Outliers - A Review

I read Malcolm Gladwell's Outliers: The Story of Success this past week. I have read his other books Blink and The Tipping Point and enjoyed them. So when I heard that he had a new book out, I figured I would check it out.

From the onset I was intrigued by the subject matter. The focus of the book is what makes some of us successful and others of us not. Is it genetics, upbringing, or environment? Is it something else entirely? As someone who considers himself success and is looking to become more so, I was interested in what factors may have and will continue to contribute to this outcome.

Gladwell spends the first few chapters looking at people who anybody would consider outliers and looking at the set of circumstances that made the person successful. He looks at people like Bill Gates, Bill Joy, and Robert Oppenheimer. He looks at a group of people like professional hockey players and wondered if successful athletes have any common characteristics. What was perhaps the most interesting part of the book (which unfortunately was at the very beginning), he points out that one startling fact is that the vast majority of people who plan in the best leagues in Canada are born in the first three months of the year. This is not some strange statistical anomaly. No, the results are so skewed something must be going on. It turns out your birthday can have a dramatic effect on your eventual success. Think about it. Canadian youth hockey groups kids by their age. The cutoff is January 1st. So all kids born in the same calendar year play in the same league. But wait. What if you were born on January 1st? You play in the same league as someone born on Dec 31st, someone who is almost a full year younger. A year when you are 30 is no big thing, a year when you are 5 or 6 is huge, and it represents 20% of your life already. Naturally the kids born earlier are going to be slightly bigger and stronger as they are slightly more physically mature. These kids are singled out as being “better” as they look better compared to the much younger counterparts. This slight advantage means they get more playing time and more attention, which just makes them better. It is a virtuous cycle. This small seemingly insignificant fact like birthdates has ripple effects that factor in for years as the same pattern holds true all the way to the top ranks of hockey. Crazy huh?
He looks at their success of these outliers through the lens of other unknowns who seem to be blessed with similar talent yet somehow did not become wildly successful as Gates or Oppenheimer. In the end he concludes that outliers’ successes are very much correlated to things external to themselves. Sure, these people might be successful, but would they be true outliers. He shows that to be a technology giant in today’s world you needed to be born in 1954 or 1955 and that you stood a much better chance to be a successful NY lawyer if you grew up in a Jewish family from the Garment District and were born in 1930. Now mind you, he is not saying these people were successful solely because of these quirks in circumstance. He is not saying all Jewish kids born in NYC will be successful lawyers. He is simply stating that there are certain facts and circumstances that must be present for someone to be a true outlier.

He spends the second half of the book exploring ideas about culture and how the contribute to the failures and success of its people. There is an explanation on why Korean and Columbian airlines had such horrific air traffic safety records for decades (pilots defer too much to their superiors in their cultures). There is an explanation about why Chinese are so good at Math (and no, it is not just because we are smarter than everyone else). One of the most interesting conclusions is given near the end of the book. He looks at education levels among poor and rich kids. It is no secret that rich kids do better on standardized tests than poor kids but the reason he draws may surprise you. He concludes that we do not have an education problem. We actually may have a vacation problem. Rich kids never stop learning. There is always camp, a parent, or a book lying around the house for them to engage in over the summer. Not so for poor kids who may get a good vacation but come back to school behind their rich counterparts who spent the summer learning. What should we do about this? Year round school!

To sum it up, Outliers tries to show that success is actually pretty predictable. When you combine hard work with the right circumstance, you have a recipe for success. It is not just about having the most talent or random luck. It is about a gift people are given when opportunities present themselves and they have the strength to grab hold of it. He concludes the book by wondering what would happen if the same types of opportunities were given to everyone. If we understand which opportunities are needed for success, and gave these opportunities for all, would the outcome not become greater success for all?
Overall, I enjoyed the book. I think Gladwell tends to oversimplify a lot of issues but it is necessary in this type of book to keep it enjoyable. Usually his ideas follow mine, which make the reading more enjoyable and easier to write about. I agree wholeheartedly that success is determined by the confluence of hard work and the right circumstances. Anyone looking for a book that is a light read on a subject that is fairly interesting, I recommend picking this one up.

Is the Market Turning?

The market was down today after several days of rallying.  This despite the fact that there was relatively good news that came out.  Most of the news as of late has been pretty good and for many people that is the problem.  When the news starts being better than expected you have to get a little bit nervous.   I'm not sure that we have really turned the corner but I do believe that after a 30% rally the downside is probably greater than the upside in the near term.  I just do not believe that you can have 9+ weeks of consistent upside gains of 1% and 2%.  I also really did not like that Nasdaq was the index that was the most down.  It was the leader up.  It now looks like the leader down as people try to get out with their profits.

The good news is that the bank stress test came out after hours and for many of the banks it was better than some had feared.  Tomorrow will be telling.  If the market reacts poorly to this relatively good news, than I think expectations may have overshot on the upside and the market may be going down over the next few weeks.   If the market rallies like it seems like it is in the after hours than you might get an even higher move to the upside.

I played the market to the downside this morning.  I took a position in the ultra-short ETF in Real Estate, SRS.  The real estate sector has rallied a lot in the last few weeks and I do not think it can continue like this.  When I look at the fundamentals, I think things are going to get even worse than right now.  I know there are those who think we  have reached bottom, but I'm not one of them.  I actually had a gain of almost 5% in the day in just this one position.   I am only taking a very short term position in this.  I'll take my gains or losses quickly rather than try and stay in this market too long.

More Supply Equals Lower Prices

Economics 101 people.  I just heard a financial reporter, Diana Olick of CNBC, say that housing prices will rise when more people start putting their home on the market.

To give context, the discussion was around the Zillow report saying that over 20% of homehowers are underwater.   The numbers might be even worse than this because there is a large "shadow inventory" of homes.  That is, there are a number of people, over 1/3 of homeowners, who wish to sell their home but have held off over the last few years for fear of owing more than their house is worth.

Olick pointed out that the sales number may be artifically low because the only thing that is selling are foreclosed homes and people who must sell.  She argues that when more of these non-distressed people put their home on the market prices will rise becasue these people will not sell their homes at the low prices.

Umm, no.  Prices are set by a confluence of supply and demand.  Suppliers do not just get to set whatever price they want.  They may wish for prices to be at a certain level, they may certainly not sell at a price they deem too low, but I can promise you prices will not rise because there is MORE supply.  It makes no sense.  I may want to sell my car at $20,000 even though it is worth about $10,000.  I may refuse to sell if I can't get $20,000 for it.  But that just means my asks will not affect the market even more.  And I promise you my bringing my home to the market will actually depress prices as buyers will feel they have a wealth of choices.

A Flurry of Moves

Only going to be a quick post today.  I did not go into work until late today because it seems I have an ear infection that causes me to have a pretty bad headache.  So rather than go into work in the morning I decided to stay home and rest a little bit.  Of course, with all that time on my hand I had to do something.  So I did a flurry of moves.  All told, I made four trades.  Since I normally only make a trade every week or so, doing four in one day just goes to show it is probably good I have a day job since I would spend all my time day trading.

The four moves I made were

1. Got out of my long financial position, UYG.  I had a 50% gain in just a few weeks and decided not to be greedy.  Sold it at $3.91 when I had a cost average of about $2.50.


2. Got more short the Dow.  Added to my position of DXD.


3. Increased my position in the material's ETF, XLB.


4. Increased my position in the Chinese ETF XFI.

All told, I increased my exposure to the market a few thousand dollars but probably went net short since my two long positions were about as long as the position I sold in the financials.  I really have no idea how long the current rally will last.  I have a feeling it might go up some more tomorrow as the market reacts positively if it is either good news or bad, the sign of a bull market.  I keep waiting for the market to correct, and yet it doesn't seem to want to do it.

My Portfolio Kicking Ass

If you look at my positions,  you will know that I have a very good day.  I am long the financials, China, and materials.  All of these are doing really well as this market rebounds.  I'm unfortunately a little bit more in cash than I want to be but I've been waiting for a pullback that does not seem to be coming.

I don't see any reason to rush into this market still, but I've been saying that for the last several weeks while the market continues to make new highs.  That leaves me with a lot of cash to try and figure out what to do.  I do think this rally has been getting a little long in the tooth, but that is the problem with crazy markets.  They do not have to make any logical sense.  I've been wanting to get short the market, more short than my current short position in the dow.  I think I will do a hedged position tomorrow.  I want to get a little bit longer on my materials and China position and then get short the market for the eventual correction that we will get.

I suggest you do the same.  This rally is going on eight weeks.  That is pretty crazy if you think about it.  People are piling into stocks to avoid missing the rally.  At some point, the buyers just will not be there anymore, and that's when the market is going to reverse and reverse hard.

Teapot Calling the Kettle

Is it me or is there a little bit of hypocrisy with Tim Geitner announcing Obama's tax plan to cut down on tax evasion by wealthy individuals and corporations?  I understand he is the treasury secretary and might be the proper person from a protocol perspective to announce this, but still.  On this one, you might have wanted to send Tim Geitner on some important mission  somewhere else and have someone else in governmnet introduce Obama.

Costco Hot Dogs

The other day I went to Costco and bought a hot dog.  For those that do not know, Costco Hot Dogs are one of the best deals around if you like hot dogs.  For $1.50 you get a pretty good size hot dog and a refillable drink.  It has always been one of the best deals around.

But as I was eating my hot dog the other day, I got to thinking if it this hot dog deal was a "good" thing.  I thought of the problem in two ways.

1. This is the type of thing that is leading America to be obese.  The hot dog and soda is about 700 to 800 calories.  All for $1.50. That is just nuts and encourages people to over consume.


2. This deal is a marvel of economic efficiency.  You can get so much for so little.

Every time I see a deal like this, it makes me think of all the things that had to happen to actually get that product into my hand.  A pig had to be raised and then slaughtered.  The meat than had to be butchered and formed into a dog.  This had to be packaged and then shipped to the Costco.  A driver had to drive that dog to the Costco where it was unloaded.  Someone took that dog and cooked it.  All these people were paid for their time.  The material costs include feeding of the pig, the packaging, and the cost of gasoline.

Now factor in the fact that the soda, taxes that are paid, and a typical retail margin of 10%, and that dog at the wholesale level is less than $1.  That is simply amazing to me.  We live in a society where so much is possible for so little.  But perhaps things have come a little bit too easy.  When you can consume that much for that little, is it any wonder why we have some of the health issues we do?  What do you think, do the pros have having cheap and available food outweigh the cons of the health risks it presents?