How I became an investor

Two months after graduating from the University of Rochester, I moved to Shenzhen, China. This decision was unusual in so far as I knew almost nothing about Chinese culture or history and had never studied Chinese. Moving to and working in a new country as an adult when you neither speak the local language nor understand the culture is a real challenge.

I moved there with a group of roughly 120 Americans, Brits, and Canadians. Expats often cope with the challenges of life in China in two ways: by “banding together” or “going native.” I observed that the vast majority of these folks adapted to the challenges of Chinese life (illiteracy, inability to communicate, cultural complexity, etc.) by banding together. Banding together meant hanging out in Western restaurants and bars to avoid the isolation and confusion that you’ll feel dining at a Chinese restaurant alone or with Chinese colleagues who cannot speak English. While I occasionally spent time with other expats, I largely chose to go native.

Life as an expat trying to assimilate into Chinese society is a process of continuous failure and learning. Ordering food begins with pointing randomly at a menu and hoping for a favorable outcome. After several weeks of disappointment, you'll finally ask to take the menu home, study the words and come back with a strategy to try to mitigate disappointment. This process was further complicated by the fact that at the time I didn't own a smartphone. Remember, this process doesn’t just apply to ordering food at a restaurant, but rather almost every aspect of your life.

After the first eight to nine months of confusion, study, further confusion and further study, I achieved basic understanding on a variety of subjects that enriched my life. I liked that I could ask people about their businesses, ask them if they needed help or give people directions if they were lost all in Chinese. I began feeling like I was contributing to society. I renewed my teaching contract to stay another year. There was still so much I didn’t understand and so many opportunities to learn that the decision was a no-brainer.

While I enjoyed both teaching grade 2, grade 5 and grade 6 students English and running my small education consulting practice, I knew that neither business was my passion. I was introduced at a young age to economic concepts by my father, who worked as a currency trader for nearly two decades at several large banks. I still remember him explaining the mechanics of a carry trade to me while I was in middle school. I was an avid student of economics and philosophy and finished degrees in both subjects at Rochester. While an undergraduate, I explored the intersection of law and economics and took several courses in commercial law, constitutional law, criminal procedure and law and economics. Given my interest in law, I researched the market structure for legal services in the US.

I did some market research to better understand supply and demand dynamics for lawyers. After a few days of research, I began to suspect that there was a bubble in the market for lawyers (too much supply of lawyers and not enough demand) in the US such that I expected the marginal product of labor (wage) to fall. The market in the US was further complicated by the presence of internet based services like LegalZoom which made whole sub-specialties of law unprofitable.

Thinking more about my comparative advantages I realized that perhaps I’d be best suited to practice law in Hong Kong. Hong Kong is a common-law jurisdiction, meaning the legal system is based on English case law. The system is quite like the legal system in the other former British colonies as well as the US and is highly respected for being fair and efficient. Given that I’d be one of the few non-Chinese lawyers in a region where foreign firms were looking to expand, I thought my ethnicity and language ability might be comparative advantages.  I applied to law school in Hong Kong and was admitted to the Chinese University of Hong Kong (“CUHK”) Juris Doctor (J.D.) program. I was thrilled. But my family was not.

After much discussion with my family, I realized that I loved them too much to choose a career that would permanently position me on the far side of the world. My desire for a connection with family wasn’t the only reason for choosing to pass on law school. I realized that lawyers were more of a conduit for facilitating and advising business transactions rather than those that were making the determination to transact (the part of doing business that I found most fascinating). Moreover, after additional research on the practice of law, I became more certain that the practice of being a lawyer is nothing like the experience of studying law academically. After careful consideration of the trade-offs, I decided to pass on law school.

Once I passed on law school, I returned to the US. What to learn next? I researched my options again focusing on my comparative advantages. I was interested broadly in the applications of microeconomics and knew a bit about running a business and wanted to apply those skills to investing. There is no obvious way for former English teachers in China to go into investing in the US, so I needed to think creatively. I reached out to the people I knew in the field and asked anyone I could for a job, even offering to work for free. Finally, I got a break and found a job on a multi-family office investment team doing analyst-grunt work. My favorite part of the job was my supervisor, an analyst around my age who encouraged me to learn by reading the annual and quarterly letters of the 20th centuries' great investors.

At the same time, I was searching for a spot on an investment team, I also considered becoming an economist. Several of my economics professors at Rochester encouraged me to consider becoming a professor of economics, but I had much self-doubt. I’ve never been the strongest math student because I have some skill gaps in algebra and calculus. None the less, I applied to do my Ph.D. in economics at George Mason University (“GMU”).  GMU’s department has a strong capitalistic spirit and an awesome group of senior and junior faculty including, Tyler Cowen, Bryan Caplan, Russ Roberts, Peter Leeson, Robin Hanson and James Buchanan.  Having spent two years in Shenzhen, the first and largest special economic zone in China, I had an intuition that the field of economic development ought to focus on special economic zones. The opportunity to study development economics as it pertained to special economic zones with someone like Tyler Cowen sounded so cool!  Much to my surprise in early 2013, I was admitted to the Ph.D. program in economics at GMU. There was only one problem, I loved investing and didn’t want to stop.

As it turned out, I liked investing much more than I originally anticipated. So many of the concepts I came across from arbitrage to venture capital were fascinating to me.  It became apparent to me how many of my passions could, over time, be honed to become competitive advantages at investing. Investing requires abstract reasoning, a love of reading, general curiosity, patience and the wiliness to act differently than your peers. After about five years in the investment business, I now have a much better sense of how little I know about what I thought I understood.  My objective over the next 50 years of my investment career is to reduce my ignorance through study, trial, and error.

On Coffee

I enjoy very few things more than waking up at 6:00am on Sunday and brewing a pot of coffee.  Coffee helps me to think abstractly, yet focus on the task at hand.  Going without it carries risks. 

A few Sundays ago at the Capital One Cafe

A lack of coffee is an unsettling experience.  Earlier this year, I went my first morning without coffee in over ten years.  I woke up in Bariloche, Argentina in an Airnbnb after a full day of traveling.  My working assumption was that all homes have coffee in the pantry.  My assumption was wrong.  My friends, who don't wake up at 6:00am, were still asleep, the car in the driveway was manual and I don't know how to drive stick.  Over the course of that morning, I felt the disturbing power of addiction.  This feeling got me thinking, how is something this addictive so widespread?

Last week, I mentioned that while commuting I like to observe other commuters to see what they’re holding.  I often see other commuters with one or two things in their hand a smart phone or a coffee.  Each morning while I pass Dunkin Donuts on State Street, I see a line of people waiting for their fix.  Down the street at Starbucks, it is the same story.  According to a recent Gallup Poll, ~64% of American adults drink coffee each day.  This is significantly greater than the percent of American adults that eat breakfast everyday (34%).

Coffee consumption has several properties which make it unique among consumer products; coffee is:

• Highly Addictive
• Unregulated
• Socially Acceptible 

Very few substances are as addictive as coffee and all of the substances that are more addictive than coffee are regulated.  There are even substances that are less addictive than coffee that are regulated as well. A highly addictive yet unregulated product means that it can be legally consumed at any age, marketed widely (even to children) and should exhibit low elasticity of demand (see 2007-8-9-10 revenue).

On top of its addictive properties, coffee sellers have an unfettered right to market their product to anyone. Coffee drinking is one of the most socially acceptable of all human practices.  It can be consumed alone, with someone you barely know, with a loved one, a colleague/s, in a business context, in a large group, in public or private all of the above is socially acceptable.  In fact, I don’t know of any other product that is as broadly socially acceptable, highly addictive and unregulated as coffee.

Can you think of one?

Ten Years of iPhone

As we approach the tenth anniversary of the iPhone release, it's worth reflecting on how life has changed since that time. 

How do you feel when you misplace it?

When the iPhone was released, I didn't see it for what it was.  I still saw it as a telephone with a larger screen, worse battery life and a challenging on-screen keyboard.  

It took me to four more years to realize that the development of the iPhone was a fundamental turning point in human history.  We can now hold our computer in our hands and carry it with us just like we've done with other core human innovations in the past: the pen, purse, sword, gun, compass and flask.

Today, a smart phone is a fully functional computer.  Having it in your pocket gives you on-the-go access to:

• The bulk of all human knowledge.  (Wow!) 
• Access to all personal information including but not limited to finance, tax, health, location, communication and images. 
• Near infinite supply of creative content including but not limited to, music, short and long films, books, articles, blogs in almost all active languages. 

In just ten years we've made significant strides eliminating the concepts of:

• Getting lost
• Boredom
• Language confusion
• Loneliness
• Indecision
• Mobility
• Profligacy
• Disagreement
• Bad teachers

All new pleasures can lead to addiction.  As I commute to work each morning I like to look at what people hold in their hands.  Looking at what (or who) people hold in their hands gives you a good sense of what people value.  The two most common objects in our hands these days seem to be our smartphone (mostly iPhones) or a coffee.  

The iPhone often outcompetes for hand time with a highly addictive drug like caffeine or the hand of our loved ones. We should be wary of addiction. 

Dutch electro house duo, Blasterjaxx masterfully captured both my concern and optimism.

While the internet is captivating, the world is beautiful. 

On Running

千里之行，始於足下 - 老子

A journey of 1,000 miles begins with a single step.  -Laozi

When I first moved to Boston during the winter of 2015 I began to regret my decision.  It was brutally cold, the snow banks were taller than me (I'm 5'8'') and my commute doubled in length.  

After my first week at work, I looked out my livingroom window at the tundra below me and saw something I didn't expect. Runners.  Along the path that circles the Charles River, runners were everywhere.  The flow of runners continued throughout the winter, into spring and summer.  Once the weather warmed up after a bit of cajoling from girlfriend I decided to give running a try.  

On my first run, I decided to set my expectations low so that I might succeed.  I guessed that the 1/4 mile to the grocery store should be within my ability. I guessed wrong.  Two days later I tried again.  While I got slightly further than my first attempt, I still couldn't complete the 1/4m without stopping.  On my third attempt I made it!  I was really happy. 

My two Japanese friends.

About nine months later, I found myself in Philadelphia on a Sunday.  I was standing at the starting line, in the rain, alongside a few of my colleagues with 30,000 other runners about to experience my first race.  A year earlier, if you had told me that I'd be running a 10 mile race, I would have been incredulous. A lot can change within a year. 

Over the course of running, I've learned a lot about myself.  Running gives you the opportunity to think abstractly as your runners high takes hold.  While I run, I explore podcasts from music, comedy to economics and think about what is troubling me.  My runs have a variety of psychological and physical benefits, improved my commute and foster my love for Boston.

Rather than walking in the cold to the train, I run to the train.  Running warms your body and if you dress appropriately you won't notice the cold.  You'll arrive at work faster and get home faster, reducing commute time.  When you do arrive at work less psychologically stressed you'll increase your productivity and when you arrive at home less psychologically stressed you'll have a more pleasant home life. 

The benefits to running are enormous and costs to running are low.  

The journey begins with a single step. 

My Grandpa's Stories

When ever my Grandpa Jerry came over, I'd always get excited for story time.  Grandpa was a gregarious serial entrepreneur; therefore, many of his stories were animated tales of profit, loss and deals made along the way.  He'd always find a way to surreptitiously include a lesson or two into these stories. But because I'm a slow learner, it took me many years to notice. 

One of grandpa's businesses was called Friedland Shipping International.  As the name suggests, his firm engaged in international shipping.  Particularly, heavy machinery and white goods between the US and Iran during the reign of the Pahlavi dynasty as well as with customers in Saudi Arabia and to a lesser extent the UAE. His firm employed a few dozen people and was based in the New York City's World Trade Center. 

During the 1960s and 1970s Iran was growing rapidly and required bulldozers, cranes and other equipment that my grandpa was able to source and ship to his customers.  As part of his business, my grandpa traveled to the Middle East to monitor shipments, build relationships with customers and learn about their culture.  Many of the stories he'd tell regarding Iranian and Saudi culture fascinated me, from drinking strong coffee, the heat of the desert, the challenges of being a Jewish trader in the Middle East and polygamy. 

Jerry Friedland with his customers.

At one point in the mid 1970s while his business was going really well, my grandpa explained that he was contacted by some Hong Kong based merchants that wanted to trade with China and they asked him if he'd like to trade with them.  At the time, China was impoverished and closed to direct trade.  He also felt that he lacked Chinese language skills and requisite cultural understanding.  Moreover, his business with the Iranians was going so well that he didn't think it was a good return on time. He declined the Hong Kong merchants' offer.  

A few years later in 1979, the Iranian revolution occurred and his business was mortally wounded.  During one of the last conversations I had with him, he told me that one of his biggest regrets regarding Friedland International Shipping was his decision to pass on trading with the Chinese.  

While I didn't understand it at the time as such, my grandpa taught me about two deeply related business concepts:

 Political Risk and Diversification

Political risk can be thought of as a situation where theft and breach of contract by your trading partner both become legal - the rules of the game no longer apply.  In this instance, the Iranian revolutionary government confiscated private property and refused to pay outstanding debts.  Accounts receivable become write-offs.  

Diversification is best thought of as putting your eggs in many baskets located in different countries with a range of political regimes.  

Diversification is the only way to reduce the pain of adverse political risk.  

If you're ever concerned with government policy or leadership, I strongly suggest you consider this lesson too.

Thank you grandpa. 

Consumption or Creation?

I love reading because there is so much I don't understand and because it is easier than writing.  Each morning, I like to read newspapers from East Asia, South Asia, Africa, Europe and the Americas.  After newspapers, I like to explore my favorite blogs.  Later in the day, I'll hop on Twitter.  Sometimes I'll dig into long-form articles or academic research. In the evenings or during my commute, I'll even indulge in fiction.  

I spend much of my waking life consuming information. 

My relationship with creation is much more complicated.  Creating ideas isn't as easy as consuming them. When you want to spend time reading, you can do so at your discretion.  Creation, on the other hand, requires inspiration, execution and coffee.

My objective is to create ideas worth consuming.

Here we go!