As an extra exercise suggested by a reader, try imagining someone writing this text 30 years from now.

Apart from the “I want/ need to believe”-type mental traps that individuals fall into, how do we justify still having institutions supposed to keep watch so unready and unwilling to investigate red flags? Lack of funding, qualified personnel, IT infrastructure… they all seem like weak arguments even put together.

We won’t go into the Taleb argument that one must be highly skeptical of “results”, and let’s not recall the Bob Rubin “focus on processes, not outcomes” (great) advice. Let’s just highlight two other books on fraud or lack of oversight – one caught, one still perhaps on the loose.

The most Madoff-like story is David Einhorn’s Fooling Some of The People All of The Time, about his years-long struggle with Allied Capital. Again, the pattern of ignored warnings is troubling, and while the story eventually played out to Mr. Einhorn’s thesis (see the 5-yr chart here), it wasn’t due to regulatory action – the credit crisis almost did the company in.

The other book is a quick read – Barry Minkow’s Cleaning Up – about ZZZZ Best, the company he founded and took public as one of the youngest persons ever to do that (remember that this is quite pre-dot.com days!). Nice story, if it wasn’t all a Ponzi scheme, and one that also took a while to uncover. Since this account is in first person and Mr. Minkow later helped the FBI uncover several corporate frauds, it’s pretty interesting lore. We’ve watched the guy live in the first Value Investing Congress and he’s a decent speaker as well.

And as we always stress: view it critically, play with the idea, try to contradict it or apply it in some other field(s). In this particular case it may be hard to do so, because Mr. Pogue’s delightfully terrible songs can really stick in one’s mind.

Highlights:

On accountants: “A majority of the horrors we’ve faced would not have happened if the accounting profession were organized properly.”

On the actions taken in the middle of the crisis: “The problem is so extreme that nothing “un-extreme” has any chance of fixing it. So I basically applaud the people in the government that are doing these extreme things. I’m sure they’re making a lot of decisions that in retrospect will be seen as mistakes, but given human condition where they have to do extreme things under fire, I’m not inclined to criticize them.” (…) “I’m happy to see that the Obama administration has brought in Larry Summers, who is a ferociously smart man and will try to do the right things even if it offends some people.”

On what needs to be done in the US: “Not only do we have to save the financial system, (…) but we also need a huge spending stimulus from the federal government… I don’t regard that as all bad at all, there’s so much that needs to be done in this country. We need a whole electricity distribution system (…) Much can be done in medical care. The hospitals in this country are about to get a vast improvement in its facilities and that’s all for the good. (…) The dangers from what we have to do are less than the dangers that would plainly come if we responded as we did in the 1930’s.”

On the US allowing Lehman to fail: “It was not a mistake. It actually helps to have one or two go (…) You have to have a loud failure.” - he did have to think about it a lot before he actually said it, though...

The numbers that matter: US$ 131Bi in equity, US$ 62Bi in float => ~ US$ 193Bi in “capital”. Book value grew 20%. Float grew 5.8% (from US$ 58.5 to US$ 62Bi). All insurance businesses operated with underwriting profit again. Cash = US$ 30Bi (US$8Bi used in Q1 to pay part of the BNSF deal). Operational assets = US$ 30Bi but generated only US$ 1.1Bi in net profits, which shows insurance/investments did the heavy lifting. The operating units will hopefully make up their fair share of contribution in a recovery.

Bottom line: investors are still paying about capital value at current prices. It has the best governance we ever saw. If they continue to grow float, have underwriting profits and make good investments, it’s a steal. Never mind the recovery.

Still on the subject of nerds making money, check below for a very nice PBS documentary about the history of the personal computer. It was made around 1996, we believe. It explains very well what happened, with interviews with the main characters such as Paul Allen, Bill Gates, Steve Jobs and Steve Wozniak.

Triumph of the Nerds 1 of 3 (50:37)

Triumph of the Nerds 2 of 3 (50:46)

Triumph of the Nerds 3 of 3 (50:38)

Background: after the AmBev – Interbrew merger, the brazilian team’s cost-cutting efforts have surpassed European standards by far and that is rattling many cages. A strike has occurred, disrupting Stella Artois production, and competitors have jumped to the opportunity of reminding people that they’re “still Belgian”, in what must be ironic for the InBev guys. And now the management team has come to be a synonym for corporate greed. Wow.

But the usefulness of the Valor story for us is to highlight the huge gap between the unions’ speech and the interest of shareholders. Some of the quotes would read quite amusingly in the social and historical arena, if they didn’t lead to image problems that might eventually affect sales. That said, it’s crystal clear that the cost-cutting and cultural change efforts in course, if handled well, are in the best interest of shareholders in the long run.

We’ve tried to get an article in English that would translate the weirdness of the unions’ quotes and couldn’t capture them all in a single article, but here’s one from a pro-union site that has an infamous quote: “AB InBev are just thinking of their bottom line for shareholders, regardless of the social cost. There is no reason at all to fire people.”

Amazingly, the article describes the kidnapping of 10 senior managers at the plant as if it was the most normal event ever… “Social cost” indeed!

In this debate, one aspect appears overlooked: communication. If you don’t have the adequate communication policies/ environment, how does one reap the rewards from all this multidisciplinary goodness?

Again, the article stands out in its own but it made us think of the multidisciplinary approach “debate”. We’ve always tried to build our teams with this in mind, looking for complementary skill sets/ experiences/ backgrounds. Nothing new there. But please bear with us as we follow the “links” this article made us follow.

The diversity prediction theorem by Scott Page states that:

“Collective error = average individual error – prediction diversity” (as stated in Michael Mauboussin’s Think Twice, Chapter 3, page 46)

Some types of problems are better suited for experts and some for “crowdsourcing”. Either way, the theorem above applies. For instance, when diversity doesn’t improve the odds of solving a problem, you can focus on decreasing the first part, i.e. decreasing average individual error or, if you prefer to see it this way, increasing “ability”, as Mauboussin calls it.

But if you think proactively and seek counter-evidences and multidisciplinary approaches yourself, it’s as if you’re increasing the “diversity” part of your own expertise/ skill set/ tool set. At the very least, you could become less prone to fall into the traps of biases and etc.

In the book, Mauboussin recommends reading Scott Page’s book (“The Difference”) and his own text on the subject.

A review of “The Difference” at the Crooked Timber blog mentions in the 8th paragraph the problem with one of the assumptions of the diversity prediction theory (just to be clear, Mauboussin deals with it in his book): it assumes that the diverse crowd interacts/ communicates in a way that the diversity “bonanza” can take place. As we at IP know, that is often far from reality.

Another approach to the same problem was discussed by Julia Kristeva: “One cannot be an amateur, or decide one day ‘Let’s be interdisciplinary’. A university may decide to develop in that direction, but what matters is that each researcher finds and establishes some complicities with other researchers so that interdisciplinarity comes from the base of the pyramid and works its way up. One can only benefit from interdisciplinary practices if researchers meet other researchers whilst learning how to discuss both their competencies and the outcome of their interaction; therefore contributing to the exposure of the risks inherent in an interdisciplinary practice… the first obstacle is often linked to individual competencies coupled with a tendency to jealously protect one’s own domain. Specialists are often too protective of their own prerogative, do not actually work with other colleagues, and therefore do not teach their students to construct a diagonal axis in their methodology.”

At IP, we’ve always taken steps to address this and this blog is part of these efforts. For instance, our team’s interaction in our Intranet today is the source for most of our posts here – this specific one was “built” from the contributions of 4 different members.

Apply it both in the big picture and the small picture – from the broadest strategic moves of your company to its tiniest daily processes. Now change the underlined word “company” for “department” if you want to go small, or “nation” and “regulatory system” if you want to go big. For extra fun, try “life”.