The Reopening - The View from Las Vegas

As a reward to myself for blogging every day in May, I travelled to the place that is at the same time the most and the least American city, Las Vegas. It had been over two years since my last trip there, Super Bowl 2019. Some observations:

• It is largely unchanged at first appearance. The casinos are packed. Restaurants are hard to get into. Crowds are abundant.
• A studious observer will notice that even though casino open tables are full with high minimums, there are numerous ones, banks in fact, that are unopened. My guess as to the primary cause for this would be the labor shortage with depressed actual or forecasted demand as a secondary contributor. 
• Speaking of the labor shortage, the struggle is real. I can support Scott Sumner's prediction and observation that labor supply is low and as a result service is poor. Let's be clear, everyone I encountered from a service perspective (waitstaff, front desk, concierge, retail clerks, etc.) did a great, friendly job. But service is SLOW. Restaurant wait times are crazy (more on this in the business thought below) and reservations are required--we almost had to slum it one night at Shake Shack but fortunately got into Din Tai Fung (more on where I ate far below). There are empty tables at "full" restaurants--not a strategically spaced COVID thing. Some have yet to open. Calls to concierge and guest services had very long waits on hold. And note this: those enormous signs out front on the strip, very valuable advertising real estate, had in their rotation help wanted ads among show previews, featured restaurants, and "...the loosest slots on the strip...". 
• One of the reasons I went and took the whole family (more on this in the culture thought below) was to see the shows. Sadly, I was a bit early in my winter planning for this trip as the primary show draw for us, Cirque du Soleil, is not ready to open yet. This makes sense as it takes time to get the band back together so to speak. 
• Masks were sparsely seen among the patrons. Probably 10% wearing them at most. Various staff is more like 75%. This was different at the poker tables as only about 20% of dealers wore them, but also about 20% of players. For the players I think this was a combination of a desire to use masks strategically as well as California CDS (just anecdotal but supported by several examples--young poker players from California and elsewhere were masking even though they admitted they were vaccinated). 

Feel free to file several of the above under either or both 'lockdowns have long-term consequences' or 'pandemics have long-term consequences'.

Two more thoughts: one on culture and one on business.

1. People have always asked me when I tell them I'm taking my kids to Vegas "What is there for kids?". The answer is lots, but it is deeper than that for me. The world is for all of us. I don't subscribe to the idea that we should shelter kids in incubation chambers until they are ready for the real world. The real world gets them ready for the real world. Yes there are obvious limits. Yet this isn't simply a disagreement about a matter of degree. I think there are hard and soft lines between what a kid should and shouldn't be exposed to. People including if not especially kids are antifragile. We walked in the heat (108) as well as in the air conditioned resorts. We saw the beautiful people among the beautiful gardens of Bellagio as well as the desperately troubled on the decidedly rough sidewalks. Of course we did not attend a strip club. At the same time I did not hide their eyes at the scantily clad girls (and guys) selling groupie photo ops. Piff the Magic Dragon's show was excellent with the adult language that is not generally my 9-year-old daughter's vocabulary. I think my kids saw repeated great examples from me and my group and many others we encountered that a Las Vegas experience can be great fun while still being responsibly and reasonably behaved and coexisting with bad, excessive, undesired behavior all with the attendant consequences.
2. As mentioned above, there were long wait times for restaurants among other things. Some of this is a temporary phenomenon that will abate as the reopening completes. Yet some of it is an enduring problem. First some history: In the mid 1970s William Bennett and William Pennington began transforming Las Vegas by developing a more family-friendly environment and a more expanded idea on what the Vegas bundle should include. Add to this the innovations Steve Wynn developed. Gradually the idea that Vegas should be stingy rooms, cheap food, limited shows, and free drinks all with the desire to get gamblers gambling gave way to the idea that these other areas could be profit centers themselves and of greatly higher quality and variety. Then came the metric revolution advanced greatly by Harrah's so that the casinos could understand their customers better tailoring the experience more individually (profit maximizing price discrimination). For a long time I yearned for the casinos to recognize and reward me for not just my gaming but also for all the other revenue I was bringing with me (hotel room, restaurant spending, show attendance, etc.). Slowly this has finally been happening to where on this past trip almost all my high-end food spending is credited to my value as a customer. But there are still unclaimed chips laying on the casino floor. The OG business model dies hard. Our room at Aria was very nice, but still lacked some basic desires. I would have liked and used a minifridge that was not stocked with high-priced items with a hair-trigger system ready to charge me for an inadvertent nudging. Keep that there, but give me another one that is empty--maybe at an upcharge. How about a coffee maker or Nespresso in the room? Presumably the casino is thinking they want me out of that room on the casino floor or at the pool ordering drinks or in a restaurant. However, keep in mind they definitely do offer room service. More to the point think about the tradeoff. Instead of popping a K-cup right out of bed, I went downstairs to Starbucks in the Promenade waiting over 30 minutes in line. The wait outside the popular Salt & Ivy for brunch was >1 hour. This is not productive time for the hotel/casino. People who were not waiting right outside the restaurant looking at their phones instead were walking away to find another place probably in another property. Waiting on queue is a dead-weight loss in need of a creative, profitable solution.

Finally, here are the places where we ate with all being recommendable:

• Bardot Brasserie
• Din Tai Fung
• Salt & Ivy
• Gordon Ramsay Pub & Grill
• Mon Ami Gabi
• Eataly
• Hash House a Go Go

The Rules of Investing Club

1. Stay invested - Don’t time the market. Timing the market is not just impossible. It is multiplicatively destructive in two ways: bad decisions compound mathematically and the likelihood of mistake compounds with attempts.
• Sub-rule - Know what this means. It applies when the market is “down” and when it is “up”. What makes you think you can define these? What makes you think you’ll both get it right on the exit/entry (at least twice) and have the nerve to make the proper moves at that time. Also, wouldn’t timing imply buying low? So why are you bailing after a crash?... oh, because even though you didn’t see the downturn coming up until this point, you now can see definitively that a further decline lies ahead.
2. Keep a cash reserve equal to X months expenses - X is up to you. A typical rule is 6 months, but mileage will vary. Be sure to include access to credit as a buffer as long as you also take into account that the event that causes you to tap into this safety reserve might also be damaging your credit access. Notice how this rule helps with adhering to the first rule.
3. Diversify - The only "free lunch" in investing as it allows for (some) risk reduction without return reduction (up to a point) when done properly.
4. Outsource - SPIVA. You ain’t special and just about no one else is either. Therefore, use well-run, low-cost, TRUE index funds. (Besides Vanguard, Fidelity and Schwab are also typically good providers.)
5. Do what it takes to stay on plan - Employ dollar-cost averaging (DCA) or enroll in forced (passive) contribution increases or use a professional as a commitment partner.
• Sub-rule - Make sure the pro has incentives that are congruent with your own, has the right credentials (CFA and CFP being the gold standards but experience matters a lot too), and is cost competitive. 

I've Got Bad News For You

Your house is going to catch fire and burn down completely in about 10 years from today give or take a month. The good news is that no one will be injured in this accident and nothing substantially bad will happen to your house between now and then. No fire, no flood, no tornado, no termites. 

The further bad news is that you are now positively uninsurable. The further good news is you no longer need insurance. Insurance is about transferring risk; not transferring expense. What you now need is a redirection of resources to prudently prepare for the coming loss. 

Similarly, worries about a collapse in health insurance markets because of genetic information breakthroughs are firstly fairly unrealistic in their assumption of complete elimination of uncertainty and secondly seriously misguided because of our misguided understanding of the purpose of insurance. 

We are confusing the mechanical result of insurance being used (compensation goes to harmed parties from unharmed parties via an insurer middleman) and the conceptual purpose for insurance existence (the transfer of a risk from those sensitive to it those better equipped to handle it including across time). 

Suppose we were in a world where health risks were as predictable as fire "risk" was in the analogy. Would this mean those with pre-existing conditions would be left to suffer? Of course not. As John Cochrane has been saying for a long time, this problem is solved by health-status insurance. 

Basically, give those with known high risks money equal to the expected value (cost) of future expenses. If the future costs are a sum certain, then there is no role for insurance (a known liability implies buying a bond). A strict parallel between the house fire and pre-existing conditions would mean no doubt about the cost ("...nothing substantially bad will happen to your house between now and then."). That is not realistic even if we have near perfect information about what pre-existing conditions foretold. 

The world we will live in even if we get really, really good at matching pre-existing conditions to future health problems will be one with some variance and uncertainty. There will still be a risk of accidental death before the predicted health problems develop along with hopefully great medical and economic advances that make treatments better and less expensive.

If we feel we should help the future victim of house fire (pre-existing conditions), we through government and private charity can give them funds to compensate for the loss. We cannot give them insurance unless and only to the degree there is uncertainty.

P.S. Perhaps doctors and patients should just secede from the broken insurance market? Count me in.

P.P.S. If you want to test your understanding, think about how a typical pregnancy is not a good candidate for insurance while a rattlesnake bite is.

P.P.P.S. I just renewed my personal homeowners policies on Casa Shazam, which gave me reason to post this thought experiment.

WWCF: First Contact

Which will come first?

Aliens Contact Us

or

We Contact Aliens

How quickly you dismiss this question on its very premises is interesting in itself. Let's start with the basic assumption that there have been, are, or will be aliens (intelligent life with origins beyond Earth). Now that we have that out of the way . . .

Where are you on the Fermi Paradox and The Great Filter? For this question to have meaning we have to additionally assume it is actionable because there will be a determination of contact made. So . . . 

Here are the terms:

Aliens contacting us would include the obvious spaceship lands on the White House lawn, but also signals deliberately sent that we detect/decipher even if they are not aimed directly for us. Add to this discoveries of artifacts here on Earth of past alien civilizations if those were exploratory or communicative in nature. So a deliberate message sent by aliens and received by us through passive discovery or active looking by us is the first condition met.

The second condition, that we make first contact, seemingly has a lot of hurdle to it. We have to discover aliens keeping to themselves to the extent they don't find us and make contact or we see one of their signals sent out prospectively, and then we make the first engaging move. Yet there is another way. If our signals we have been sending out unintentionally/sloppily since the time we have been aware that we've been transmitting to the cosmos or sending out deliberately to "is there anybody out there?" are received by aliens, then we have made first contact. Another feather in the cap of us first is what qualifies as "intelligent" life. While I am open to revision, right now I would allow anything at or above the minimum threshold of animal cognition. So Martian mice count, but Martian bacteria do not. As impressive as space monkeys would be, there is no chance they contact us first.

Robin Hanson has already been putting in the heavy lifting on this one. And don't tell me that it is already settled--dis ain't ova. 

My prediction: Perhaps I allow the Fermi Paradox to overly influence me or perhaps I'm too optimistic in regards to The Great Filter. Nevertheless, I come down on the side of the second case, we contact aliens first. To this I will assign a respectable but still negotiable 65% probability.

Trust Is a Fragile Fabric

https://en.wikipedia.org/wiki/Bayeux_Tapestry

Of the many, many lessons to be learned from the COVID-19 Pandemic, one that stands out to me is how important honest communication is. Honesty is a bedrock of trust. Trust is an essential quality for a thriving society.

While fear can enable a society to survive, it takes trust to allow it to flourish. Largely we are only surviving the most recent pandemic. There are many reasons for this from poor understanding and application of science to isolationist responses regarding testing and vaccination driven by nationalist pride (distrust!) to blatant failure to test to failure to properly quarantine to failure to experiment and on and on. Granted that many of these failures came about because we were starting from a poor state of trust, we did not do much to improve the arrangement. In fact we set it back meaningfully along the way.

Suppose we get another pandemic (we will, just wait). Suppose further that it is similar to COVID in terms of virulence and contagion. Perhaps it is dissimilar enough that we have a caught-off-guard type of reaction thus making it even more similar to COVID. But we do remember COVID, so we actually do have some improvements in societal and government response. For example, some communities, large business firms, perhaps the federal government wants to conduct wipe-spread, rapid testing. What might stand in the way of that policy being well received and complied with?

The people that would need to be getting tested would need strong assurance that a positive test would be met with reasonable consequences. What about our response to COVID would give them that assurance? Although people would definitely want to know if they were infected all else equal, pushing back against this desire would be multiple, reasonable concerns. Namely, that they would be subject to harsh treatment if positive (social stigma, rough or indefinite or otherwise undesirable detention, etc.) and perhaps more reasonably that they would be subject to involuntary quarantine, lockdown, social stigma, etc. even if they tested negative. 

Compounding this would be a distrust that they were getting the full story. Vaccination acceptance still suffers from the horrible Tuskegee Study crime. To a lesser degree dismissive elite responses to those with concerns about vaccination, as unfounded as those may be, also deters people from trusting authorities on vaccines. Being told masks are worthless and then that masks were essential sent a clear message--don't trust the authorities. This was one of many noble lies, a short-sighted concept that completely fails to ask the essential question: And then what?

The Chinese government lied to the world at the early stages of the pandemic. They have characteristically been very deceptive as the pandemic has unfolded including apparently not cooperating with the investigation of a lab leak cause. We should expect and demand better from our authorities. In the long run people respect the concept of 'we don't know' especially when coupled with transparent, honest, and updating 'here is what we are thinking'. The 'And then what?' from this approach is productive responsibility and fruitful experimentation. 

Elaborate Investing versus Adaptive Investing

When investing, be careful not to confuse complicated with complex. 

My inspiration for this post came from reading this essay by Arnold Kling a few years back where he elaborates on a longer essay by Jordan Hall that draws a distinction between complicated and complex. Hall sets the terms:

...[I]n brief the distinction is that a complicated system is defined by a finite and bounded (unchanging) set of possible dynamic states, while a complex system is defined by an infinite and unbounded (growing, evolving) set of possible dynamic states.

Kling's treatment is very helpful as he extends the concept to economics and climate:

When I was a graduate student in economics in the late 1970s, we were trained as if the economy is complicated, but not complex. We were told that if we learned enough mathematics and statistics and applied these tools, then eventually we could predict and control economic outcomes. 

In fact, economic behavior is complex. There are too many causal factors, feedback loops, non-linear effects, and unprecedented phenomena involved to enable economists to control the economy precisely and reliably.

....

Climate scientists use computer models, because the problems with which they deal are complicated. But there are multiple models, and they do not agree with one another. That tells me that the climate, like the economy, is complex. There are too many causal factors, feedback loops, non-linear processes, and unprecedented phenomena involved to enable precise and reliable prediction and control.

In contrast, landing a spacecraft on the moon is merely complicated. It is a very difficult problem, but we can arrive at a determinate solution.

I would like to extend this model to the investing world especially from the standpoint of the typical buy-side* investor (AKA, you and me and most all of us). 

The money management world loves to overcomplicate things. This is because overcomplication gives a mystique or air of superiority to the wise, benevolent (expensive) investment professional. It also conveniently provides a nice cover for when things don't go so well. As an aside I believe this is a very big part of the investment world's embrace of ESG--perhaps to be expanded upon in a future post.

At the same time that they are embracing overcomplication, they are riding in like valiant knights to save the day. This is not to say that investing is simple. Investing is complicated, but that complication and solutions designed to solve it are not the full story. 

If it were just complicated, Wall Street would have solved investing long ago. And it wouldn't have needed a retail investor's money to do so. Investing is complex. This follows naturally from economic behavior including the economic actors and forces within it being complex. Consider a single stock.

We can attempt to value a stock based on a number of different, widely used, credible models (e.g., dividend discounting, free cash flow to equity, multiple of price to book, multiple of price to sales, etc.). These formulations are complicated to a certain degree and can be made more complicated with arguable improvement to the output. What should give us immediate pause is that each of these will almost always yield a meaningfully different answer. 

Each model will rely on assumptions, and those assumptions will have their own underlying complications. No matter how hard we try, all the king's computers and all the king's CFAs cannot definitively (precisely and accurately) value a single stock let alone the market as a whole. The best one could hope to do is be right more often than not to a slight but still meaningful degree. Very few highly incentivized, very well funded pros can actually do this. And even they fade with time. 

The nature of investing being complex is not simply complication layered upon complication. It is of another dimension entirely. Economic value is ultimately subjective value. It is subject to preferences, tastes that change in unpredictable ways. It is also subject to random events that spawn new, unforeseen paths of development. There are future technologies of which we have not even dreamed and for which all of the physical ingredients are currently before us. 

Those in money management on the sell-side* offer the comfortable refuge of 'solving' the complicated. This is dangerous even if unintentionally deceptive. Investing is never solved. It is constantly evolving both from the standpoint of the market external to the investor as well as the investor's own financial goals and risk preferences. Consider the latter an additional layer of complexity with its own complications. 

The solution to complex challenges is flexibility. A good financial plan must be adaptive. Elaborate schemes alone will not save it from peril. If anything, they may give a false sense of security along with crippling high costs. Start with straightforward guiding principles, and follow with constant reassessment: What are you trying to achieve? What is at risk? What is the current probability of success/failure? What are the magnitudes of those potential outcomes? How confident should you be in these estimates? What if you're wrong?

Appreciation for the complexity of investing means looking beyond solutions for the merely complicated. 

*In traditional industry parlance the buy-side refers to those purchasing investments especially investment products. This could include buying a mutual fund or investing money with a more involved manager. The sell-side is of course those on the other side of the trade selling the investment fund or services. The ultimate buy-side investor is the principal owner of the account--the one who's money is being invested. She may hire a money manager to act as agent for her. It would be his job to take on the role of buy-side investor facing those looking to sell investments to him (ultimately her). So for him it can be confusing since he is selling to his client his services to buy on her behalf. In the industry he is always considered buy-side. The firms he invests his clients' money with are the sell-side. Many a principal-agent problem develops when the buy-side doesn't stay prudently arms length from the sell-side. Think of it as the financial world equivalent of the McD.L.T. 

Disagreeing to Agree

We mostly all agree on the premises:

1. Progress comes through experimentation.
2. Most experiments fail.

We mostly all disagree on the conclusion:

• For progressives the answer is "Therefore, we should pursue large experimentation conducted by the state on the basis of arbitrarily determined noble objectives."
• For conservatives the answer is "Therefore, we should pursue limited experimentation constrained by the state on the basis of arbitrarily determined morality."
• For libertarians the answer is "Therefore, we should pursue a great many small experiments conducted by entities on the basis of their own arbitrarily determined desirability, feasibility, and expected profitability."

One desirable feature of any of these processes would be for those involved to have strong stakes in the outcomes (good and bad) constrained by the rights of third-parties not to be harmed in the process. I leave it to the reader to decide which of these most easily aligns with that desired incentive structure.