Nostradoofus

“Soldiers of Academia” is my phrase for children molded from birth, Spartan-style, by competitive parents hoping to secure admission to the Ivy Leagues.  As described in the previous article, this was effective a generation ago, though perhaps did not result in happier children.  

Today, there is a second problem:  the Soldiers of Academia regimen may have become a false promise, even for those who are solely interested in external measures of success (money, alumni bumper stickers, etc.).

The causes of this new change?  Increasing competition and declining return on investment.

Increasing competition

The Soldier’s competitive funnel begins in first grade, with millions of children competing for just a couple thousand Ivy League spots a decade later. Twenty years ago, few people thought of primary school in this way, so the few who took the Soldier approach could easily outdistance non-Soldiers to grab all the spots at Harvard.

Just one problem now: everyone knows the Soldier model worked. K-6 math and chess tutoring is available in every city. The pool of qualified applicants is exploding. It’s reasonable to expect that, by 2020, your 17-year-old Latin-speaking, Rachmaninoff-playing chessmaster may not seem very special to the Harvard admissions board.

Under those conditions, just as most people would consider it irrational to spend 100% of their childhood preparing for an NBA career, parents may no longer want to bet everything on this particular type of academic boot camp.  The expected value is too low.

Declining return on investment

Even if you beat the odds and get into the Ivy League, today’s payoff is lower. The cost of top-tier private college has risen much faster than inflation, while professional real income per work hour has stagnated.

If you doubt this, interview someone who has just gone to his 20-year high school reunion. Inquire about how his classmates have made out. You may be surprised, as I was, to find the very best students in their high school class are not consistently the most financially secure. Often the opposite.

Top students go to private undergraduate and graduate schools, incurring debts of $150k to $350k. Educational choices (graduate school) and high debt then guide them into professional jobs with high pay, but extremely long work hours (management consulting, investment banking, law, medicine, etc.), which in turn delay marriage and home ownership well into one’s 30’s.

By their 20-year reunion, at age 38, many have no family (either still single or age-induced infertility), just getting out of debt, just thinking about a first house, and so forth.

In contrast, sensible second-tier students go to state schools, incur little debt, settle down early, buy homes, and by age 38 are well on their way to financial security.

I’m not saying, “don’t try for the Ivy League.” But it does make sense to reevaluate the range of possible outcomes, and their probabilities, before sacrificing your child’s joie de vivre in a do-or-die, decade-long rush at the Harvard admissions committee.

Of course, some teaching pressure is well warranted. Everyone applies at least some to help their child to read, write, swim, ride a bike. But there is a point past which this mode of learning is less efficient than intrinsic motivation.

Intrinsic fulfillment can produce a good payoff in all conditions. After laying an appropriate groundwork, if you can encourage your child to find something he loves, and to seek marketable applications of that love, your child will probably become highly accomplished at something unexpected. College admissions boards LOVE this, because their dull job is rendered briefly interesting by a quirky candidate. But even failing the run at Harvard, your child will learn early how to seek fulfillment while making a good living, so the Harvard stamp becomes less critical.

My current favorite examples of classical education followed by intrinsic fulfillment are this guy, and also this guy. Call it goofy if you will, but speaking as a guitarist, I can say this is impressive.

Summary: compared to 20 years ago, a decade-long academic push is much less likely to get you into Harvard, and, even if successful, has a lower payoff. As a result, it would seem parents are better off laying a very broad educational groundwork, then letting the child pursue something meaningful and marketable.

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Coastal California knows two large groups of K-12 students I’ll call the “American Indolents” and the “Soldiers of Academia.”

The American Indolents are descended from parents and grandparents who knew only limitless American power and riches: suburban comfort, economic ease, and relative job security. These kids coast on imperial momentum — or think they do — spending afternoons watching TV, smoking pot, playing video games, and generally goofing off.

The Soldiers of Academia are descendants of recent immigrants. Poverty is in recent family memory. Economic advancement is the primary famiy value. Intellectually, they “work to failure,” a weightlifting term meaning that you stop only when physically unable to continue. Imagine the “Rocky” theme song playing in the background as these kids are pushed relentlessly, from early childhood, to maximize academic opportunity. They spend their afternoons playing piano and chess, learning Latin, and going to Kumon math tutoring.

Based on my 30-year observation, the economic outcome is what one would expect: in general, today’s Soldiers become tomorrow’s prosperous doctors and lawyers, while today’s Indolents become tomorrow’s struggling gas station attendants and retail service workers.

Yet these two groups share a common feature: dissatisfaction. Naturally the Indolents are trapped like sharecroppers in dead-end subsistence work. Less obviously, the Soldiers, who marched and drilled through their childhood years to the pleasure of their parents, can sometimes be resentful, anxious adults, unsure what occupational fulfillment might mean.

There is a third, smaller group we’ll call “Intrinsics.” Before the age of 15, they find a calling, vocation, or hobby, intrinsically satisfying, and adaptable to have economic value. Not all Intrinsics are happy, and not all are rich (though many are), but most of them have something more important than wealth, or even than happiness: a sense of fulfillment, purpose or meaning in life.

A key benefit of this approach is that personal fulfillment is not contingent on big success. At the same time, it seems to increase the odds of stratospheric success. There is no external motivation (e.g. money, parental approval) powerful enough to drive you to global excellence. It has to come from being really, really interested in something first.

Warren Buffett did not begin trading stocks at age 11 under pressure from his parents. Teenage Bill Gates did not program minicomputers because his mom forced him. Walt Disney’s love of drawing and entertainment drove his success, over the objection of his father. In all cases, intrinsic enjoyment and curiosity drove achievement, not the other way around.

Thus a parent might prefer to encourage their child to be an Intrinsic instead of a Soldier — someone who knows how to identify a dream, make it marketable, and follow it through. At age 70, I would feel successful to have a happy, relaxed, purposeful 40-year-old daughter. Financial security would probably be a component of her relaxation, but as a means, not an end.

This is particularly important now, because I suspect the Soldiers of Academia model may not work as well in the next 20 years as it has in the last 20.

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The Wall Street Journal says top private U.S. university admissions discriminate by race (”Is Admissions Bar Higher for Asian at Elite Schools?”, Wall Street Journal, 11/11/06, subscription required).

Despite the statistical evidence of bias, these colleges, apparently including the Ivy League, deny the practice exists, as they did when excluding Jews in the early twentieth century. While the problem has waned in the past 15 years — the University of California confessed and went meritocratic in recent years — the SAT disparity mentioned in the WSJ article suggests the practice persists.

For our Wisconsin readers, here is a primer on Asian-American academic excellence. Lesson one: there’s nothing Asian about it. It’s simple opportunity cost: every hour spent on one thing is an hour not spent on something else.

So, to produce academic overachievers, immerse your kids in academia. Go to the library every afternoon. Read. Write. Cancel your summer vacation, and spend the money on Kumon (a respected private math tutor).

Walk into a coastal California public library on a weekday afternoon, and note most faces are Asian (including south Asia). 12% of the California population, but 60% of the library population. This adds up. Consistent effort yields results.

It should come as no surprise, then, that after years of consistent study, many of these kids are academic superstars. What else would you expect? That they’ll get into Harvard by going surfing every afternoon? Unlikely.

“Asian” is an irrelevant red herring. Anybody can do this. By a twist of cultural fate, those who actually do are mainly recent descendants of Asian immigrants. To put quotas on their Ivy League acceptance is to punish a family reverence for academia.

“Reverence” is not too strong. Imagine the family strain of such a singleminded effort. Mom driving the kids around every afternoon. Kids abandoning sports, friends, parties, all in favor of intellectual excellence.

Now imagine, after a dozen years in this academic boot camp, you get a cursory rejection from Harvard, in favor of a less qualified person, due to ethnic background. You’d be mad, wouldn’t you? What could be more contrary to American meritocracy?

Beyond unfairness, in the limit case, this may be socially destabilizing. I suspect such policies will not exist in 10 years, but in the meantime, write your congressman.

That’s the university admissions perspective. The family perspective, covered in the next post: is it actually a good idea to put your kids through 12 years of academic boot camp?

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About 7% of Americans live within 60 miles of the Santa Monica Mountains. “Greater Los Angeles” now stretches in a continuous mega-urb (interrupted only by one large Army base), from Ventura to the Mexican border. 150 miles of solid city. Seriously.

What’s a nature lover to do? First is sea kayaking. 200 yards offshore, at any time of year except summer weekends, you can paddle in near silence. A seal pops his head up, three yards away. A dolphin speeds by. Bright orange garibaldi shimmer fifteen feet below.

Second is river cycling. Hidden among the city is a spider web of river trails, some concrete, many not. Here is my daily bicycle commute:

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Why is Steve Jobs so good at making products people want? An Apple engineer I know had this to say on September 25, 2005:

“Say what you will about SJ, but he (and/or the people he surrounds himself with) are genius. I feel part of the secret is simply having built a culture where everyone cares about things down to the smallest detail — we sure do that with some of the stuff I’m
working on now — but there’s also the quality of what I’ve always thought of as ‘yummy.’ You make a yummy little morsel of a couple of different kinds of already-existing technology and mash them together, make sure it is (deceptively) simple, and make sure the fit+finish is perfect, and use ultra-clean modern design. Still, it’s that ‘yummy’ quality that’s paramount.”

Can this be copied? Possibly not. Why?

Aesthetics and integration are organizationally thankless. They require heavy up-front investment in things that are not identifiable product features, and thus carry benefits that are hard to communicate. Integration is particularly thankless, because it requires iterative design, causing unpredictable delays and blown budgets, again in return for no specific feature. Middle managers are typically punished for such things, and learn to avoid them.

Most companies are unable to measure the benefit of aesthetics and integration. So even when these ideas can be communicated, their benefit (price premium, increased sales, increased customer satisfaction) cannot be assessed internally before release, and so there is no way to decide how much to invest. So no one else does it.

Simplicity is worth more, but appears less.Ease of use often takes the form of superficial simplicity, creating the appearance of fewer features, and thus is potentially risky to an organization unable to assess its true market impact.

Apple has invested decades in a corporate culture that values aesthetics.This is singular. Apple has been indoctrinating new hires with its aesthetic “rules” for at least twenty years, giving them a big advantage at producing products where such things are valued. Since everyone in a software company imagines himself a creative genius, it’s a huge advantage for Apple to get everyone pointed in the same direction from the very beginning. That said, it’s probably safe to say Apple’s vision is all Steve, and wouldn’t survive his departure. Similar to Akio Morita at Sony: when he passed away in 1999, the company ran down like an old battery.

To the extent Jobs’ Apple enforces a unified, simple, aesthetic design sense, it’s unreasonable to expect any other company to copy. Thus it constitutes a sustainable competitive advantage.

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Be worthy of imitation.

Self-improvement is intrinsincally worthwhile, but has the side effect of inspiring imitation, which in turn amounts to influence.

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Where does all the money go in U.S. healthcare? Since 1985, costs have increased at double-digit percentages annually, yet doctors today earn only about one fourth what they did then, per hour, inflation-adjusted.

So where does the money go? Public company net profits tell an interesting story.

Big health insurance companies, often a bogeyman in these discussions, are actually not hugely profitable, earning a respectable but unexciting 10% on sales.

By contrast, nearly all major drug companies earn more than 25% on sales — almost unheard of among companies with over $10 billion in sales. 25% net margins are more appropos to small niche operations, such as a mugging or petty theft.

So are drug companies the perps? Well, not lately. Their profits have been falling dramatically for the past five years, and sales are pretty flat. Over the same period, health insurers have grown enormously, though they remain relatively unprofitable.

(As an aside, health insurers are probably worth a look for investors, because their rapid growth doesn’t seem to be priced into their stock in all cases.)

The implication is that until about 2001, drug companies were shaking people upside down to make the coins fall out. Then they stopped. (OK, what really happened is that they had high profit margins due to patent exclusivity, but then those patents began expiring.) Around the same time, insurers started taking more of the pie. But they didn’t keep much of it as profit, instead paying most of it through to employees and suppliers.

What suppliers, though? Not drug companies. Not doctors. So we must ask again: where it it all going?

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Here are my notes from the Wesco Financial annual meeting of shareholders on May 9, 2007. I am paraphrasing Wesco chairman (Berkshire Hathaway vice-chairman) Charlie Munger — there are few direct quotes here.

Why was Berkshire Hathaway a “lollapalooza”? (Charlie Munger’s word) It was multiple factors acting in concert, reinforcing one another:

• Warren Buffett is smart, though not the smartest.
• He was extremely interested in investing from age 10. Hard to excel in a subject if you’re not intrinsically fascinated.
• To start early in professional life is a tremendous advantage.
• Buffett is one of the best “learning machines.” Consistent, lifelong learning.
• In investing, accumulated wisdom doesn’t decay rapidly in value (contrast this with technical disciplines such as software).
• All the work of Berkshire was concentrated in one man’s mind. As with Singapore under Lee Kwan Yew, one excellent individual drove the entire enterprise to victory.
• Buffett has a habit of maximizing his objectivity.
• He received constant rewards for doing well. This has the effect that behavioral conditioning would predict: he continued to improve. Contrast this with normal corporate pay, which rewards a CEO no matter what he does.
• Buffett is not influenced by “nuttiness”: envy, greed, profligacy, revenge, self-pity, “world is unfair to me,” etc.
• He is more like Marcus Aurelius: a tough stretch is, for him, an opportunity to learn, teach, etc.

“You could argue I was forced into investing, because one is rendered a social outcast in most fields by calling revered luminaries “nuts.”

There is a great difference between intelligence and judgment. Having one implies nothing about whether one may have the other.

• For example, by basic good judgment, it’s obvious that trust is more important than compliance. Any contractual clause you may write in can be trumped by an untrustworthy counterparty. Yet many otherwise intelligent people don’t value trust highly enough in their business dealings. By contrast, we (Wesco Financial) didn’t even do audits until the outside world forced it upon us. Instead, we dealt only with people we trusted.
• For example, avoiding conflict of interest is more important than being current in your books. If you mark derivative instruments to market, for example, you leave valuation in the hands of internal people with a strong incentive to overestimate their value. Thus being current creates a conflict of interest, and thus obviously should not be done. Even senior accountants don’t understand this.

“Posco is not a commodity business.” — technology advantages were learned from Nippon Steel that give them an edge. But don’t write off commodities entirely — even they are attractive at some price.

“We don’t play gin rummy with our friends.” (meaning that Berkshire only buys businesses to keep, not to resell.)

• This reputation attracts better businesses — companies that would sell to no one but Berkshire.
• By contrast, because private equity buys to flip, they cannot get access to the quality of deals we do.

Envy is driving endowments to throw money into private equity. To see what will happen, observe what happened in to endowment investments in venture capital a few years ago.

USG made a mistake to do a rights offering in summer 2006 at well below intrinsic value.

Useful mental model: inversion. For examle, instead of “what do I want, and how do I get it,” also consider “What do I dislike, and how do I avoid it?”

Investor question: “what long-held belief have you changed recently?” Munger’s answer: We changed a lifelong belief about railroads recently. Why? Because of the recent comparative advantage of railroads over trucking. Rail improved with double-stacked trailers, computer scheduling, and rising real energy costs.

Book recommendations:

• “Martians of Science”
• “Deep Simplicity”
• Isaacson’s biography of Einstein
• Supermoney (decades old, but worthwhile)

Two kinds of market inefficiency these days:

• Too small for anyone to follow it.
• Craziness in bigger markets, e.g. panics.

Two markets in China:

• Gross excess in Shanghai
• A few interesting things elsewhere. Hong Kong is still pretty inefficient.

Treasury Secretary Nicholas Brady reversed his decision to cut off Salomon Brothers from government bond auctions based essentially on his trust of Buffett and his reputation.

Munger bought his first new car at age 60, long after he had become very wealthy.

Much trouble traces to “self-serving bias.” Plus envy.

Think of investing in terms of opportunity cost, not hurdle rate.

Lessons of the past 10 years — more of the same:

• Be more selective.
• No regret at passing up immoral investments, e.g. chewing tobacco.
• Don’t let envy drive investment decisions.

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This was originally an email to Doug. He liked it, so I posted.

Woot is designed around simplifying customer service, which is an underappreciated tactic.

To simplify doesn’t mean to skimp, but instead to do away with service entirely by redesigning what they sell and how they sell it. Rather than use dorky buzzwords like “reengineering,” I’ll illustrate by example.

I loved a take-out lunch place that used to operate on the Stanford campus. The grumpy Thai lady who ran it had a key insight: they do their entire business from noon to 1, so service speed is the scarce resource. She responded by rounding off all prices to whole numbers of dollars. By not handling coins, they double their throughput, I estimate. They sling chow and pocket greenbacks at an unbelievable pace, serving hundreds from a single window in only an hour. Wonderful.

I was so impressed by that restaurant that I adapted the idea years later to Firepad. From 2003 to 2006, the entire online software industry was giving away free samples, except me. I found that by offering no free trial, but an unlimited 30-day money back guarantee, I eliminated 90% of my support load, with almost no effect on sales. The free-trial guys rarely buy, it turns out. They just consume resources. My Firepad income per work hour (the key measure) went up by an order of magnitude.

Like the grumpy Thai lady, Woot seems to do nothing but sling chow and pocket greenbacks.

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The highest investment return I have ever achieved was not on a stock, bond or business investment.

It was to replace my home thermostat.

My home was built in 1977. Almost exactly 30 years later, in March 2007, I updated to a modern programmable digital thermostat, which cost $40 plus a half hour of installation time, using only a screwdriver.

In the first 8 weeks, our gas use fell by more than half compared to last year, despite colder weather this year. The savings are at least $150. Summer air conditioning results remain to be measured, but the implication is we will save between $500 and $1500 in the first year, on a $40 investment.

This can happen because programmable thermostats are flexible. By day, you want the temperature at 67 degrees, but at night, no one cares if it falls to 62. That 5-degree change causes a nonlinear reduction in energy use — depending on outside temperature, it can be the difference between running the heater 10% of the time or 100% of the time at night.

Whether you value energy conservation or frugality, this is an astonishing result. The implication is that, if you have an old house, you can save more energy with a $40 thermostat upgrade than by buying a $20,000 Toyota Prius.

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