Ethics and Economic Development

This evening I attended a lecture on Ethics at UMKC with keynote speaker Randy Cohen of New York Times and All Things Considered Fame. The event was sponsored by the Center for Practical Bioethics, and I was rather expecting a focus on biology, but the issue never so much as came up.

Randy is the go-to guy for the nations ethical issues, though he would be quick to denounce the height of his own ethical standards. Moreover, he generally discounts the impact or even existence of personal character, and believes his success is due quite entirely to luck and social advantage, not any aptitude he might posses. Randy is a believer in the idea that the community a person is surrounded by determines the moral choices and ethical behaviour of an individual rather than the character of that individual -- not just during youth, but from moment to moment.

The best indicator of your income is your parents income level, and according to Randy, the best indicator of your behaviour is the behaviour of the person sitting next to you at the time. Essentially, there is no moral superiority or individual responsibility, but rather a systemic community responsibility bound to those with power to create an environment that encourages people to be ethical. Randy cited numerous statistics and research studies to back up his claims. The outcome of his conjecture is that people are mindless and flighty automotons who mirror behaviour and can neither be congratulated nor held responsible for their choices in the vast majority of cases. From time to time there may be independently ethical individuals, but such behaviour is often inconsistent and exceedingly rare, and we cannot rely on it to create an ethical society.

He spoke for some time about poverty (and prosperity) not being indicative of character, but rather being indicative of the economic circumstances in which one is in. When Randy's argument was countered by a speaker he said something to the effect of 'that would be nice to believe, but it is not my opinion that statistics support the existence of individual character'.

He pointed out that cheating in school, plagiarism, and music downloading are due to changes in technology that encourage these activities rather than any sort of moral decline, and that they continue due to our lack of creating innovative solutions to address them. Note I said address and not legislate -- Randy is against RIAA lawsuits and school zero tolerance and affirmative honor codes. He stresses that harsh penalties actually lead to more crimes because people refuse to turn others in or to convict them with such extreme penalties in place. Rather he asserts that there ought to be easier better alternatives to cheating created, and that there ought to be simple low-impact ways to discourage it.

A few experimental examples he referenced include:

• Subjects were dramatically more likely to help an old lady in need if they serendipitously found a dime in a pay phone before hand.
  
• Subjects were led across campus to an unimportant lecture event. When they were told that they were very early and had time to waste they were quite likely to stop and help a man in dire need of medical attention. When given no mention of time constraint they were moderately likely to help him, and when told they were in a hurry, they were extremely unlikely to help him. Being minutely late to a superfluous event dramatically affected ethical behaviour.
• Subjects being interviewed in a room in which smoke was coming from the vent were dramatically less likely to report that the building was on fire, if other individuals were in the room did not appear to notice the event (diffusion of accountability, assumption that others must know what's going on).
• In the Stanford Prison Experiment, normal people were committing prisoner abuse and sexual humiliation within 6 days on their own. The soldiers at abu-girab were just normal people who had a failing of leadership to address a steadily declining situation. People will adjust to anything over time as their expectations and justifications and peer-acceptance evolves.
  

The most immediately obvious thing about Randy is that he is quite a humorist and a rather vocal leftist. He also seemed to be a bit down on America and its lack of upward mobility, citing that it is worse than Europe/England. (I'm not sure I believe that, but he didn't reference a stat, so I can't specifically dispute it).

When he could brush his political opinions aside, he gave some strong insight into ethical behaviour. What he did not do, is point out very many solutions. Several audience questions, including that of my friend Airick West, ventured into the realm of "okay, so then what do we do about it". Fortunately, after the event I was able to catch a Thai dinner with two surprisingly action-oriented UMKC professors and a few bright young entrepreneurs who were apt to discuss just such issues.

During the course of this discussion we ventured into cultural, social and economic development plans which I will save for another day. Perhaps if I'm "lucky", you'll hear about them as part of a cohesive plan. In fact, if a number of us aspiring citizens are extremely "lucky" day in and day out for a number of years, you may even see dramatic results. ;)

(Well, I suppose now that I've gone there, I might as well refer back to Lucky or Smart.)

Siddhartha

Siddhartha by Hermann Hesse is one of my favorite books, perhaps my favorite book. To me it is something of the intersection of Eastern and Western thought, and of religion, philosophy and human experience. It is the simple story one man's journey through life. If it resonates with you deeply, you will see its beauty. If it does not, I suspect you will find it a rather boring and simple story. It is short though, so I recommend you give it a shot.

I once met a girl who's graceful intellectual presence inspired me to read it (she noted it as her favorite book, though sadly I was never able to discuss it with her). I had several friends and persons I look up to previously recommend it, and soon after I bought and read it, I found out it was the favorite book of my favorite teacher (and one of the people I most admire) Joyce Halsey.

Joyce told me that she reads the book every year of her life to center herself. Joyce was the first teacher to openly admit to me that grades weren't inherently important and to show me that I may have better things to do with my time than schoolwork which does not inspire me. She taught me to truly value the life-long intellectual and philosophical pursuit that does not end. More importantly, she gave me reassurance that it was okay to be me -- more so that it was wonderful. Joyce was the director of my high school's International Baccalaureate Program and taught English and Theory of Knowledge. She is now off teaching somewhere in Africa; never content to settle in to conformity - she moves on to newer quests. A while back I found a note to myself that indicated that if I ever became rich I was to buy her a car. I have no idea why, but I'm sure she deserved it. Let it be known that I still intend to do so.

Anyhow, a good place to read about Hermann Hesse is here, and if you're cheap Siddhartha is now public domain and can be found at Read Print and Project Gutenberg.

The World's Best Video Gamer

In high school I worked at an Internet company called Q-Networks (QNI). One of my co-workers there was the now Internet-famous Jonathan Wendel. I believe this to be the last consistent job he had before he became a professional gamer. (QNI was also home to Tech Report's Scott Wasson, Mike Wheeler, and Wes Burrows amongst other characters). KC Host (a startup I was partner in) was created by a half dozen or so ex-QNI employees -- but that's another story. Back to Mr. Wendel.

I can recall Jonathan winning Quake tournaments while on customer support calls and playing in a tiny (1x1 inch) window in the bottom corner of his screen so that the customer service manager wouldn't notice. His playing was graceful and serene, mesmerizing and sometimes bordering on nauseating to watch (spinning, hopping, running backwards). His customer support calls were awkward, stuttered, and confusing. In general, he was very competitive, and only played to win no matter the sport. (This is why he hated Quake 2, he lost at it).

Anyhow, Wendel went on to win cars and motorcycles and cash prices, and to have a line of sound cards, mouse pads and Abit motherboards branded in his honor and he now points to the future of cyber gaming. The glory and the fame of true domination are brought to him and his pride (read ego), though to the best of my knowledge he still lives in his parent's basement. Still though, I have to admire his business savvy and personal re-investment.

I recall one time when he asked to borrow a video card because his parents had taken his away for playing too much. They were always meddling and grounding him from his computer. I suspect that changed when he began travelling the world and winning $40,000 prizes. I assume they are now quite proud and supportive of his dedication. I hope he's still a nice guy like he used to be -- I suspect he still is as long as gaming doesn't come up.

Anyhow, here he is in the news again on MSNBC. He's been in Time and Newsweek and everywhere else. His website is fatal1ty.com

Be shocked, be amazed, be completely and totally unsurprised. The video game industry is a mainstream multi-billion dollar industry that drives hardware sales and cyber-athletes are here to stay.

(While we're on the topic, see if you can beat me to build the world's first video game that tricks people into doing something useful without realizing it. Or rather, bring uselessness to life by bringing video games to reality)

Lucky vs E-Myth

These two books could hardly be more opposite if they tried. The difference stems mostly from the disparity between the viewpoint of a humble technology entrepreneur and an insightful retail salesman.

• E-Myth teaches you that you should hire idiots and orchestrate their every movement. Lucky teaches you that you should hire geniuses and get out of the way.
• E-Myth teaches you that you too can nourish and train your entrepreneurial spirit. Lucky teaches you that entrepreneurs are born, not made, and that attempting to be one unnaturally is a sure recipe for failure.
• E-Myth says good enough is the enemy of great. Lucky says great is the enemy of good enough.
• E-Myth preaches measured, quantified awareness. Lucky preaches blind faith and idealism.
• E-Myth teaches you to be powerful in sales by taking control, Lucky teaches you to relax and embrace powerlessness.
• E-Myth teaches you that you haven’t been paying enough attention to management, and that experts are beyond useless to you. Lucky teaches you to stay out of the management of your business and leave it to the people who are better suited to do it.

So what do they agree on?
Two things I can surmise: Have a vision, and learn to love the word ‘No’.

Once you understand when and why both perspectives are right, ta da, you’ve learned something useful.

Lucky or Smart?

Secrets to an Entrepreneurial Life



Lucky or Smart is the 2005 production of 6 time entrepreneur, young multi-millionaire, and Tripod founder Bo Peabody. This is an awesome book written by an entrepreneur, for entrepreneurs; very honest and concise. I picked this one up at the 2005 Entrepreneur's Exchange in Kansas City. This book was Tom Lauerman's pick. Tom is the current EE president, and is also known for being my favorite investor. (cough)

Bo Peabody has had some amazing and fortunate things happen to him that he would attribute to good luck. But he has done them time and time again -- something that others would attribute to smarts. Bo says only that he was smart enough to realize when he was getting lucky, and he drives to teach you to do the same thing. Bo even goes so far as to argue that there is a pseudo scientific formula for creating business luck. Lucky things happen to entrepreneurs who create fundamentally innovative, morally compelling, and philosophically positive companies. Why? Because smart people gather there and work hard -- and when that happens, luck shows up!

I wrote a 5 page summary for this book, but it's a quick read anyhow and his anecdotes are useful and entertaining. You're better off just getting it straight from the source.

The E-Myth Revisited

Why most small businesses don’t work, and what to do about it.

The E-Myth Revisited is the 2001 update to Michael Gerber’s perennial classic on small business development: The E-Myth.

Review Summary: This is a valuable book. It often traverses between lucid and lame, but I’m suggesting that you need to read it anyhow.

The E-Myth is one of the books I've been urged to read by Dr. Terrence Sebora, perhaps the book. Terry loves E-Myth. He has assigned its reading in both of the MBA courses I have taken from him. As the former Director for the Center for Entrepreneurship at the University of Nebraska-Lincoln, and an influential mentor during Allied Strategy's business plan days, there was no way I was going to escape Terry's favorite book.

E-Myth refers to the American myth that most businesses are created and run by true entrepreneurs. Instead it conjects, that most businesses are started by workers taken hostage by a temporary entrepreneurial seizure. This book is designed to hit home with the newly minted, or already disillusioned technician or craftsperson turned business owner. It is designed to spur entrepreneurial and managerial thinking in that person and to convince them to take a systematic and higher level view of their business. It urges them to work ‘on’ their business rather than ‘in’ their business, and to create something that does not depend on them, and could one-day be sold. In accomplishing this purpose, the book is dead on.

Despite my serial entrepreneur's perspective conflict, there were still significant portions of the book I found rather enlightening. Whether I like to admit it or not, E-Myth did a good job of reminding me what I was here to do. In fact, I would go so far as Terry to say that every aspiring business owner should read this book. I suspect most that thumb through The E-Myth will not only take away something of value, but will be immediately struck as to which of their friends desperately need to read this book.

Attached is a 19-pg outline of information gleaned from the book, that is, if you're the executive summary type.

Stock Market Skeletons

All right, I'm airing out my closet.

On my father's 64th birthday, a painful legacy was finally put to rest. This is the final liquidation dividend from the first and worst stock trade of my life: Commerce One. Yes, that's right, a whopping $.33 -- Just short of a phone call. Now really, this investment was done long ago, but I've kept it all these years as a reminder. I held till the bitter end. I'm hoping that in time its lessons will eventually absolve my loss, and for this reason, I share them with you.

It all started when I stepped out of my high school physics class to make an impulsive trade using a school phone. (mistake #1)

My dad had gotten the tip from my tech-savvy cousin Steve (mistake #2, 3rd party tips), I had read up on their prospectus (mistake #3, hype), and at some point during a lecture on frictional coefficients, I had decided I was ready to bite. I didn't wait. I stood up in my chair, asked my teacher if I could use the phone in the lab and made an urgent $40 phone brokerage order (#4, duh). Never mind that I'd never had a conversation with an adult regarding investments in my life. If I could create a Roth IRA, I could darn well invest my retirement. I heard Steve had picked a lot of winners, I knew technology, I liked the company, and the market was booming; I figured that this would be as good a start as any.

And so it was, along with software.com/phone.com, OpenWave, and nVidia that my Commerce One stock rode the bubble to new bounds and several multiples of its value.

As the bubble descended on all of them, I grew leery and spoke with my dad about selling. He explained to me that wise investors didn't fret over market convulsions and instead they hold on for their planned investment duration, or in this case 3 years. Everything tends to 15% in the long run.

Apparently, my father hadn't been told about tech stocks either. I held on and stomached the mounting thousand dollar losses with disillusionment as the bubble burst. Looking back, with MBA in hand, and 6 additional years of amateur investment experience, I can hardly grasp my logic. I think the picture below describes my folly better than words.
(note the logarithmic scale)

I never sold. Ever.

Advice #1: Only a gambler makes impulse stock purchases. Only a fool fails to notice when he has lost such a gamble. Only a genuinely apathetic man should neglect to have a downside limit. Gambling is fun, but if you're not in a financial position to do it, don't.

The sad truth, is that I was a gutless gambler, unable to confront reality. Was it ego, misplaced trust, fear of failure, naivety, wishful thinking? It's hard to say, but boy did I learn my lesson. As a high-schooler I lost denominations in the tens of thousands of dollars, which, though abstract and far away in retirement land, still hurt. Downside is real. Sometimes volatility never comes back. Ever.

Advice #2: Test your theories on real market data, but with fake money. Pretend to make trades and follow stocks to see if they work out. Look at failures and crashes from the past. Read books. Do anything but learn your lessons risking your retirement. Don't let yourself be fooled one day at a time. Keep the broader picture in mind.

Now before you hear my "sell x% when it goes down y%" theory, or my "avoid high volatility and positively correlated stocks" methodology, let's take a look at the next high-stakes trade I made, and why it was the same, yet different.

I bought Cerner at 16 and some change with a limit order. I think you can see about where that goes on the graph.

So what lesson did I learn exactly? Obviously it wasn't avoiding technology stocks, high beta, or falling prices. Instead, the following is what I claim to have learned:

Advice #3: You should not invest in stocks that you don't have the resources, insight, and copious spare time to know everything about. To do so is gambling. Index funds and other diversified financial vehicles are more appropriate for this commitment level. Hedge your risk, don't delude yourself, and don't be a retard.

At the time I was preparing to work at Cerner, and didn't have much better to do. I had spent hundreds of hours researching the company and its market position in order to impress the management. I knew the company's valuation, and more importantly I knew exactly why it fell, and why it was headed right back up. I knew that many of the original investors and major share holders were doctors at Menorah Medical Center. I knew that Menorah was Cerner's flagship software installation. I knew Menorah was just bought out, and was switching to rival software from Meditech. I knew from my mother that there was an air of panic about the hospital and a great deal of unfounded speculation going on with the physicians. Most importantly, I knew that the company was in good long-term shape. In short, I wasn't just gambling; I was making a strategic bet.

That sealed it, I decided that anything under 17 was a damn good price, and I set a 30-day limit order to buy if it hit that mark. If I couldn't get it for that price, I was only out the cost of an online order. If I could get it for that, it was a steal.

And it was. It came through the next day.

While I was at Cerner, I kept abreast of their UK health care deals, and I kept my stock. About a year later, after I had left the company, I grew weary of staying in the intel loop, and the company reached what I viewed as a reasonable valuation. I wanted to lock in my gains, so I sold my shares for a near 4x return. Looking back, I should have held on to them, but at that point, it had become pure uneducated speculation. I wasn't willing to invest the time to do it right, and frankly, I shouldn't have --- I didn't have enough capital working for me to justify the time I spent. (Though disturbingly, my retirement earnings were approaching my salary at the time).

Now it's easy to get excited about a big win like this, but you can't. To do so, would be to make the same egotistical mistake that I made with Commerce One. To have the belief that Cerner would always go up, or to maintain the belief that I didn't need to have knowledge to keep a wise investment would have meant a lesson ignored.

Now days, I'm a pretty safe investor. My heart isn't in it. It doesn't really excite me like starting a company. I stay out of trouble, I hedge market, currency, and interest rate risk, and I don't make large bets unless I have a damn good reason. I still make small bets for fun and the occasional macro play, but I collect my earnings, I cut my losses, and mostly, I ignore the market altogether. I read the WSJ and that's it. In general, it's a waste of time, and of life energy. If you don't have lots of money, and don't want to commit the effort required to do it right, I suggest you don't do it at all.

Lesson learned: If you want to gamble, find a way that doesn't involve your retirement.

That's my opinion anyhow.

Side Note:

Two summers ago, (back when my Commerce One stock was worth about $3), I was having lunch with Sandy Kemper, CEO of Perfect Commerce, at Pit-stop BBQ in Lee's Summit. I was discussing the use of Commerce One's Doc-Soap XML Data binding tooling in Allied Strategy's Web Services framework. Ironically, I was then using software open-sourced by the company I had so horrid a history with (Allied Strategy has since deprecated this for products from BEA and Apache). I knew that Sandy had just purchased and stripped out most of what I saw as the remaining value from Commerce One through a series of IP and product acquisitions on the cheap -- what I did not know, is that Sandy kept something of a secret as well. He too held a bit of Commerce One stock in his account, just to give memory to the pain -- To keep the lesson fresh.

Perhaps he was just being nice, but to this day, I feel a bit vindicated by it. So much so, I bought him a Cigar.

Sometimes its the little things.

Update: Feb 2006 - Sandy just outright bought the remainder of Commerce One for what I'm guessing amounts to 1/100 of 1% of their 2000 valuation. A class action was filed over the IPO.