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Wealth Secrets of Financial Elites

How do financial elites gain effortful power? What are their wealth management secrets?

 

Chrystia Freeland’s book Plutocrats: The Rise of the New Global Super-Rich (New York: Penguin Group, 2012) suggests three factors:

 

1. Anti-fragility or positive growth from the interaction of volatility and time. Freeland focuses on forces like entrepreneurship, globalisation, technology and political change. The “anti-fragility premia” is perhaps best discussed in Nassim Nicholas Taleb’s options trading and philosophy work.

 

2. Capital Accumulation as inter-generational wealth creation. Pick a famous dynastic family like the Carnegies or the Rothschilds. Capital Accumulation can be expressed as the positive growth of wealth over time expressed as a Present Value to Future Value cashflow. This process can also be considered in terms of the financial decisions that we make over our lifespan: decisions today set-up the potential favourable conditions for tomorrow. Warren Buffett’s official biographer came up with a memorable image to describe this process: The Snowball.

 

3. Rent-Seeking: Rent-seeking is control of financial / real assets that allow for Capital Accumulation to occur (as an extraction premia). Gordon Gekko exemplifies this in the Oliver Stone film Wall Street. Rent-seeking may be done via entity structures (such as a pass-through vehicle like a limited liability partnership) and through wealth management strategies (such as funds management and legal tax minimisation).

 

Freeland and others suggest that Superstars are able to use these three factors to gain cumulative career and financial advantages.

 

This leads to the following equation for elites: rent-seeking control of PV and FV cashflows + anti-fragility + volatility (where the first two are stronger than volatility, which in the case of events like the 2007-09 global financial crisis, can still lead to significant drawdowns).

 

An example from my own life: the 1998-2008 period of work with The Disinformation Company Ltd (now TDC Entertainment):

 

1. Pick an anti-fragile trend – such as pre-millennialist conspiracy theories in the mid-late 1990s and a web portal platform during the 1995-2000 dotcom speculative bubble.

 

2. Set-up a structure for capital accumulation: TDC as a Delaware-registered company that engaged in book, television, DVD, web, and conference projects and that built an audience.

 

3. Rent-seeking over time via the free cash-flows from the project portfolio.

 

You can find and understand examples from your own life.

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Pink Floyd’s The Endless River

Pink Floyd’s new, mostly instrumental album The Endless River is due out 10th November. It’s a tribute to late keyboardist Rick Wright developed from The Division Bell sessions in 1994. I remember as a student journalist in 1994 the joy that La Trobe University’s Rabelais editors all felt when EMI provided a review copy of The Division Bell (whose ‘High Hopes’ featured ‘The Endless River’ as a song lyric). A lot has happened in 20 years between studio albums . . .

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New Academic CV and Publications Track Record

I have a new Academic CV and Publications track record (PDF).

 

The document integrates for the first time my academic research; PhD and Masters studies; Disinformation website work (mainly from my first editorial and writing tenure in 1998-2003); journalism; and subculture research. There are some known gaps in the publications history – notably the Black Box magazine project in 2002, two small REVelation excerpts in 1996-97, and many more Rabelais student journalism articles / reviews from 1994. It’s as near complete a list that I’m likely to get – unless I do further archival work. Many of the Disinformation articles in 1998-2003 are available at Archive.org. Much of the academic research is available from this website or in the specific academic journals.

 

A personal reflection:

 

I spent much of my first decade of public writing as a freelance journalist, subcultural researcher, website editor / writer during the end of the dotcom speculative bubble, and then in the Swinburne University Masters program in strategic foresight. This period covered several phases: (1) a 1994-95 period of primarily New Journalism experimentation; (2) a 1996-97 period of immersive subculture research and magazine articles which largely ended in March 1998; (3) a 19998-2003 period of my first Disinformation editorial tenure; and (4) my 2002-04 Masters studies which were largely a reflection cycle on the prior periods and the lessons I had learned. This period transitioned when I joined the Smart Internet Technology CRC research consortium in December 2003.

 

I spent my second decade as a researcher; pivoted into research management; did Masters and early PhD work on counterterrorism and political science; and then collaborated with others on academic research. This period covered several phases: (1) a 2003-2007 period of Smart Internet Technology CRC research in which I also pivoted out of doing magazine research due to employment contract restrictions; (2) a 2007-09 pivot period of moving into research management and transitioning my academic research career into political science; (3) a 2010-14 period of collaborative research articles; and (4) a 2009-present period of focus on PhD research about pattern languages and strategic culture, and applied research on hedge funds / terrorist organisations as strategic subcultures.

 

Collectively, I put in 10,000 hours of deliberate practice over the 20-year period in journalism and research. The 1994-95 period of New Journalism was skills acquisition and experimentation. The 1996-97 period of subculture research benefited from close work with several talented magazine editors, and led to new insights during the 2003-07 period at the Smart Internet Technology CRC. This was a period in which I enjoyed a brief publicly visible profile as an editor and writer. The 1998-2003 period at Disinformation led to a renewed focus in 2009 on event arbitrage and understanding hedge fund strategies. I experienced personal crises in 1997 and in 2006-07 over financial and ‘decision to publish’ issues that led to life-changing pivots. The 2002-04 and 2007-09 periods were active reflection cycles on these pivots. In Spiral Dynamics terms, the 20-year timeframe of writing involved several sequences of skills cultivation (Alpha new state), rapid growth (Delta surge), life crisis (Gamma Trap problems), and pivot to new opportunities (alternation of Beta questioning and new Delta surge).

 

This 20-year writing arc has led to a current personal synthesis: (1) PhD and recent academic publications as a new phase of skills building; (2) applied research as a strategy to address the life circumstances of the 1997 and 2006-07 crises; and (3) this blog as a way to capture and communicate some of these ideas to a public audience. My writing is more focused and often more private. I publish more slowly in academic journals than in past internet and magazine work. I work with a smaller group of collaborators. I have a more sustainable daily routine.

 

I’m grateful for the past experiences. I’m looking forward to sharing new writings in the future with you.

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ISA 2015 Pitch Postmortem

Two paper proposals I pitched missed out on the first round of the International Studies Association’s next annual convention in New Orleans, February 2015. I’m on the waiting list.

 

I’m taking this as useful feedback. Here’s some things I’ll keep in mind for ISA 2016 in Atlanta, Georgia:

 

  • Spend more time in advance to craft and distill the papers to fit the ISA annual convention’s yearly theme.
  • Pitch individual panels on different streams / topics rather than two papers on variations of the one topic.
  • If possible make contacts in advance to be on panel and roundtable discussions.
  • Use the annual convention as a development tool for progressing the write-up of scholarly journal publications.
  • Keep online visibility tools – academic CV, Google Scholar, Academic.edu profile – up-to-date.

 

I’ll be working on all of these in the coming months to prepare for future academic conferences.

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Reading Steve A. Cohen’s White Paper in the SAC Insider Trading Case

I’ve followed hedge funds – pooled fund structures that engage in active management often uncorrelated with financial markets – for about a decade.

 

Almost 12 years ago I wrote a Masters paper on Long-Term Capital Management (PDF) in Swinburne University’s Strategic Foresight program. I read Sebastian Mallaby’s history More Money Than God (PDF) and MIT’s Andrew Lo. Hedge funds appeared to be exemplars of Richard Slaughter‘s Institutes of Foresight thesis. More recently, I have thought of hedge funds as possible examples of meso-level, organisational strategic subcultures.

 

Today, I re-watched the PBS Frontline documentary ‘To Catch A Trader‘ (2014) and read the white paper (PDF) from SAC founder Steve A. Cohen’s lawyers in the now-notorious Elan and Wyeth insider trading case. Cohen’s portfolio manager Matthew Martoma was convicted of insider trading and sentenced to jail. Cohen’s SAC was fined millions and is now basically a family office.

 

I’ve had the white paper for over a year but only today got a chance to have a close read of it with an eye on how Cohen’s lawyers describe his trading strategies. I learned to do this when studying strategic foresight methodologies.

 

Some of my summary notes from the white paper:

  • Back of envelope estimate of Steve Cohen’s trading portfolio size in July 2013: $US1,253,000,000.
  • Cohen trades over 80 individual securities a day.
  • Algorithms, direct market access, and dark pools are routinely used for trade execution.
  • The PBS Frontline documentary describes Edge as an informational advantage about market activity.
  • The white paper describes the following as Events: (1) corporate access (competitor announcements; adverse developments); (2) market moving (catalysts, technical analysis); (3) analyst convergence (broker-deal reports; ratings such as downgrades); and (4) market rumours (false market).
  • SAC portfolio managers develop a Company Investment Thesis. This may involve: (1) trimming positions whilst going into earnings announcements; (2) using option hedges to offset long/short positions using a market neutral strategy; (3) anticipating slippage: incremental shifts in share prices due to the timing of executed trades; and (4) responding to risk reviews of large positions.
  • Market price-psychology patterns that Cohen has identified: (1) increases in individual share prices versus S&P 500 declines (deteriorating market) over specific time periods; (2) tests of if positive market reaction is sustainable (possible mean reversion); (3) company news that is ambiguous or less-than-spectacular information that will trigger a decline; and (4) rapid stock appreciation that creates high expectations and the probability of a price decline.

 

The Steve A. Cohen white paper illustrates how to potentially reverse engineer a hedge fund’s trading strategy – as a strategic foresight example – and to not be a Muppet-like naive retail trader.

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U2’s Songs of Innocence

U2 released its thirteenth album Songs of Innocence for free on Apple’s iTunes service today.

 

U2’s decision echoes the free digital download strategy used previously by Nine Inch Nails (The Slip) and Radiohead (In Rainbows). My 2008 conference paper and presentation slides found that each band adopted the strategy during a period of heightened conflict with their labels, and leveraged their audiences to negotiate better contracts.

 

U2’s espoused reason for the strategy is to raise global awareness of specific charities. Other reasons may emerge . . . (One of them being a surge in back catalogue sales.)