The story, of course, is one of the epic industrial battle of the present time.  Airbus, owned by a consortium of European Union countries with a wacky organizational structure designed to insure that no one country has too much control, has come somewhat out of nowhere over the last 20 years to challenge Boeing who has been the dominant player in the industry for a while now.  Boeing has had its share of public problems lately with several management shake-ups and a merger with McDonnell Douglas.  However, nothing appears to be a bigger mistake than Airbus’ decision to build the giant super jumbo A380 which has not sold well and is late being delivered due to all kinds of production problems.  Meanwhile, after not building a new airplane in over a decade, Boeing is cleaning up with its new 787 Dreamliner.  Basically Airbus made a bet that the world would need super jumbos that would fly large numer of passengers (in some cases over 800 at a time) and Boeing bet that there would be more of a need for point-to-point routes using smaller planes.  They each placed their bets, in amounts in the tens of billions of dollars, that essentially locked in their strategies for decades to come.  Right now, it looks like Boeing made the right bet (after making a series of bad bets) but that could all change.  I was more interested in more of the inside story behind the decisions that led to the strategies the companies elected to employ.

Good examples of the sort of story I was expecting are Taken for a Ride, a book about the merger of Daimler Benz and Chrysler or Smartest Guys in the Room, the story of the Enron collapse.  I had a hard time putting those books down.  This book was more of a rambling collection of quotes from other people with a writing style that just never grabbed me.  The author is a fairly accomplished guy apparently but, while I read the whole thing and came away with a few new bits of information, I found the book to be a pretty disappointing experience almost to the point where I want to go and buy one of the other books that tells the same story but with a more typical business story writing style.

Apparently, Leonardo DiCaprio is planning to produce and star in a movie about the Enron scandal.  The Enron story is one of my favorite business stories of all times, probably second only to the implosion of Long-Term Capital Management.  LTCM crashed faster than Enron did but, in business terms, they are kind of like the Titanic.  However, despite the obvious metaphor of Enron as the Titanic of the business world starring the same actor, I am not sure that I need to see another movie about it, much less a fictional account.  I read the book, Smartest Guys in the Room and I also watched the documentary of the same name.

All that being said, I’ll probably put it in the Netflix queue when it comes out.

I found myself struggling with this tension while reading a recent article in BusinessWeek about Barclay’s Global Investors, a money management firm.  Barclay’s has hired a world-class collection of very, very smart people who look for “signals” in markets that describe investment strategies that can generate alpha, or the amount of return in excess of the beta which is the market rate of return (or the return that you would get by just investing in an index fund tracking the entire stock market).  Barclay’s attempts to use this alpha-hunting strategy to “consistently beat the markets”.

One example is a signal identified by Richard Sloan, a Wharton business professor.  Sloan discovered the accrual anomaly which, in very simplistic terms, exists because stock market valuations have not historically distinguished between non-cash earnings (earnings that result from accruals) and cash earnings.  And, companies with cash earnings tend to be stronger companies and perform better than companies that depend on non-cash earnings.  The result, if you were to have invested in companies with strong cash earnings, is an alpha (or return above the market return) of an eye-popping 12% or more!

It’s hard not to read an article like this and run out and move all of your investments into funds controlled by super-smart people like this.  However, there are plenty of examples of super-smart people who blow up in the stock market.  The classic example is the story of Long-Term Capital Management described in another great business book, When Genius Failed.  LTCM, a hedge fund, thought they had found a signal that nobody else had recognized and they had two Nobel laureates involved in the company with massive amounts of data that pointed to the success of the strategy.  They leveraged themselves way beyond anything that is reasonable and, of course, the event that their models showed was so unlikely to happen as to be practically impossible did, in fact, happen.  LTCM was obliterated with almost $5 billion in losses because they failed to account for skewness (a win-loss record does not matter if a single loss has the ability to lose far more than an infinite number of wins) and almost took down the entire banking system with it but for an unprecedented intervention from the Federal Reserve.  The BusinessWeek article actually mentions the LTCM problem and Fooled by Randomness discusses it also.

It’s not surprising that Barclay’s does well in times of relatively rational markets and tanks when irrational markets prevail (e.g., the dot-com nonsense).  The title of the BusinessWeek article is “Outsmarking the Market”, but is it really possible to do that?  There seems to be so many factors that go into how the market reacts to things that even a strong signal like the accrual anomaly may not work again like the data suggested it did before.  That is the limitation of historical data and the risk of the black swan.  The problem that I have is that the tension between these two ideas has had me in cash for most of the recent run-up in the stock market and I am desperate for an investment strategy that takes all of this into account.

A former bond trader at Solomon Brothers, Lewis started his writing career with Liar’s Poker, a book that gave a behind-the-scenes look at some of the stuff that goes on on Wall Street, including a particularly nasty bond trading scandal that negatively affected a number of Wall Street big shots.  (One of my other top all-time favorite books is When Genius Failed by Roger Lowenstein, essentially a follow-up to Liar’s Poker because it picks up the story of the same central character John Meriwether, the former Solomon trader that almost blew up the entire banking system after leaving Solomon starting a company called Long Term Capital Management only to be completely fooled by randomness!) 

So, among other books after Liar’s Poker, Lewsi wrote and amazing book, Moneyball, which follows Oakland A’s General Manager, Billy Beane and tells the story of Beane’s use of statistics that are overlooked by most baseball experts to identify players that, while not fitting the traditional mold, managed to generate a lot of wins for the A’s for a lot less money than average teams.  (A Beane prodigy later used the strategy with money to win the World Series for the Boston Red Sox which another prodigy tried and failed to implement the strategy for the Dodgers). 

Lewis’ most recent book, The Blind Side (the Wikipedia link includes a link to an NPR interview with Michael Lewis), did the same thing for professional football that Moneyball did for baseball.  Specifically, The Blind Side points out something that should have been very obvious but which isn’t always so obvious: the fact that the left tackle position is probably the second-most important position in professional footbal after the quarterback.  I actually saw this in action earlier this year.  I was at Qwest Field for a Seattle Seahawks home game against the St. Louis Rams.  At one point in the game, Orlando Pace (who is mentioned in The Blind Side), St. Louis’ left takle was injured.  And, almost immediately, the Seahawks attacked the left side and consistently were able to pressure Marc Bulger in the second half of the game after not being able to get to him much in the first half when Pace was still in the game.  I was floored and probably would never have noticed that detail prior to reading The Blind Side.

A couple of items in the news and blogosphere this week made me think about this idea of things that are hidden in plain sight and their relationship to randomness.  The first is an article in Slate Magazine by Robert Weintraub about the hidden role of centers in the NFL.  Taking The Blind Side as a starting point Weintraub argues that centers actually put the other members of the offense, including the left takle, into position to make plays.  Given that they start each play and are responsible for calling out assignments and making as many as three different takles during the lightning quick pace of an NFL play, I can’t argue with him.  I do know, from watching Jay Cutler’s first few games where there were a number of fumbled snaps, that if the center and the quarterback are not in sync, the play can never evolve as planned.  This is interesting to me because as much footbal as I watch, until I read The Blind Side, I just paid attention to the headline grabbing “skill position” players.  With the playoffs starting today, I plan to spend more time watching this part of the game.

The other article that came to my attention and which touches on these topics was feature in yesterday’s Wall Street Journal about a guy in Northern California who has a crazy good record of predicting sports outcomes to the point where it is upsetting the odds in Las Vegas and causing some online casinos to take their sites down while they adjust the odds.  Since 1999, Bob Stoll has only had one year with a college football wagering record of less than the 52.4% rate against the spread needed to make money on sports wagering.  Can he keep it going forever or will mean reversion eventually catch up to him?  How much randomness is involved in his success?

Sports, and professional football in particular, involves a tremendous amount of randomness but I like being fooled by it.  Close, high-stakes games are much more fun and interesting to watch than sitcoms, or any kind of TV really, or most movies.  There is a reason why the NFL can make billions selling their product.  While I don’t want to ruin the experience for myself, I still wonder often about the role of randomness in it.