 millionYoung, a mathematician and fund manager at Deutsche Morgan Grenfell in London, set up holding companies to purchase oversized stakes in speculative stocks. He showed up for sentencing in a skirt and makeup, and was declared unfit to stand trial.
Risk - SINCLAIR STEWART
In the fall of 1752, a seasoned captain by the name of Henry Kent boarded the Dragon, a 310-ton merchant vessel, and set sail from the southern coast of England, bound for Bengal.
During his previous 14 years in the employ of the East India Co., both as a mate and a commander, Kent had amassed a remarkable record for punctuality: Despite the great distance of this trading route, and the perils of pirates, disease and weather, the sailor always returned to his home port on time.
But on this, his final trip, Kent veered into uncharted waters. Although he rounded the Cape of Good Hope in early 1753, squarely on schedule, he did not continue on to Bengal. Instead, he spent four months on the coast of Madagascar, cutting side-deals with the local population for his own benefit, helping to build a factory, bartering alcohol, and even buying slaves.
This sojourn caused him to miss the seasonal window for a return passage to England, conveniently enabling him to extend his extracurricular business pursuits (and no doubt imposing significant costs on his employer, the East India Co.).
Kent may prove to be among the first rogue traders of the global economy, a swashbuckling precursor to the likes of Nick Leeson, who sank the British bank Barings in 1995, and, more recently, Jérôme Kerviel, the 31-year-old Frenchman whose allegedly unauthorized trading cost Société Générale about $7.2 billion in losses this year. Like these latter-day renegades, Kent used the resources of a powerful and well-capitalized company to engage in improper trades; and, like them, he incurred considerable risk when he did so.
"The mortality rate was 60% on these ships, and people were dying like crazy," explains Emily Erikson, a professor at the University of Massachusetts who chronicled Kent's travels in a paper she co-wrote with Peter Bearman of Columbia University. "There had to be some sort of compensation, and that was engaging in this illicit activity."
Risk taking has been part of human culture since the prehistoric era, whether it be hunting big game or rolling a primitive form of dice known as knucklebones.
Yet rarely has the subject occupied such a central place in the collective consciousness. The U.S. economy is teetering on the brink of recession and threatening to pull other countries down along with it. Investors have lost faith in some of the world's most storied banks, whose reckless promotion of exotic derivatives products fuelled an ill-advised boom--and resultant collapse--in the subprime mortgage industry, leading to hundreds of billions of dollars worth of losses and the savaging of the credit and equities markets.
And then, of course, there are the alleged escapades of Kerviel, the rogue trader who improbably hoodwinked one of Europe's largest banks and, in the process, became an overnight poster boy for a global banking culture drunk on risk.
Kerviel came from modest means (his mother was a hairdresser; his father taught metalworking), and attended a middle-of-the-road university. The French banking system is known for its class-consciousness, and it rewarded Kerviel's unassuming pedigree with a correspondingly unassuming job: He was sequestered far from the limelight of the trading floor, performing administrative work.
Eventually, he was promoted to junior trader on the "Delta One" team and specialized in European stock index futures--the trading equivalent of giving kids plastic cutlery so they can't hurt themselves.
Kerviel was supposed to be looking for arbitrage opportunities--discrepancies between index futures and underlying cash prices that might yield a small profit. Instead, he began making a series of escalating bets on the direction of these markets, and used his knowledge of the back room to evade his superiors, creating fictitious offsetting trades. These offsets made it look as though he had removed himself from a position, when in fact he was accumulating a portfolio worth billions. It worked swimmingly until early this year, when the market suddenly turned, forcing him to backtrack in an even more audacious fashion. By the time the bank learned of his alleged duplicity and took action to unwind his trades, it was staring into the maw of a $7-billion loss. It was by far the most devastating account of rogue trading in history, and perhaps the most unusual.
What sets Kerviel apart from his predecessors is his apparent lack of motive. Unlike, say, Captain Kent and Leeson, he didn't seem to be making the unauthorized trades in order to feather his own nest. In fact, he suggested to prosecutors that he just wanted to be recognized within the firm and perhaps bag a bonus of a few hundred thousand dollars--chump change by the heady standards of investment banking.
That raises some interesting questions, not merely about lax supervision at SocGen, but about the very genesis of risk taking in the financial community.
It has typically been assumed that self-enrichment is the catalyst for this behaviour. But as Kerviel's example suggests, maybe there are other, less discernible, motives at work. What if his propensity for risk is genetically hard-wired? What if he just wanted to belong? What if, as he has intimated, the very culture of banking was complicit in his misdeeds?
The study of risk, like many disciplines, has tended to fracture along academic fault lines, with neurologists, psychologists, sociologists, evolutionary biologists and, most recently, geneticists weighing in on why we engage in this sort of behaviour.
"As I see it, there is not a single human act with total certainty of outcome. Ergo, all behaviour is risk-taking behaviour," says Gerald Wilde, a professor emeritus of psychology at Queen's University in Kingston, Ontario. "The art of life isn't the art of minimizing risk--the art of life and of decision-making is the art of maximizing risk. One has to venture, but the question is, how much to venture?" In other words, what compels one person to drive at reckless speeds or sky-dive, or risk a prison sentence for illegal trading, while another steers away from the shoals?
There is mounting evidence that some of these tendencies have a strong genetic component.
Geneticists have long suspected that, in centuries past, men who were successful hunters and warriors were perceived as better mates, and were therefore likely in a better position to pass along their genes--assuming their heightened willingness to take risks didn't get them killed first.
But it wasn't until the 1970s, when noted psychologist Marvin Zuckerman conducted tests on twins, that more quantifiable evidence began to emerge. His study led him to conclude that about 60% of sensation seeking--a personality trait closely linked to risk taking--is genetically determined.
"Risk is a subjective thing. Very few people actually know the risk of something they undertake," says Zuckerman, a professor emeritus from the University of Delaware. "Impulsive sensation seeking tends to be linked to a tendency to act without planning ahead, which can also be a characteristic linked with sensation seekers in the financial world."
Zuckerman points out that high-sensation seekers tend to have low levels of monoamine oxidase type B, or MAO-B, an enzyme that helps break down and regulate dopamine. Dopamine receptors have been linked directly to our thresholds for sensation seeking, and the implication is that without sufficient MAO-B to keep our urges in check, people could be prone to risky behaviour.
Not surprisingly, women have higher natural levels of MAO-B than men, and the amount we have in our bodies increases with age, mirroring our tendencies to become more conservative and risk-averse as we get older.
More recent studies have focused on stathmin, a gene that plays a key role in the way we respond to fear. In 2005, a research team bred mice that had no stathmin and then placed them in a large box. Whereas normal mice instinctively scurry to the safety of a corner or wall, the genetically modified mice would often linger in the open space, seemingly oblivious to what should naturally be, at least for them, a fearful situation. In turn, that reduction in fearfulness prompted them to take the additional risk of remaining in a vulnerable position. "When there is a lack of fear, it can modify behaviour," explains Gleb Shumyatsky, the Rutgers professor who led the research effort. "Here, this deficiency in fear leads to improper risk assessment."
Risk taking, however, can't simply be boiled down to genetic determinism, any more than Kerviel's rogue trading can be solely attributed to low MAO-B levels or a stathmin deficiency. While genes influence personality traits, so too do myriad other circumstances, from diet to childhood experiences to one's physical environment and emotional makeup.
Indeed, one study published this year has determined--much to the chagrin of some classically trained economists--that our emotional state greatly influences the way we make supposedly rational financial decisions. The research was conducted by two experts in neurofinance, an emerging discipline that seeks to understand trading and investment behaviour through the lens of neuroscience.
Camelia Kuhnen, a finance professor at Northwestern University, and Brian Knutson, a psychology professor at Stanford University, triggered heightened emotional responses in men by showing them erotic material, and then measured their brain activity. Next, they presented the men with two gambling options, one of which involved taking on more risk. As their arousal increased, so did their propensity to opt for the riskier bet.
"The message of our work is the fact that emotions determine very high-level decisions, like your portfolio, and investors should be aware of this fact," says Kuhnen. "If I may speculate, money has become what psychologists call a primary reinforcer. The sight of a $100 bill and a platter full of hot lasagna when you're hungry--they do the same thing to your brain. Money is now, in an evolutionary sense, comparable to any other sort of primitive reward, like food."
Yet that still doesn't explain why people who are already incredibly rich continue to incur serious risks in the hope of making more money. Nor does it account for why someone like Kerviel would risk public humiliation and jail time seemingly without the possibility of gleaning much in the way of financial reward.
Addiction specialists don't see much difference between a rogue trader losing billions of dollars and a compulsive gambler sinking into debt at a casino: Both can be addicted to the adrenalin rush of winning, and both can be prone to doubling down repeatedly in an effort to reclaim their losses. "The pattern tends to be people who have some pretty high expectations of themselves and who have had some success," says Nina Littman-Sharp, who manages the problem gambling services unit of the Centre for Addiction and Mental Health in Toronto. "People get very hooked by an early win, particularly if things aren't going well for them otherwise."
Kerviel himself, in discussions with prosecutors, seemed to acknowledge he had a similar problem. By December, 2007, he was actually sitting on an estimated $2-billion profit realized through his unauthorized trades. That was just before the market turned against him, converting those profits into billions in losses and sending him into a spiral of more fake trades to hide his mistakes. "I didn't know how to deal with it. I was happy and proud of myself, but I didn't know how to justify it," he said in a transcript released by French authorities. "Thus I decided not to declare it, and to hide the sum, I created an opposite fictional operation."
As for his decision to engage in this activity in the first place, he only hinted at a motivation. He was a middle-class outsider who lacked the social and educational credentials of his peers in the banking community; as armchair sociologists pointed out in the aftermath of the scandal, he may have taken on such outsized risk to earn respect and prove himself an equal. "I was aware, starting from my first meeting in 2005, that I was less well-considered than the others, as regarded my university degree and my professional and personal background," Kerviel told prosecutors. "I had not come directly to the front office, but had passed through the middle office, and I was the only [trader] to have done that."
Kerviel surrendered himself to police in January, and spent five weeks in jail while his lawyers negotiated his release on bail. He has been charged with forgery and breach of trust, and a trial is expected to begin next year.
Although he has not denied making the trades, he has remained unusually defiant, implicating the company in his scheme. To his way of thinking, the bank's silence while he was making unauthorized trades, its refusal to question his unwillingness to take vacation, and the regular alerts it issued to him for exceeding his trading limits, was a form of passive acceptance. The pursuit of profit, in his mind, begat willful blindness.
SocGen has vehemently denied this, of course. But some risk experts believe Kerviel might be onto something: that the financial community doesn't just have a problem managing risk (as has been clearly evidenced both by l'affaire Kerviel and the banking sector's disastrous foray into subprime mortgages); it actively encourages the wrong kind of risk.
"I'd argue that there's good risk taking and bad risk taking, and Wall Street is not good at drawing a line between the two," says Aswath Damodaran, a professor of finance at New York University and author of Strategic Risk Taking. "Investment banks are manic-depressive when it comes to taking risks. People are encouraged to take the wrong types of risks for the wrong types of reasons."
There are several fundamental flaws, according to Damodaran, the biggest of which is Wall Street's compensation packages. Salaries and bonuses are based on the ability to generate fees from advising on deals, creating new products or trading; that, in turn, creates an incentive to push these products and deals through the system, regardless of whether they are likely to be good for investors.
Look no further than the subprime collapse, in which banks were pumping out collateralized debt obligations and other complex derivatives that made mortgages more readily available to borrowers with sketchy credit histories.
These derivatives may have been a boon to the bankers who were selling the products, but they proved to have a calamitous effect on homebuyers and credit markets, as well as on investors in the banks themselves.
Some of the world's largest financial institutions have already written off hundreds of billions of dollars worth of subprime exposure, and one, Bear Stearns, collapsed in a broken heap. True, some executives have lost their jobs over the mess and have seen their shareholdings tumble in value, but they've nevertheless exited with handsome--or, to many, galling--severance packages. Stan O'Neal exited the CEO chair at Merrill Lynch with about $161 million (U.S.) last October, after the firm reported billions of dollars in subprime-related losses. Chuck Prince, who resigned as head of Citigroup amid similar writedowns in November, left with $68 million (U.S.).
"It sets up a compensation system where you get rewarded for upside risk but not penalized as much for downside risk," says Damodaran. "We're seeing the risk we're seeing because of the asymmetry of payoffs that are created. This system is designed for strange people, weird people, people almost on the edge, who can take you to the cleaners."
There is also what's known as a "selection bias" in Wall Street's hiring practices that has nurtured this environment of risk taking, Damodaran believes. The MBA students recruited by investment banks tend to be good salespeople with a natural inclination toward taking risks and thereby generating revenue; the ones who have the hardest times getting jobs at these banks, he says, tend to be more thoughtful and cautious.
Virtually every function of a bank, at its core, involves assessing and managing risk, whether it be approving a loan or deciding where to invest deposits. Most investment banks have large compliance and risk departments that are charged with monitoring trading, policing conflicts of interest, and determining the thresholds for acceptable risk.
Yet, on balance, these systems have proved to be woefully incompetent.
Few can figure out how a low-level employee like Kerviel was able to take such massive positions without arousing suspicion among risk experts in the bank. And few can figure out why top executives at Wall Street's most sophisticated firms--and some Canadian ones, too, like CIBC--were seemingly ignorant of the fact they were strapping on billions of dollars worth of debt backed by risky mortgage securities.
One partial explanation: Risk departments have been neutered in the froth of a bull market, their voices afforded less input into decision-making. No one wants to hear someone preach caution when revenue is breaching record levels and creating monster bonuses.
Risk management, it seems, only becomes empowered in the bad times, after disasters have ensued and investors have already been punished. Although banks like Citigroup, SocGen and Merrill Lynch insist they have learned a painful lesson and are upgrading their supervisory structures accordingly, the real test of their mettle will come when markets turn beneficent again. Will hiring practices change? Will risk managers be able to pull the plug on a promising business that could deliver billions in profit--but might also cause potentially grave problems in the future? And will a trader like Kerviel get fired for making huge amounts of money the wrong way, outside of acceptable risk limits? Observers like Damodaran aren't much convinced.
"The people who get the most glory are people who fight battles, even if these are stupid battles," he says, borrowing a page from the evolutionary psychologists. "I'm not sure there's been a huge deviation in human nature over the last millennium, but in financial markets, I think it's become exaggerated. It's at the core of everything we do."
During his previous 14 years in the employ of the East India Co., both as a mate and a commander, Kent had amassed a remarkable record for punctuality: Despite the great distance of this trading route, and the perils of pirates, disease and weather, the sailor always returned to his home port on time.
But on this, his final trip, Kent veered into uncharted waters. Although he rounded the Cape of Good Hope in early 1753, squarely on schedule, he did not continue on to Bengal. Instead, he spent four months on the coast of Madagascar, cutting side-deals with the local population for his own benefit, helping to build a factory, bartering alcohol, and even buying slaves.
This sojourn caused him to miss the seasonal window for a return passage to England, conveniently enabling him to extend his extracurricular business pursuits (and no doubt imposing significant costs on his employer, the East India Co.).
Kent may prove to be among the first rogue traders of the global economy, a swashbuckling precursor to the likes of Nick Leeson, who sank the British bank Barings in 1995, and, more recently, Jérôme Kerviel, the 31-year-old Frenchman whose allegedly unauthorized trading cost Société Générale about $7.2 billion in losses this year. Like these latter-day renegades, Kent used the resources of a powerful and well-capitalized company to engage in improper trades; and, like them, he incurred considerable risk when he did so.
"The mortality rate was 60% on these ships, and people were dying like crazy," explains Emily Erikson, a professor at the University of Massachusetts who chronicled Kent's travels in a paper she co-wrote with Peter Bearman of Columbia University. "There had to be some sort of compensation, and that was engaging in this illicit activity."
Risk taking has been part of human culture since the prehistoric era, whether it be hunting big game or rolling a primitive form of dice known as knucklebones.
Yet rarely has the subject occupied such a central place in the collective consciousness. The U.S. economy is teetering on the brink of recession and threatening to pull other countries down along with it. Investors have lost faith in some of the world's most storied banks, whose reckless promotion of exotic derivatives products fuelled an ill-advised boom--and resultant collapse--in the subprime mortgage industry, leading to hundreds of billions of dollars worth of losses and the savaging of the credit and equities markets.
And then, of course, there are the alleged escapades of Kerviel, the rogue trader who improbably hoodwinked one of Europe's largest banks and, in the process, became an overnight poster boy for a global banking culture drunk on risk.
Kerviel came from modest means (his mother was a hairdresser; his father taught metalworking), and attended a middle-of-the-road university. The French banking system is known for its class-consciousness, and it rewarded Kerviel's unassuming pedigree with a correspondingly unassuming job: He was sequestered far from the limelight of the trading floor, performing administrative work.
Eventually, he was promoted to junior trader on the "Delta One" team and specialized in European stock index futures--the trading equivalent of giving kids plastic cutlery so they can't hurt themselves.
Kerviel was supposed to be looking for arbitrage opportunities--discrepancies between index futures and underlying cash prices that might yield a small profit. Instead, he began making a series of escalating bets on the direction of these markets, and used his knowledge of the back room to evade his superiors, creating fictitious offsetting trades. These offsets made it look as though he had removed himself from a position, when in fact he was accumulating a portfolio worth billions. It worked swimmingly until early this year, when the market suddenly turned, forcing him to backtrack in an even more audacious fashion. By the time the bank learned of his alleged duplicity and took action to unwind his trades, it was staring into the maw of a $7-billion loss. It was by far the most devastating account of rogue trading in history, and perhaps the most unusual.
What sets Kerviel apart from his predecessors is his apparent lack of motive. Unlike, say, Captain Kent and Leeson, he didn't seem to be making the unauthorized trades in order to feather his own nest. In fact, he suggested to prosecutors that he just wanted to be recognized within the firm and perhaps bag a bonus of a few hundred thousand dollars--chump change by the heady standards of investment banking.
That raises some interesting questions, not merely about lax supervision at SocGen, but about the very genesis of risk taking in the financial community.
It has typically been assumed that self-enrichment is the catalyst for this behaviour. But as Kerviel's example suggests, maybe there are other, less discernible, motives at work. What if his propensity for risk is genetically hard-wired? What if he just wanted to belong? What if, as he has intimated, the very culture of banking was complicit in his misdeeds?
The study of risk, like many disciplines, has tended to fracture along academic fault lines, with neurologists, psychologists, sociologists, evolutionary biologists and, most recently, geneticists weighing in on why we engage in this sort of behaviour.
"As I see it, there is not a single human act with total certainty of outcome. Ergo, all behaviour is risk-taking behaviour," says Gerald Wilde, a professor emeritus of psychology at Queen's University in Kingston, Ontario. "The art of life isn't the art of minimizing risk--the art of life and of decision-making is the art of maximizing risk. One has to venture, but the question is, how much to venture?" In other words, what compels one person to drive at reckless speeds or sky-dive, or risk a prison sentence for illegal trading, while another steers away from the shoals?
There is mounting evidence that some of these tendencies have a strong genetic component.
Geneticists have long suspected that, in centuries past, men who were successful hunters and warriors were perceived as better mates, and were therefore likely in a better position to pass along their genes--assuming their heightened willingness to take risks didn't get them killed first.
But it wasn't until the 1970s, when noted psychologist Marvin Zuckerman conducted tests on twins, that more quantifiable evidence began to emerge. His study led him to conclude that about 60% of sensation seeking--a personality trait closely linked to risk taking--is genetically determined.
"Risk is a subjective thing. Very few people actually know the risk of something they undertake," says Zuckerman, a professor emeritus from the University of Delaware. "Impulsive sensation seeking tends to be linked to a tendency to act without planning ahead, which can also be a characteristic linked with sensation seekers in the financial world."
Zuckerman points out that high-sensation seekers tend to have low levels of monoamine oxidase type B, or MAO-B, an enzyme that helps break down and regulate dopamine. Dopamine receptors have been linked directly to our thresholds for sensation seeking, and the implication is that without sufficient MAO-B to keep our urges in check, people could be prone to risky behaviour.
Not surprisingly, women have higher natural levels of MAO-B than men, and the amount we have in our bodies increases with age, mirroring our tendencies to become more conservative and risk-averse as we get older.
More recent studies have focused on stathmin, a gene that plays a key role in the way we respond to fear. In 2005, a research team bred mice that had no stathmin and then placed them in a large box. Whereas normal mice instinctively scurry to the safety of a corner or wall, the genetically modified mice would often linger in the open space, seemingly oblivious to what should naturally be, at least for them, a fearful situation. In turn, that reduction in fearfulness prompted them to take the additional risk of remaining in a vulnerable position. "When there is a lack of fear, it can modify behaviour," explains Gleb Shumyatsky, the Rutgers professor who led the research effort. "Here, this deficiency in fear leads to improper risk assessment."
Risk taking, however, can't simply be boiled down to genetic determinism, any more than Kerviel's rogue trading can be solely attributed to low MAO-B levels or a stathmin deficiency. While genes influence personality traits, so too do myriad other circumstances, from diet to childhood experiences to one's physical environment and emotional makeup.
Indeed, one study published this year has determined--much to the chagrin of some classically trained economists--that our emotional state greatly influences the way we make supposedly rational financial decisions. The research was conducted by two experts in neurofinance, an emerging discipline that seeks to understand trading and investment behaviour through the lens of neuroscience.
Camelia Kuhnen, a finance professor at Northwestern University, and Brian Knutson, a psychology professor at Stanford University, triggered heightened emotional responses in men by showing them erotic material, and then measured their brain activity. Next, they presented the men with two gambling options, one of which involved taking on more risk. As their arousal increased, so did their propensity to opt for the riskier bet.
"The message of our work is the fact that emotions determine very high-level decisions, like your portfolio, and investors should be aware of this fact," says Kuhnen. "If I may speculate, money has become what psychologists call a primary reinforcer. The sight of a $100 bill and a platter full of hot lasagna when you're hungry--they do the same thing to your brain. Money is now, in an evolutionary sense, comparable to any other sort of primitive reward, like food."
Yet that still doesn't explain why people who are already incredibly rich continue to incur serious risks in the hope of making more money. Nor does it account for why someone like Kerviel would risk public humiliation and jail time seemingly without the possibility of gleaning much in the way of financial reward.
Addiction specialists don't see much difference between a rogue trader losing billions of dollars and a compulsive gambler sinking into debt at a casino: Both can be addicted to the adrenalin rush of winning, and both can be prone to doubling down repeatedly in an effort to reclaim their losses. "The pattern tends to be people who have some pretty high expectations of themselves and who have had some success," says Nina Littman-Sharp, who manages the problem gambling services unit of the Centre for Addiction and Mental Health in Toronto. "People get very hooked by an early win, particularly if things aren't going well for them otherwise."
Kerviel himself, in discussions with prosecutors, seemed to acknowledge he had a similar problem. By December, 2007, he was actually sitting on an estimated $2-billion profit realized through his unauthorized trades. That was just before the market turned against him, converting those profits into billions in losses and sending him into a spiral of more fake trades to hide his mistakes. "I didn't know how to deal with it. I was happy and proud of myself, but I didn't know how to justify it," he said in a transcript released by French authorities. "Thus I decided not to declare it, and to hide the sum, I created an opposite fictional operation."
As for his decision to engage in this activity in the first place, he only hinted at a motivation. He was a middle-class outsider who lacked the social and educational credentials of his peers in the banking community; as armchair sociologists pointed out in the aftermath of the scandal, he may have taken on such outsized risk to earn respect and prove himself an equal. "I was aware, starting from my first meeting in 2005, that I was less well-considered than the others, as regarded my university degree and my professional and personal background," Kerviel told prosecutors. "I had not come directly to the front office, but had passed through the middle office, and I was the only [trader] to have done that."
Kerviel surrendered himself to police in January, and spent five weeks in jail while his lawyers negotiated his release on bail. He has been charged with forgery and breach of trust, and a trial is expected to begin next year.
Although he has not denied making the trades, he has remained unusually defiant, implicating the company in his scheme. To his way of thinking, the bank's silence while he was making unauthorized trades, its refusal to question his unwillingness to take vacation, and the regular alerts it issued to him for exceeding his trading limits, was a form of passive acceptance. The pursuit of profit, in his mind, begat willful blindness.
SocGen has vehemently denied this, of course. But some risk experts believe Kerviel might be onto something: that the financial community doesn't just have a problem managing risk (as has been clearly evidenced both by l'affaire Kerviel and the banking sector's disastrous foray into subprime mortgages); it actively encourages the wrong kind of risk.
"I'd argue that there's good risk taking and bad risk taking, and Wall Street is not good at drawing a line between the two," says Aswath Damodaran, a professor of finance at New York University and author of Strategic Risk Taking. "Investment banks are manic-depressive when it comes to taking risks. People are encouraged to take the wrong types of risks for the wrong types of reasons."
There are several fundamental flaws, according to Damodaran, the biggest of which is Wall Street's compensation packages. Salaries and bonuses are based on the ability to generate fees from advising on deals, creating new products or trading; that, in turn, creates an incentive to push these products and deals through the system, regardless of whether they are likely to be good for investors.
Look no further than the subprime collapse, in which banks were pumping out collateralized debt obligations and other complex derivatives that made mortgages more readily available to borrowers with sketchy credit histories.
These derivatives may have been a boon to the bankers who were selling the products, but they proved to have a calamitous effect on homebuyers and credit markets, as well as on investors in the banks themselves.
Some of the world's largest financial institutions have already written off hundreds of billions of dollars worth of subprime exposure, and one, Bear Stearns, collapsed in a broken heap. True, some executives have lost their jobs over the mess and have seen their shareholdings tumble in value, but they've nevertheless exited with handsome--or, to many, galling--severance packages. Stan O'Neal exited the CEO chair at Merrill Lynch with about $161 million (U.S.) last October, after the firm reported billions of dollars in subprime-related losses. Chuck Prince, who resigned as head of Citigroup amid similar writedowns in November, left with $68 million (U.S.).
"It sets up a compensation system where you get rewarded for upside risk but not penalized as much for downside risk," says Damodaran. "We're seeing the risk we're seeing because of the asymmetry of payoffs that are created. This system is designed for strange people, weird people, people almost on the edge, who can take you to the cleaners."
There is also what's known as a "selection bias" in Wall Street's hiring practices that has nurtured this environment of risk taking, Damodaran believes. The MBA students recruited by investment banks tend to be good salespeople with a natural inclination toward taking risks and thereby generating revenue; the ones who have the hardest times getting jobs at these banks, he says, tend to be more thoughtful and cautious.
Virtually every function of a bank, at its core, involves assessing and managing risk, whether it be approving a loan or deciding where to invest deposits. Most investment banks have large compliance and risk departments that are charged with monitoring trading, policing conflicts of interest, and determining the thresholds for acceptable risk.
Yet, on balance, these systems have proved to be woefully incompetent.
Few can figure out how a low-level employee like Kerviel was able to take such massive positions without arousing suspicion among risk experts in the bank. And few can figure out why top executives at Wall Street's most sophisticated firms--and some Canadian ones, too, like CIBC--were seemingly ignorant of the fact they were strapping on billions of dollars worth of debt backed by risky mortgage securities.
One partial explanation: Risk departments have been neutered in the froth of a bull market, their voices afforded less input into decision-making. No one wants to hear someone preach caution when revenue is breaching record levels and creating monster bonuses.
Risk management, it seems, only becomes empowered in the bad times, after disasters have ensued and investors have already been punished. Although banks like Citigroup, SocGen and Merrill Lynch insist they have learned a painful lesson and are upgrading their supervisory structures accordingly, the real test of their mettle will come when markets turn beneficent again. Will hiring practices change? Will risk managers be able to pull the plug on a promising business that could deliver billions in profit--but might also cause potentially grave problems in the future? And will a trader like Kerviel get fired for making huge amounts of money the wrong way, outside of acceptable risk limits? Observers like Damodaran aren't much convinced.
"The people who get the most glory are people who fight battles, even if these are stupid battles," he says, borrowing a page from the evolutionary psychologists. "I'm not sure there's been a huge deviation in human nature over the last millennium, but in financial markets, I think it's become exaggerated. It's at the core of everything we do."
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